Sub-Par Growth and Excessive Regulation

by Marilou Moursund on June 11, 2013

in Employment,Fiscal Policy,politics,Recommended Reading

In an “, author Niall Ferguson lays out an interesting thesis that institutional rigor mortis and excessive regulation is slowing down growth in the United States.  This has been the slowest recovery in the post war period, and seemingly never-ending fiscal stimulus has not been able to bring down high levels of unemployment.  The National Federation of Independent Businesses (or NFIB) confidence index remains low as well.  From the linked article:

Nearly all development economists agree that good institutions—legislatures, courts, administrative agencies—are crucial. When poor countries improve their institutions, economic growth soon accelerates. But what about rich countries? If poor countries can get rich by improving their institutions, is it not possible that rich countries can get poor by allowing their institutions to degenerate? I want to suggest that it is.

Consider the evidence from the annual “Doing Business” reports from the World Bank and International Finance Corporation. Since 2006 the report has published data for most of the world”s countries on the total number of days it takes to start a business, get a construction permit, register a property, pay taxes, get an export or import license and enforce a contract. If one simply adds together the total number of days it would take to carry out all seven of these procedures sequentially, it is possible to construct a simple measure of how slowly—or fast—a country”s bureaucracy moves.

Seven years of data suggest that most of the world”s countries are successfully making it easier to do business: The total number of days it takes to carry out the seven procedures has come down, in some cases very substantially. In only around 20 countries has the total duration of dealing with “red tape” gone up. The sixth-worst case is none other than the U.S., where the total number of days has increased by 18% to 433. Other members of the bottom 10, using this metric, are Zimbabwe, Burundi and Yemen (though their absolute numbers are of course much higher).

His thesis is all the more interesting given the dysfunction in all levels of government that is being exposed every day by scandal after scandal.  Several years ago we told clients that one of the trends that we would be watching would be the increasing tension between the private and the public sector.  During the financial crisis, the “Too Big to Fail” banks almost crashed our economy.  Our “Too Big to Function” government is also a threat to our future prosperity.  The lack of accountability at all levels of the system is both an embarrassment to our country and a wake-up call to demand transparency and better governance.

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