The US economy grew at an annualized rate of just 1.1 percent in the last quarter. Most analysts expected a figure in the neighborhood of 2.0 percent. Historically, 2.5 to 3.0 percent was considered feasible and healthy. We have a lot of ground to make up.
Weak growth and high inflation call to mind the economic woes of the 1970s. But things aren’t that dire yet. The misery index — the sum of the unemployment and inflation rates — peaked in mid-1980 at 21.92. Right now it’s 8.48, thanks to an unusually strong labor market. But we shouldn’t be satisfied with “less bad than the Carter era.” We need to rev up America’s economic engine to unleash broad-based prosperity.
What’s the source of sluggish growth? Former Senators Phil Gramm and Pat Toomey recently argued in the Wall Street Journal that President Biden’s regulatory deluge is imposing serious costs on the economy. Politically, this is concerning because regulators are de facto legislating, which is supposed to be Congress’s domain. Economically, the burdens of regulation drag down growth. Executive agencies are imposing a host of crippling rules on productive entities, raising the costs of doing business and contributing to a general environment of economic uncertainty.
Heavy-handed regulations “could smother America’s productivity, wages, and living standards,” Gramm and Toomey warn. Productivity means how good we are at turning inputs into outputs. Wages obviously mean payments to labor, which depend on labor productivity. And living standards are ultimately a function of income and wealth, relative to the goods and services they command. All three measures reflect the supply side of the economy.
Regulations don’t affect aggregate demand. They may change its composition, but its level and growth rate are ultimately determined by monetary factors. Regulations affect aggregate supply. Making it more difficult to produce and distribute wealth lowers the economy’s sustainable growth rate. Hence for a given rate of nominal GDP growth, Biden’s regulatory onslaught results in lower real GDP growth and higher inflation. This is a long-term effect: It will persist as long as compliance costs remain high.
We shouldn’t overemphasize inflationary effects. Let’s assume the US economy could grow at a rate of 2.0 percent, absent the Biden regulatory ratchet. That means hampered aggregate supply contributes 0.9 percent to annual inflation. Since inflation is currently about 5.0 percent, demand-side factors by themselves would still result in an inflation rate (of 4.0 percent) twice the Federal Reserve’s official target.
We should focus on real output for its own sake. Output determines the standard of living: we can’t consume more than we produce. With Biden’s encouragement, the administrative state has shackled a ball and chain to the productive sector. That makes the typical American poorer. As long as the executive branch can get away with lawless legislative appropriation, we’ll continue to get a steady flow of rules that advance the interests of bureaucrats and politicians, at the expense of workers and business owners.
We need to do two things to clean up this mess: unshackle the economy and shackle the administrative state. Bureaucrats and their political enablers can’t be trusted to curb their ambitions, so we must do it for them.