April 11, 2017

Using Regulatory Reform to Boost Growth

The Case of British Columbia
Summary

Given the dismal decade the United States has just gone through, as well as the budget pressures that governments at all levels are facing, states and the federal government should be thinking about whether regulatory reform makes sense.

Economic growth during the 21st century in the United States has been slow relative to historical norms. From 1948 to 1999, US real GDP growth averaged 3.6 percent per year. Growth has averaged a dismal 1.9 percent per year from 2000 to 2015. This slowdown in growth may explain a general feeling of pessimism and a sense of shrinking opportunity among the American public.

Two popular policy prescriptions to jump-start growth are greater government spending (proposed by Keynesian economists who see the problem as a lack of demand) and tax cuts (proposed by economists favoring supply-side solutions). But with structural deficits the norm at the federal level, and the national debt projected to explode in the decades ahead, the bigger deficits needed to finance such measures are no longer palatable to many Americans.

Regulatory reform could be a form of low-hanging fruit to boost growth at a time when state and federal budgets are pinched. The experience of the Canadian province of British Columbia offers a model for how this can be done. In 2001, the province began a red tape cutting effort, with a goal of reducing regulatory requirements by a third within three years. In June of 2001, the province had 382,139 requirements in place. By March of 2004, that number had fallen to 268,699—a decline of almost exactly 30 percent.

As the first chart illustrates, in the years leading up to the reform, British Columbia was experiencing a “dismal decade”—a phrase used to describe the sluggish economy in the province around that time. Real GDP in the province grew, on average, 1.9 percent less than Canada’s between 1994 and 2001. Meanwhile, growth shot up in the years after the reform began. British Columbia experienced a rebound, and growth was 1.1 percent higher per year, on average, than Canada’s between 2002 and 2006.

The absolute numbers make British Columbia’s improvement in economic performance more clear, as the second chart shows. In the 1994–2001 period, real GDP grew on average by 2.6 percent per year; this jumped to 3.8 percent in the 2002–2006 period. This difference is statistically significant (p=.08). A difference of just over one percentage point in growth might not sound like a lot, but consider the following: An economy that grows at 1 percent per year will double in size roughly every 70 years, but an economy growing at 2 percent takes half the time to double—just 35 years. An economy growing at 4 percent will double GDP in a mere 18 years.

No doubt other events and forces aside from regulatory reform also contributed to British Columbia’s economic turnaround. Nonetheless, this example highlights how a major regulatory reform was associated with improved economic performance and—just as importantly—was accomplished without jeopardizing health or the environment. According to a 2009 benchmark report from the British Columbia Progress Board, the province maintained a first-place ranking in Canada for environmental quality and health outcomes from 2001 onwards.

Given the dismal decade the United States has just gone through, as well as the budget pressures that governments at all levels are facing, states and the federal government should be thinking about whether regulatory reform makes sense. It could be a cost-effective way to boost growth and give Americans hope for a more positive future.