John B. Taylor – an economist at Stanford University – provides a vital supply-side explanation for the weakness in the post-Great Recession recovery since 2009. On his Economics One blog, he compares the post-2009 recovery with it’s post-1982 counterpart.
One measure of the difference between the regulatory policies in the two recoveries is shown in the next chart. It compares the number of federal workers engaged in regulatory activities in the years before and during both recoveries. Note that in the early 1980s the number of federal workers in these regulatory areas was declining, in sharp contrast to the situation now, even when TSA workers are excluded as in this chart.While correlation does not prove causation, regulations, whatever their benefits, tend to raise the cost of doing business and thus discourage business expansion and economic growth.
As I teach my students in every economics class I teach, business see regulations as costs. Higher regulation means higher cost, which decreases supply. In the microeconomic world, that means price rises and output falls. Expanded to macroeconomics, higher regulations across the economy means higher cost to business across the board, meaning aggregate supply (as we call it) falls or is held back, as does economic output.
Unfortunately, far too many policymakers in Washington have listened too long to economists too heavily focused on aggregate demand – not aggregate supply. Republicans began listening somewhat to supply-siders in the 1980s, but the deeper supply-side argument regarding the economy was drowned out in the cacaphonic argument over the Laffer Curve. The supply-side view is about more than just taxes, however; it is focused on all cost to businesses, and how they impact economic growth. This is not just an American phenomenon either. The halls of power and punditry in Great Britain are full of discussion over what “supply-side reforms” Britain needs to get out of its double-dip recession.
One can only hope the voters, who have seen the aggregate-demand-obsessed-Keynesian “consensus” disappear before their eyes over the last few years, can understand this, although it would help if the Romney-Ryan campaign made this a topic of discussion.
Cross-posted to Virginia Virtucon