Dust flux, Vostok ice core

Dust flux, Vostok ice core
Two dimensional phase space reconstruction of dust flux from the Vostok core over the period 186-4 ka using the time derivative method. Dust flux on the x-axis, rate of change is on the y-axis. From Gipp (2001).

Thursday, July 4, 2013

Confounding factors in US GDP growth--a partial criticism of Dawson and Seater (2013)

A recently published paper in Journal of Economic Growth has generated some interest over its claim that US GDP would be about 3.5 times greater than it currently is if the level of regulation had remained at 1949 levels (or a reduction in growth by an average of 2% per year).

The thesis is intuitively compelling, and has captured the interest of a few economics websites. Personally, I don't doubt that regulation does stifle growth--I have seen first-hand too many examples, not to mention the change in economic environment from the 1970s to the current day. But this is anecdotal.

The first question--how to quantify regulation? The authors use the measure of the number of pages of the Code of Federal Regulations, which is as good a measure as one can use in a reasonable amount of time.

Regulation and its growth over time. From Dawson and Seater (2013).

I admire the authors for their ability to work through the statistics in their study. Statistics is one of my least favourite topics--even though I have to do it on occasion. It's like the vegetables on your plate that your parents insist you have to eat--or in my case, journal editors and sometimes regulators. (e.g. "We're not publishing this without some statistics." "Doesn't the beauty of the calculus compel you to publish it?" "No." " . . . grumble . . .")

Effect of regulations on trend of total economic output. From Dawson and Seater (2013).
Effect of regulations on total factor productivity, which is like output with the 
effects of capital investment and labour removed. From Dawson and Seater (2013).

From the above graphs, the authors conclude that the effect of regulation suddenly became more pronounced in the late 1970s, despite the observation that the growth of regulation has been relatively low since 1980 (which would show better if figure 1 were on a log scale rather than linear). The authors have inferred that the response is nonlinear--as if a tipping point were suddenly reached in 1980, beyond which the economy began to contract terribly in response to the (relatively small) increases in regulation.

The trouble with this sort of statistical study is the possibility of overlooking confounding factors. In this case, there are two--energy availability/costs, and the impact of excessive credit in the system.

An article I encountered today looks at energy use in the US through its history. The major figure appears below.

Energy consumption in the US. Another graph that would be better 
displayed on a log scale. Source.

Look at the spectacular growth, especially from about 1930 to the early 1970s (the first energy crisis). Growth in energy usage has been nowhere near as great since then. Total energy use peaked in 2005. 

The main takeaway here is that the rate of growth in US energy usage after 1980 is much smaller than was the case before.

Energy is critical for a manufacturing economy. If the US economy could be viewed as a plant, the plant has three inputs--energy (sun), physical commodities (fertilizer), and credit (water). Until about 1974, there was an abundance of energy and physical inputs, so the immense credit poured into the economy resulted in spectacular growth. 

Since then, however, it's been quite cloudy, and the soil is a little depleted of nutrients. But all the government can do is water. And that's what they've been doing--and they are shocked to find that they aren't getting the same result they did in the 1960s. Instead they risk drowning the plant entirely.

There is something else, the government can do--and that is regulation. Regulation is like pruning--if done carefully, it can really benefit the plant. Unfortunately, much regulation that exists today more resembles the job done by a maniac with a machete.

I don't wish to negate the conclusions of the authors--there is no doubt in my mind that the crazed hacking perpetrated by the government has reduced the size of the economy. But the reckless overwatering given the loss of sunlight has also played an important role.

Dawson, J. W., and Seater, J. J., 2013, Federal Regulation and Aggregate Growth, Journal of Economic Growth, 18 (2), 137-177, doi: 10.1007/s10877-013-9088-y