There is little to suggest that President Donald Trump’s deregulatory agenda has provided a significant boost to economic growth. While it may still be too soon to fully judge the impact, the historical evidence suggests that hopes of a more significant boost in the longer run are also likely to be disappointed.
- There is little to suggest that President Donald Trump’s deregulatory agenda has provided a significant boost to economic growth. While it may still be too soon to fully judge the impact, the historical evidence suggests that hopes of a more significant boost in the longer run are also likely to be disappointed.
- Trump’s pledge on his first day in office to eliminate 75% of all Federal regulations indicated that it would be a central component in his economic agenda, and it is likely to remain so if he wins a second term later this year. Deregulation is notoriously hard to measure, but the available evidence suggests – perhaps unsurprisingly – that Trump has fallen well short of his initial goal. The overall size of the Federal rulebook is little changed since he became President and spending and staffing at regulatory agencies has declined only modestly. That said, there has been a clear drop-off in the flow of new regulations during Trump’s first term, and the share of firms reporting problems with red tape has fallen steadily.
- Proponents of deregulation claim that it boosts the economy’s supply side, by encouraging competition, improving efficiency and therefore raising potential economic growth. There has been a gradual acceleration in productivity growth over the past couple of years, which is now trending at close to 1.5%, compared with less than 1.0% for most of the past decade. But there is little to suggest that pick-up has been driven by looser regulations. Instead, it looks more like a cyclical response to the tightness of the labour market.
- Looking at the financial and energy sectors, which have seen some of the biggest regulatory changes over the past couple of years, there is slightly clearer evidence that deregulation has supported stronger activity. In both cases, however, the impact on the wider economy has been small.
- There was an obvious jump in lending by small banks in mid-2018 after Congress passed the Economic Growth Act, which eased regulatory restrictions and capital requirements for all but the largest banks. But that boost faded quickly and it failed to prevent a continued slowdown in business investment growth.
- Similarly, while looser environmental regulations may have played some role in the surge in crude oil production in recent years, activity in the sector has continued to be driven mainly by global commodity prices and, in any case, it has made only a modest contribution to overall GDP growth. Meanwhile, Trump’s attempts to reinvigorate the coal industry appear to have failed.
- The upshot is that the prospect of further deregulation during a Trump second term is unlikely to provide a significant boost to economic growth. Similarly, while it could pose a threat to some sectors of the stock market, we don’t think that a renewed tightening of regulation under a Democratic President would be as big a risk to the economy as some fear.
Deregulation doing little to boost economy
On his first day in office, Donald Trump promised to eliminate 75% of all Federal regulations and later signed an Executive Order requiring that for every new regulation introduced, two should be repealed.
With cutting red tape likely to remain a core priority if Trump wins a second term later this year, in this Focus we consider how much of his deregulatory goals Trump has actually achieved, and whether it has had any impact on the economy.
Slash and burn?
Attempting to quantify deregulation and its economic impact is notoriously difficult. But there are a number of proxy measures which can serve as a useful starting point. In general, those proxies suggest Trump’s deregulatory push has fallen short of its lofty goals.
The number of pages in the Code of Federal Regulations has barely budged over the past couple of years. (See Chart 1.) That is clearly only a crude measure that takes little account of the scope and severity of red tape, but it does suggest that there has been no significant decline in the overall regulatory burden facing firms since Trump became President.
Chart 1: Number of Pages in Code of Federal Regulations (000s)
Source: GWU Regulatory Studies Center
In part, that simply reflects the limitations on the President’s power. The process for repealing or amending Federal regulations is lengthy, requiring detailed analysis, reviews and public comment periods, and a significant share of the Trump administration’s deregulatory actions have been subject to legal challenges.
The Trump administration has attempted to bypass that bureaucracy, with reduced enforcement of existing rules by regulatory agencies and job vacancies going unfilled across the executive branch. Looking at overall spending and staffing at Federal regulatory agencies, both have edged lower over the past couple of years, but neither has declined significantly. Regulatory bodies still account for a higher share of Federal government spending and overall non-farm employment than before the financial crisis. (See Chart 2.)
Chart 2: Budget & Staffing of Federal Regulatory Agencies
Sources: GWU Regulatory Studies Center, Refinitiv, CE
That said, while the success of Trump’s deregulatory agenda has been limited, the flow of new regulation does at least seem to have slowed in recent years. Chart 1 also illustrates that despite a relentless upward trend in recent decades, the size of the Federal rulebook held broadly steady in Trump’s first two years as President. There has also been a clear drop-off in the number of economically significant regulations published in recent years. (See Chart 3.) Only 98 have been finalised so far in Trump’s first term, compared to 175 at this stage in each of President Barack Obama’s two terms and an average of 118 for every President since 1980.
Chart 3: Economically Signficant Rules Published
Sources: GWU Regulatory Studies Center, OIRA, CE
Finally, there is also some evidence of firms themselves reporting a lighter regulatory burden. The share of firms in the NFIB small business survey saying that red tape is their single biggest problem has declined from just under 20% when Trump was elected to 12% now – though that downward trend appears to have started as far back as 2015. (See Chart 4.) But the bigger question is whether stemming the flow of new regulations has been enough to boost the economy?
Chart 4: NFIB Share of Firms Saying Red Tape
A supply side story
Deregulation is supposed to boost the economy’s supply side, by encouraging competition, increasing efficiency and therefore potential economic growth. But the historical evidence from previous periods of deregulation is mixed at best. Perhaps the most notable example of deregulation was under President Ronald Reagan in the 1980s. Along with cutting taxes, reducing government spending and tackling high inflation, deregulation was one of the four pillars of “Reaganomics”. Looking back at Charts 1 and 2 suggests that the success of Reagan’s deregulation is often overstated, but there was a modest reduction in the size of the Code of Federal Regulation in the early 1980s, while the budget and staffing of regulatory agencies fell quite sharply.
Regardless, there is little evidence that this provided any boost to the economy’s supply side. Both productivity and labour force growth declined during the early 1980s and, while productivity growth soon picked up again, it failed to break out from its previous trend. (See Chart 5.)
Chart 5: Productivity & Labour Force (%y/y, 3Yr Av.)
Meanwhile, although it isn’t generally considered an era of widespread deregulation, the late 1990s was notable for the deregulation of the financial sector under President Bill Clinton, including the deregulation of derivatives trading and, most significantly, the repeal of the 1933 Glass-Steagall legislation, which had mandated the separation of retail and investment banks.
Productivity growth did surge in the late 1990s, but the financial sector played only a small role in that acceleration. By far the biggest driver was the IT revolution, with the widespread adoption of PCs leading to a wave of capital deepening and efficiency gains throughout the economy. Meanwhile, labour force growth remained on a gradual downward trend.
Looking at those same indicators now, it is notable that productivity growth has picked up over the past couple of years, with the three-year average annual growth rate just below 1.5%, compared with less than 1.0% for most of the preceding five years. But there is little to suggest that has been driven by deregulation. Instead, it looks more like a cyclical response to the tightness of the labour market, which has forced firms to invest in new equipment and in improving the skills of existing workers. (See Chart 6.)
Chart 6: Non-Farm Productivity & Prime-Age EPOP
Even if productivity growth hasn’t decisively broken out of its weak post-crisis trend, Trump’s deregulation could be sowing the seeds of a renewed acceleration by encouraging competition. By reducing barriers to entry and the costs of regulatory compliance, deregulation can encourage new firms to enter the market and in turn force the most inefficient firms out of business. Looking at the latest data on firm births and deaths, however, there isn’t yet evidence of a clear shift. (See Chart 7.) Although the business birth and death rates have picked up over the past couple of years, both remain below their pre-crisis levels.
Chart 7: Business Births & Deaths (As a % of Total)
Overall, it’s hard to make the case that Trump’s deregulatory agenda has had a meaningful impact on the economy at the aggregate level. But it is possible that the positive impact of deregulation is being offset by other factors. Accordingly, we now take a closer look at the deregulatory actions taken by the Trump administration, the most significant of which have focused on two sectors – finance and energy.
Financial sector deregulation
Amongst the deluge of executive orders issued in Trump’s first few weeks in office was a directive setting out a series of core principles for regulating the financial sector, including ensuring that regulation was “efficient, effective, and appropriately tailored”. But the biggest piece of financial deregulation during Trump’s presidency actually came from Congress, in the form of the Economic Growth, Regulatory Relief & Consumer Protection Act, which was passed with bipartisan support in May 2018.
The act stopped short of the complete repeal of Dodd-Frank that Trump had previously called for, instead focusing on providing regulatory relief for smaller banks. The asset threshold for banks to be classed as “Systemically Important” was raised from $50bn to $250bn, exempting 32 banks (accounting for more than 20% of overall bank assets) from the annual stress tests and stricter capital requirements applied to institutions deemed too big to fail. It also reduced regulations for hundreds of community banks with assets under $10bn (accounting for another 10% of total banking assets), by lifting the Volcker rule ban on proprietary trading and easing restrictions on non-conforming mortgage loans.
The act was intended to boost the economy by encouraging banks to lend and there was a clear spike in lending by small banks (defined by the Fed as those outside of the top 25 by total assets) when the bill was signed. (See Chart 8.)
Chart 8: Bank Loans (%3m/3m Annualised)
Moreover, that spike was driven by lending to businesses, with the three-month-on-three-month annualised growth rate of small banks’ commercial & industrial lending peaking at 28% in mid-2018. (See Chart 9.)
Chart 9: Bank Lending (%3m/3m Annualised)
But it isn’t clear if this actually had much impact on the economy. The boom in lending failed to generate any notable increase in the manufacturing capex intentions surveys, which continued trending lower. (See Chart 10.) The NFIB survey of small businesses’ investment intentions, which ought to have benefited most from increased lending by community banks, did see a clear pickup over the following months. But that jump was soon reversed and, in any case, we know that business investment growth has been slowing since early 2018. More recently, business lending growth has started to slow again, and most banks are now tightening credit standards in response to weaker economic growth.
Chart 10: Capex Intentions Survey Indices
The new regulations didn’t seem to significantly affect mortgage lending, but there is some evidence of small banks stepping up their provision of other consumer loans. (See Chart 11.) It’s possible that this contributed to the strength of consumption growth in 2018, although the boost to disposable incomes from the 2017 tax cuts was probably far more important. Regardless, any boost clearly wasn’t sustained, with lending to consumers falling sharply in the early months of 2019. The total value of small banks’ outstanding consumer loans is now lower than it was before the Economic Growth act was signed.
Chart 11: Non-Mortgage Consumer Lending (%3m/3m Ann.)
Other notable changes to financial regulation made by the Trump administration have been the repeal of the Consumer Financial Protection Bureau’s arbitration rule, which had allowed class action lawsuits against banks and other lenders, and the repeal of the so-called fiduciary rule requiring retirement investment advisers to act in the best interests of their clients. But it’s hard to imagine how either of those reforms could have boosted economic growth.
Overall, the financial deregulation pursued by the Trump administration does seem to have succeeded in providing a one-off boost to bank lending to businesses, but there is little evidence that this has supported stronger investment or economic growth. Moreover, at a time when the unemployment rate is at a 50-year low and asset prices are at record highs, there is a risk that easing regulations on the banks will help sow the seeds of financial imbalances further down the line.
Energy sector deregulation
The Trump administration set an explicit goal of promoting US energy independence by encouraging domestic production, and that has mainly involved loosening what Trump perceived to be unnecessary environmental protections. Most notably that included his move to withdraw the US from the Paris Climate Agreement, with the US formally triggering the one-year notice period for withdrawal in November. But the administration has also repealed or amended plenty of other US environmental regulations with more immediate relevance to the energy sector.
Trump has repeatedly pledged to end “the war on coal”, which prompted the repeal of the Clean Power Plan that set strict targets for cutting carbon emissions from power plants – the repeal of the Stream Protection Rule, which restricted coal mining operations – and the elimination of various other environmental and wildlife protections.
The rapid pace of deregulation hasn’t reversed the fortunes of the coal industry, but it has (at least temporarily) brought to an end the downward trend in output and employment during the Obama years. (See Chart 12.)
Chart 12: Coal Mining Output & Employment
Rather than regulation, by far the bigger headwind facing the domestic coal industry is the continued shift to using cheaper natural gas for electricity generation. (See Chart 13.) Ironically, this is one sector where Trump’s goal of energy independence now looks within reach, with the US becoming a net exporter of natural gas in 2017 for the first time since the 1950s. Rather than the administration’s regulatory policies, however, that has been driven mainly by new LNG export facilities coming online and by surging shale oil production, of which natural gas is often a by-product.
Chart 13: Share of US Electricity Generation (%)
Trump’s efforts to support the oil sector appear to have been a little more successful. On top of the more general loosening of environmental regulations, there have also been several deregulatory actions focused on the oil sector, including the repeal of the Methane and Waste Prevention Rule, which had set restrictions on emissions and on the “flaring” of associated gas produced from shale wells, the repeal of a law forcing firms to disclose chemicals and other details of fracking operations, and various other rule changes expanding the lands available for new drilling.
The Trump administration has also been more supportive of the development of new oil pipelines. The Dakota Access pipeline, which had been blocked by the Obama administration but was approved by Trump in early 2017, now provides low-cost transport for half a million barrels per day of crude oil from the remote Bakken shale formation to a terminal in Illinois. By replacing costlier rail transport, this has helped to make more wells economically viable. Along with the easing of regulation, the development of new pipelines under Trump has probably played some role in the surge in crude oil production over the past couple of years. (See Chart 14.)
Chart 14: Crude Oil Production (Million bpd)
That said, there are limits on how much Trump has been able to influence these developments because much of the relevant regulation is set by state and local governments. Despite also being granted approval by Trump in early 2017, the Keystone XL pipeline project – designed to help transport heavy crude from oil sands in Canada via Nebraska to refineries on the Gulf Coast – continues to face legal challenges and construction still hasn’t started. Meanwhile, plenty of new pipelines have been constructed over the past couple of years in and around Texas, which has been by far the biggest driver of rising US crude oil production, without Trump’s intervention.
Furthermore, there is little to suggest that deregulation has given a fundamental boost to mining investment. If deregulation truly was revitalising the oil sector, we would expect to see drilling activity rising at a materially stronger pace than the past relationship with prices would imply. As Chart 15 illustrates, however, that hasn’t happened.
Chart 15: Crude Oil Price & Active Drilling Rigs
After trending higher from mid-2016 to the start of 2019 as oil prices rallied, drilling activity has declined over the past year as prices fell back. Much like coal, activity in the oil sector has continued to be driven mainly by economics rather than regulation.
In any case, while the share of the credit that should be given to Trump is debatable, the boost to the wider economy from surging oil production has been small. Oil & gas extraction still accounts for less than 1.5% of GDP, and it has contributed an average of only 0.1%-pts to annual growth since Trump became President.
We’re open to the idea that the economic benefits of deregulation take time to feed through, and it may still be too soon to fully judge the impact of Trump’s deregulatory agenda. Given the difficulties of measuring deregulation, it’s also possible that by unleashing “animal spirits”, the more general business-friendly perception of the Trump administration has contributed to the strong cyclical performance of the economy over the past couple of years.
Nonetheless, the historical evidence implies that any longer-run benefits are likely to be small, while there is little to suggest that deregulation has provided an economically significant boost to activity over the past few years in the sectors where red tape has been cut the most. As a result, the prospect of further deregulation if Trump wins a second term is unlikely to provide a significant boost to economic growth. Similarly, a renewed tightening of regulation under a Democratic President may not be as big a risk to the economy as some fear.
Regulations are labelled as economically significant by the Office of Information and Regulatory Affairs if they are judged to “Have an annual effect on the economy of $100 million or more or adversely affect in a material way the economy, a sector of the economy, productivity, competition, jobs, the environment, public health or safety, or State, local, or tribal governments or communities.” ↑
Andrew Hunter, Senior US Economist, +44 20 7808 4071, email@example.com