## Abstract

We introduce a new time series measure of the extent of federal regulation in the U.S. and use it to investigate the relationship between federal regulation and macroeconomic performance. We find that regulation has statistically and economically significant effects on aggregate output and the factors that produce it—total factor productivity (TFP), physical capital, and labor. Regulation has caused substantial reductions in the growth rates of both output and TFP and has had effects on the trends in capital and labor that vary over time in both sign and magnitude. Regulation also affects deviations about the trends in output and its factors of production, and the effects differ across dependent variables. Regulation changes the way output is produced by changing the mix of inputs. Changes in regulation offer a straightforward explanation for the productivity slowdown of the 1970s. Qualitatively and quantitatively, our results agree with those obtained from cross-section and panel measures of regulation using cross-country data.

## Keywords

Regulation Macroeconomic performance Economic growth Productivity slowdown## JEL classification

E20 L50 O40## Notes

### Acknowledgments

We thank Michele Boldrin, Tim Bollerslev, Michelle Connolly, Simeon Djankov, Ronald Gallant, Thomas Grennes, Bruce Hansen, Bang Jeon, Christopher Laincz, Oksana Leukhina, Aart Kraay, John Lapp, Marcelo Oviedo, Douglas Pearce, Denis Pelletier, Pietro Peretto, Martin Rama, George Tauchen, an anonymous referee, and an anonymous Associate Editor for helpful comments. We are also grateful to Amit Sen for providing finite-sample critical values for the Zivot–Andrews test. The regulation and marginal tax rate data are available on Seater’s website at: http://www4.ncsu.edu/~jjseater/index_003.htm.

## Supplementary material

## References

- Akhand, H., & Liu, H. (2002). Marginal income tax rates in the United States: A non-parametric approach.
*Journal of Monetary Economics*,*49*, 383–404.CrossRefGoogle Scholar - Alesina, A., Ardagna, S., Nicoletti, G., & Schiantarelli, F. (2003). Regulation and Investment. Working paper # 9560. National Bureau of Economic Research, Cambridge, MA.Google Scholar
- Averch, H., & Johnson, L. L. (1962). Behavior of the firm under regulatory constraint.
*American Economic Review*,*52*, 1053–1069.Google Scholar - Bandiera, O., Caprio, G., Honohan, P., & Schiantarelli, F. (2000). Does financial reform raise or reduce saving?
*Review of Economics and Statistics*,*82*, 239–263.CrossRefGoogle Scholar - Banerjee, A., Lumsdaine, R. L., & Stock, J. H. (1992). Recursive and sequential tests of the unit-root and trend-break hypothesis: Theory and international evidence.
*Journal of Business and Economic Statistics*,*10*, 271–287.Google Scholar - Barro, R. J. (1981). Output effects of government purchases.
*Journal of Political Economy*,*89*, 1086–1121.CrossRefGoogle Scholar - Barro, R. J., & Ridlick, C. J. (2011). Macroeconomic effects from government purchases and taxes.
*Quarterly Journal of Economics*,*126*, 51–102.CrossRefGoogle Scholar - Barro, R. J., & Sahaskul, C. (1983). Measuring the average marginal tax rate from the individual income tax.
*Journal of Business*,*56*, 419–452.CrossRefGoogle Scholar - Barro, R. J., & Sahaskul, C. (1986). Average marginal tax rates from social security and the individual income tax.
*Journal of Business*,*59*, 555–566.CrossRefGoogle Scholar - Bassanini, A., & Ernst, E. (2002). Labor market institutions, product market regulations and innovation: Cross country evidence. OECD Economics Department Working Papers, No. 316.Google Scholar
- Becker, G. S., & Mulligan, C. B. (1999). Accounting for the growth of government. Working paper, University of Chicago.Google Scholar
- Blanchard, O. (1985). Debt, deficits, and finite horizons.
*Journal of Political Economy*,*93*, 223–247.CrossRefGoogle Scholar - Blanchard, O., & Giavazzi, F. (2003). Macroeconomic effects of regulation and deregulation in goods and labor markets.
*Quarterly Journal of Economics*,*118*, 879–908.CrossRefGoogle Scholar - Christandl, F., & Fetchenhauer, D. (2009). How laypeople and experts misperceive the effect of economic growth.
*Journal of Economic Psychology*,*30*, 381–392.CrossRefGoogle Scholar - Crain, W. M., & Hopkins, T. D. (2001). Impact of regulatory costs on small firms. Report SBAHQ-00-R-0027, Office of Advocacy. Small Business Administration, Washington, DC. U.S .Google Scholar
- Dawson, J. W. (2007). Measuring federal regulation in the U.S.: 1938–2005. Working paper, Appalachian State University.Google Scholar
- Diebold, F. X., & Inoue, A. (2001). Long memory and regime switching.
*Journal of Econometrics*,*105*, 131–159.CrossRefGoogle Scholar - Djankov, S., LaPorta, R., Lopez-De-Silanes, F., & Shleifer, A. (2002). The regulation of entry.
*Quarterly Journal of Economics*,*117*, 1–37.CrossRefGoogle Scholar - Djankov, S., McLiesh, C., & Ramalho, R. (2005). Regulation and growth. Working paper, World Bank, March.Google Scholar
- Djankov, S., McLiesh, C., & Ramalho, R. (2006). Regulation and growth.
*Economics Letters*,*92*, 395–401.CrossRefGoogle Scholar - Elliott, G., Rothenberg, T. J., & Stock, J. H. (1996). Efficient tests for an autoregressive unit root.
*Econometrica*,*64*, 813–836.CrossRefGoogle Scholar - Friedman, M., & Friedman, R. (1979).
*Free to choose*. New York: Avon Books.Google Scholar - Goff, B. (1996).
*Regulation and macroeconomic performance*. Boston: Kluwer.Google Scholar - Greenwood, J., & Yorukoglu, M. (1997). 1974.
*Carnegie-Rochester Conference Series on Public Policy*,*46*, 49–95.CrossRefGoogle Scholar - Hakkio, C. S., & Rush, M. (1991). Cointegration: How short is the long run?
*Journal of International Money and Finance*,*10*, 571–581.CrossRefGoogle Scholar - Hamilton, J. D. (1994).
*Time Series Analysis*. Princeton, NJ: Princeton University Press.Google Scholar - Hopkins, T. D. (1991).
*Cost of regulation*. Rochester, NY: Rochester Institute of Technology.Google Scholar - Kaufman, D., Kraay, A., & Mastruzzi, M. (2003). Governance matters. Working paper #3106. The World Bank, Washington, DC.Google Scholar
- Kimble, J. (2002). A crack at federal drafting.
*Court Review*, Spring, 44–47.Google Scholar - Kimble, J. (2007). Lessons in drafting from the new federal rules of civil procedure (Part 1).
*Michigan Bar Journal*, Spring, 62–65.Google Scholar - Loayza, N. V., Oviedo, A. M., & Servén, L. (2004). Regulation and macroeconomic performance. Policy Research Working Paper, No. 3469, World Bank, September.Google Scholar
- Loayza, N. V., Oviedo, A. M., & Servén, L. (2005). The impact of regulation on growth and informality: cross-country evidence. AEI-Brookings Joint Center for Regulatory Studies, Related Publication 05–11, May.Google Scholar
- Lumsdaine, R. L., & Papell, D. H. (1997). Multiple trend breaks and the unit-root hypothesis.
*Review of Economics and Statistics*,*79*, 212–218.CrossRefGoogle Scholar - Maddison, A. (2000).
*The world economy: A millennial perspective*. Paris: OECD.Google Scholar - McChesney, F. S. (1987). Rent extraction and rent creation in the economic theory of regulation.
*Journal of Legal Studies*,*16*, 101–118.CrossRefGoogle Scholar - Mulligan, C. B., & Shleifer, A. (2003). Population and regulation. Working paper, University of Chicago.Google Scholar
- Murray, C. J., & Nelson, C. R. (2000). The uncertain trend in U.S. GDP.
*Journal of Monetary Economics*,*46*, 79–95.CrossRefGoogle Scholar - Nicoletti, G., Bassanini, A., Ernst, E., Jean, S., Santiago, P., & Swaim, P. (2001). Product and labor markets interactions in OECD countries. OECD Economics Department Working Papers, No. 312, OECD, Paris.Google Scholar
- Nicoletti, G., & Pryor, F. L. (2001). Subjective and objective measures of the extent of governmental regulations, Working Paper. OECD and Swarthmore College, December.Google Scholar
- Nicoletti, G., & Scarpetta, S. (2003). Regulation, productivity and growth: OECD evidence. Economic Policy, April 2003, pp. 9–72.Google Scholar
- Nicoletti, G., Scarpetta, S., & Boylaud, O. (2000). Summary indicators of product market regulation with an extension to employment protection legislation. OECD Economics Department Working Papers, No. 226, OECD, Paris.Google Scholar
- Nordhaus, W. D. (2004). A retrospective on the 1970s productivity slowdown. NBER Working Paper # 10950.Google Scholar
- OECD. (2003).
*The sources of economic growth in OECD countries, organization for economic Co-OPERATION and development*. Paris: OECD.Google Scholar - Parente, S. L., & Prescott, E. C. (1999, October).
*Barriers to Riches*. Third Walras-Pareto Lecture. Lausanne: University of Lausanne.Google Scholar - Peretto, P. (2007a). Corporate taxes, growth, and welfare in a Schumpeterian economy.
*Journal of Economic Theory*,*137*, 353–382.CrossRefGoogle Scholar - Peretto, P. (2007b). Schumpeterian growth with productive public spending and distortionary taxation.
*Review of Development Economics*,*11*, 699–722.CrossRefGoogle Scholar - Peretto, P. (2007c). Energy taxes and endogenous technological change. Working paper. Duke University.Google Scholar
- Peretto, P. (2008). A Schumpeterian analysis of deficit-financed dividend tax cuts. Working paper. Duke University.Google Scholar
- Perron, P. (1989). The great crash, the oil price shock, and the unit root hypothesis.
*Econometrica*,*57*, 1361–1401.CrossRefGoogle Scholar - Perron, P. (1997). Further evidence on breaking trend functions in macroeconomic variables.
*Journal of Econometrics*,*80*, 355–385.CrossRefGoogle Scholar - Pigou, A. C. (1938).
*The economics of welfare*(4th ed.). London: Macmillan.Google Scholar - Sa, N. (2007). Sunk costs, market structure, and welfare: A general equilibrium interpretation. Working paper. Duke University.Google Scholar
- Saikkonen, P. (1992). Estimation and testing of cointegrated systems by an autoregressive approximation.
*Econometric Theory*,*8*, 1–27.CrossRefGoogle Scholar - Stephenson, E. F. (1998). Average marginal tax rates revisited.
*Journal of Monetary Economics*,*41*, 389–409.CrossRefGoogle Scholar - Stigler, G. J. (1971). The theory of economic regulation.
*Bell Journal of Economics and Management Science*,*2*, 3–21.CrossRefGoogle Scholar - Stock, J. H., & Watson, M. (1993). A simple estimator of cointegrating vectors in higher order integrated systems.
*Econometrica*,*61*, 783–820.CrossRefGoogle Scholar - Ventura, J. (1997). Growth and interdependence.
*Quarterly Journal of Economics*,*112*, 57–84.CrossRefGoogle Scholar - Vogelsang, T. J., & Perron, P. (1998). Additional tests for a unit root allowing for a break in the trend function at an unknown time.
*International Economic Review*,*39*, 1073–1100.CrossRefGoogle Scholar - Zivot, E., & Andrews, D. W. K. (1992). Further evidence on the great crash, the oil-price shock, and the unit-root hypothesis.
*Journal of Business and Economic Statistics*,*10*, 251–270.Google Scholar