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The Numbers Behind a Non-Competitive Economy

Posted by Christopher Geehern on Jun 13, 2013 9:01:00 AM

American employers have long been convinced that inefficient regulation and bureaucratic governmental institutions make it harder to run a business in the United States than elsewhere.  

Small businessTurns out, they’re right. Harvard historian Niall Ferguson argues in a book to be published today, and in an adaptation in the Wall Street Journal this week, that economic growth in the United States is being undermined by creaky regulation, staggeringly complex legislation and a court system choked by frivolous litigation.

Ferguson argues more broadly in The Great Degeneration:How Institutions Decay and Economies Die, that the central institutions of Western democracy - representative government, the free market, the rule of law and civil society, are all in decline.

“If poor countries can get rich by improving their institutions, is it not possible that rich countries can get poor by allowing their institutions to degenerate?” Ferguson asks in the Journal.

He says the numbers leave little doubt that American entrepreneurs face an uphill battle:

  • The World Bank defines “red tape” by measuring the total number of days it takes entrepreneurs to start a business, obtain a construction permit, register a property, pay taxes, get an export or import license and enforce a contract.  The time period to accomplish those tasks in the U.S. has increased 18 percent from 368 to 433 days during the past seven years, an increase that places the nation in the bottom 10 worldwide along with Zimbabwe, Burundi and Yemen.
  • The U.S. score in the World Economic Forum Global Competitiveness Index has declined by six percent in the past decade, while China has improved its score by 12 percent. Business executives responding to the Forum’s most recent survey cited “inefficient government bureaucracy,” taxes and tax regulation as the most problematic factors for doing business in the United States.
  • The U.S. ranking for its legal system and property rights has dropped from ninth in the world in 2000 (9.23 out of a possible 10) to 33rd in 2010 (7.12 of a possible 10), according to the Fraser Institute’s Economic Freedom Index.
  • A separate evaluation of the U.S. legal system by the World Justice Project ranks the nation 17th out of 97 countries for the extent to which the law limits the power of government, 19th for regulatory enforcement and 22nd for access to civil justice. Ferguson points out that the ranking place the U.S. near the bottom of former British colonies, behind New Zealand, Australia, Canada and Hong Kong.

The news is even more sobering for employers doing business in highly regulated, high-cost states like Massachusetts.  Ferguson notes in the Journal that the pace of institutional degeneration is not uniform. He maintains that the nation’s four primary growth corridors – the Great Plains, the Gulf Coast, the Intermountain West and the Southeast – “are growing not just because they have natural resources but also because state governments in those regions are significantly more friendly to business.”

Ferguson is not the only researcher to underscore the growing friability of key American economic institutions. Michael Porter of Harvard Business School last year asked alumni to indentify the areas where the United States was falling behind other countries. The most common responses – the effectiveness of the political system, the K-12 education system and the complexity of the tax code.

Associated Industries of Massachusetts believes that the cost and sheer complexity of starting a business here in the commonwealth often acts as an unseen brake on the innovation, discovery and entrepreneurship that are the Bay State’s most visible economic strengths. That complexity is about to increase as Massachusetts prepares to implement the 906-page Affordable Care Act and its thousands of pages of accompanying regulations.

It already takes 433 days to get a business on its feet in the United States. Business people can’t wait another day.

Topics: Regulation, Issues, Economy

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