The Price of Regulation

The Mercatus Center has a new study out claiming that regulations are enacting an enormous toll on our economy.

Economic growth in the United States has, on average, been slowed by 0.8 percent per year since 1980 owing to the cumulative effects of regulation:

If regulation had been held constant at levels observed in 1980, the US economy would have been about 25 percent larger than it actually was as of 2012.

This means that in 2012, the economy was $4 trillion smaller than it would have been in the absence of regulatory growth since 1980.

This amounts to a loss of approximately $13,000 per capita, a significant amount of money for most American workers.

Caveats first: it is possible, even likely, that Mercatus is significantly overestimating the impact of regulations. The reason is that their analysis is cumulative. They find that regulations knock 0.8% off our economic growth every year. Well, if you multiply that exponentially over 32 years, you get a huge amount. Their study only goes back to 1980. So … if they extended it back to 1950, how much would they say regulations are costing us? I addressed this before when some numbnuts said our economy would be four times bigger without regulation. When you play with exponential numbers, you get big results.

Moreover, regulations have an economic benefit, as Ron Bailey notes:

According to agency calculations, American families would see up to $7 in health benefits for every dollar invested through the Clean Power Plan. By lowering particulate, ozone, and nitrogen oxide pollution, the EPA argues, Americans will gain the health equivalent of $55 to $93 billion annually; the yearly costs will be only $7.3 billion to $8.8 billion by 2030.

Garbow added that EPA regs don’t just stop harms but spur technological innovation. He specifically cited regulations that support the deployment of renewable energy supplies, and he pointed out that there are now more jobs in the solar power industry than there are in coal mining.

Those caveats having been made, however, I think Mercatus is probably in the ballpark or at least in the parking lot. Other estimates have generally been in the 10-20% range and I don’t think anyone would argue that regulations have no cost on our economy. Even if Mercatus has overestimated the impact of regulations by 100%, that would still be a 10% hit on the economy and $5,000 out of each our pockets.

Moreover, as Bailey notes, the supposed benefits of regulations are probably overestimates themselves. Many are based on past regulations when we did think like stopping companies from dumping toxic chemicals in water or belching smog into our neighborhoods. But there is a huge difference between reducing smog to very low levels and reducing it to zero. The former has huge health benefits and low cost. The latter has high cost and low benefits.

Most importantly, as Megan McArdle argues, regulations do not exist in a vacuum. They exist on top of and beside existing regulations.

“In one year,” wrote Warren Meyer in 2015, “I literally spent more personal time on compliance with a single regulatory issue — implementing increasingly detailed and draconian procedures so I could prove to the State of California that my employees were not working over their 30-minute lunch breaks — than I did thinking about expanding the business or getting new contracts.”

I know what you’re going to say: Employees should have lunch breaks! My answer is “Yes, but.…” Yes, but putting the government in charge of ensuring that they get them, and forcing companies to document their compliance, has real costs. They add up.

An economy with but one regulation — employees must be allowed a 30-minute lunch break, and each company has to document that it has been taken — would probably not find this much of a drag on growth. But multiply those regulations by thousands, by millions, and you start to have a problem.

(Meyer runs the oustanding Coyote Blog where he opines on economics, business and climate science. Those of who are in the climate skeptic camp could find a lot in his recent series on global warming, where he argues for the “lukewarmer” position. More germane to this, you should read his recent post about the Lilly Ledbetter Fair Pay Act and the massive amount of paperwork it is imposing on businesses so that lawyers can file lawsuits we can achieve pay equality.)

One regulation on pollution is not a big deal. But the cumulative weight is crushing, especially on small businesses. Over the last decade, through Bush II and Obama, we have seen a steep decline in new business and IPOs. A huge number of businessmen and economists think is because of over-regulation (particularly the Sarbanes-Oxley law). Maybe the EPA is right about the economic benefits of those regulations. But even if they are, those regulations are on top of a million others, eradicating most of the supposed benefits. Taking away ten hours of a businessman’s time is nothing … unless you’ve already regulated him so badly he only had ten hours left to expand his business.

Look, no one opposes all regulation. We don’t want to go back the days when we had lead in our water, air and food. But we have long passed the point of diminishing returns. And it’s holding back our economy in a big way. McArdle again:

All of these costs have to be carefully weighed against the benefits of regulations — and not just on a regulation-by-regulation basis, as is currently done, if such cost-benefit analysis is done at all. Each hour of a firm’s time that is sucked up by compliance is an hour that is not spent growing the firm, improving the product, better serving the customer. And as the number of the hours so spent increases, and the number of precious hours spent on growth and operations shrinks, each added hour we take is more costly to both the business and to the rest of us. With labor markets lackluster and growth underwhelming, that’s a cost that none of us can well afford.

To be fair, a huge part of the problem is state and local regulation. That needs to be addressed on a state-by-state basis. But the Federal government could set the tone quite easily. The GOP Congress could pass a law that:

  • Puts a two-year moratorium on new federal regulations.
  • Mandates agency-level review of each and every regulation on the books (which might have the side benefit of actually documenting in one place how many regulations we have — no one actually knows).
  • After two years, only re-enables regulations that the agencies have documented are critical to a clean environment or worker safety or some other concrete goal.

They could set a broad goal of cutting the number of regulations in half. And then dare Obama (or Clinton) to veto it.

The biggest problem with our government right now is that our leaders are asleep at the wheel. They have let regulations, tax codes and spending grow without real supervision. That can work fine for a few years. But eventually, the clinking, clattering, cacophony of caliginous cogs and camshafts that is government starts grinding the country to a halt. Periodically, you have to take a hatchet to the regulations if the country is to function. It’s been 23 years since we did that. We are long overdue.

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  1. AlexInCT

    It is not that the regulatatory machine sucks life out of the economy: it is that it is specifically created to allow abuse.

    My son is currently applying for a pistol permit in CT. The bureaucratic machine in Hartford has made that not just as hard and expensive as possible a process to discourage people, but I have been told by police officer friends included built in loopholes that would allow agents of the state to deny totally qualified and honest citizens their right on nothing but a whim. If some asshole feels like fucking you over, they use these regulations to do so.

    The biggest problems I have with regulation is that they have allowed an elite class of corrupt people to produce as system where they not only can pick and choose whom they want to let win and whom they want to make lose, but then can blame others for the evil system they created. Entities like Wall Street or GE are only as evil as the political class that is in bed with them and creates the rules and loopholes that favor them, allows them to be. People that buy into the idiocy that government should regulate the abuses and excesses in the private sector are just plain dumb ass fucking morons acting out of emotion, and then the basest and most vile of them – jealousy and envy –  and not out of any noble motive.

    The only way to curve corruption is to destroy the political class that has created a system that only allows others to play if they line up to buy favors from them. That is, a smaller government that has no power to pick the winners and the losers, economically and otherwise, and that doesn’t exist to perpetuate itself by buying votes with other people’s money from the dregs.

    The entire SJW movement is about totalitarianism and nothing else. This shit always ends in economic ruin, massive amounts of corpses, and misery for all but the connected. And the connected are usually unscrupulous and evil fucks like the current crew in charge.

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