The increasing burden of regulations since the 1970s has strangled $4 trillion of GDP from the American economy.
That eye-popping figure comes from a new working paper out of the Mercatus Center at George Mason University that calculated the cumulative cost of regulations and their economic effect.
“Had regulation been held constant at levels observed in 1980, our model predicts that the economy would have been nearly 25 percent larger by 2012,” Bentley Coffey, Patrick A. McLaughlin, and Pietro Peretto wrote.
Not all regulation is controversial – stopping a company from increasing profits by 3 percent if only they poison a small town is a justifiable one – but the analysis demonstrates the impact of ballooning regulations, from the important to the absurd.
The problem stems from the complexity that regulations encounter when translated from a federal rule to the workplace.
“Even an otherwise virtuously conceived regulation has long raised concerns for skeptics because such a regulation may still result in adverse consequences that are hard to anticipate in a complex and dynamic economy,” the authors wrote.
Regulations also have a tendency to be shaped by special interests. Large companies with political connections can get their complaints heard, and compliance is easier than for smaller companies who lack the legal expertise of their larger competitors.
The number of regulations, too, can restrain economic growth unnecessarily. In isolation, a regulation doesn’t sound burdensome. It’s a “common sense” approach to economic reality, or an obvious solution to protect consumers and workers. When dozens of regulations mount, however, some can contradict each other, and they can eat up a business’s resources with no gain to public safety or market competition. That’s a deadweight loss without any social benefit.
Regulation compliance, then, can spur some nasty consequences.
“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,” Megan McArdle wrote.
The cumulative effect of regulation is an ever-increasing squeeze on smaller businesses and marginal workers. Debating the effects of the minimum wage, regulation, and tax increases can lead to unintended consequences when all aren’t considered as interconnected in reality.
“Throwing a single rock, found at the side of a stream, may seem like a good idea because now no one will trip on it. But as more and more rocks are thrown into the stream and accumulate, eventually the stream’s flow is diverted or dammed to a halt,” the report’s authors wrote.
Some countries have recognized that problem and created a “regulatory budget.” To promote economic growth and restrain the burden of regulation, Canada created a budget on the federal level. The approach “can bring greater accountability, discipline and transparency to the policy process” if implemented effectively, according to the R Street Institute.
Regulatory reform offers a chance to revive the economy with a cost-benefit approach to government policy. The Obama administration has used a similar approach in its advocacy for criminal justice reform. Like better tactics that make cities safer and more effective, regulatory reform could return large benefits for the American economy and federal oversight.
