The costs of excessive regulation act exert a drag on economic growth that over time has significant consequences. The U.S. Council of Economic Advisers summarizes its recent report this way:
Excessive regulation is a tax on the economy, costing the U.S. an average of 0.8 percent of GDP growth per year since 1980. This taxation by regulation has increased sharply in recent years, with approximately 500 new economically significant regulations created over the last eight years alone. Through a thorough review of the literature, the Council of Economic Advisers (CEA) finds that deregulation will stimulate U.S. GDP growth.
The report examines the growth of federal regulation and provides an international perspective. Perhaps surprisingly, given all we’ve heard about EU regulatory overreach,
OECD calculations place the United States as 27th out of 35 countries in product market regulation behind France, Chile, and the Czech Republic . This measures a country’s success at setting product market regulation that encourages competition and ensures a level playing field among firms. (References omitted.)
The costs are substantial.
In 2012, the total cost of Federal regulations to the U.S. economy was estimated at $2.03 trillion (in constant 2014 dollars) by Crain and Crain (2014) as part of a study for the National Association of Manufacturers (NAM)…
The Office of Management and Budget (OMB) – which only evaluated 0.4 percent of all final rules – estimated in 2016 that major Federal regulations imposed annual costs of $74 to $110 billion (in constant 2014 dollars). For OMB to evaluate a rule, it must be expected to cost over $100 million and have already been evaluated by the agency. OMB notes that their estimates are not a complete accounting of all the costs and benefits of all the regulations issued by the Federal government. It is then likely that the total cost of regulation in 2016 is closer to Crain and Crain’s estimates for 2012.
The impact falls heavily on smaller enterprises.
In particular, the cost per employee of complying with regulations was higher for small firms ($11,724) than it was for firms with over 100 employees ($9,083), meaning that small firms disproportionately bear the cost of complying with regulations (Crain and Crain 2014). Rather than encouraging business development and investment, excessive regulation disproportionately discourages small business growth through the higher burden of regulation.
There’s much more in this brief (14 pages) and clearly written report (shorter form here). We commend it to your attention. The CEA concludes,
Federal regulatory activity in the U.S. may have proliferated with the best of intentions, but the negative consequences of excessive, duplicative, or badly designed regulation are a tax on the U.S. economy. Past instances of deregulation have shown substantial gains to consumers and businesses in the economy. Deregulation can unleash the greater potential of the U.S. economy, spurring the innovation and economic growth necessary to keep the United States prosperous, and to empower its citizens with greater opportunities.
What’s true at the federal level is also true with respect to state and local regulatory policy. In our 2017 foundation report we wrote in a similar vein,
Economic growth through innovation and entrepreneurship is also affected by the state’s regulatory environment. Over the decades, Washington has added new regulatory systems intended to protect the natural and built environment. That said, the Pacific Research Institute ranks Washington No. 42 in regulatory burden on a scale that has No. 1 as least burdensome…
Regulatory compliance raises the cost of developing facilities and operations…[R]egulatory policies should be regularly reviewed to see that benefits justify the costs of compliance.
For more, see our posts on the Washington Research Council report on the Growth Management Act and the Sightline Institute’s discussion of how regulatory costs impact Seattle housing affordability.
The CEA study is a useful reminder that the cumulative costs of excessive regulation impede economic growth, limiting opportunity for upward mobility and shared prosperity.