The Economic Ball-and-Chain of Regulation

Bob Beauprez / Townhall Columnist

As someone who spent virtually all of my life connected to small business – dairy farming, real estate development, community banking, and now a family buffalo breeding ranch – I learned first-hand that that there was a real cost to government regulation. Regulations accumulate over time eventually leading to the same result as the proverbial straw piled on the camel's back.

Just how great of a cost is that additive pile of regulation on our economy? A new study by the Mercatus Center at George Mason University came up with a mind boggling answer. Had regulations been frozen in place in 1980, the U.S. economy would have been $4 trillion – or 25% - larger than it was in 2012. In personal terms, that's an additional $13,000 for every man, woman, and child in America. For a family four, it would amount to $52,000 for that one year alone.

Put another way, $4 trillion of economic output would rank as the fourth largest economy in the world; larger than Germany, France, and the United Kingdom, and twice the size of Russia's total output. It would mean a lot of jobs, better jobs, bigger paychecks, greater freedom and opportunity.

Most studies of the cost of regulation focus on a particular industry, a specific piece of regulation, or perhaps nation-to-nation comparisons, essentially looking at a moment in time. However, there is a cumulative effect of additional regulation over time that is very real, too.

The authors of the new study, Patrick McLaughlin, Bentley Coffey, and Pietro Peretto, took a longer, more expansive view. The study uses an economic model that examines federal regulation’s effect on firms’ investment choices. Rather than isolate a moment in time or a particular regulation or industry, the economists used a 22-industry dataset that covers 1977 through 2012.

The study finds that "federal regulation—by distorting the investment choices that lead to innovation—has created a considerable drag on the economy, amounting to an average reduction in the annual growth rate of the US gross domestic product (GDP) of 0.8 percent."

It is noteworthy that under President Obama, annual GDP growth has never exceeded 3%. Under George W. Bush growth exceeded 3% just two years. But, in the twenty years before that, GDP growth was above 3% in all but six years.

"Federal regulations have accumulated over many decades, piling up over time," note the three economists. "When regulators add more rules to the pile, analysts often consider the likely benefits and compliance costs of the additional rules." Since 2012, the last data year utilized in the study, 80,000 pages of regulations have been published in the Federal Register each year, and that doesn't include the dozens of Executive Orders and Memorandums issued by President Obama.

"But regulations have a greater effect on the economy than analysis of a single rule in isolation can convey. The buildup of regulations over time leads to duplicative, obsolete, conflicting, and even contradictory rules, and the multiplicity of regulatory constraints complicates and distorts the decision-making processes of firms operating in the economy," according to the Mercatus Center report. "Firms respond to both individual regulations and regulatory accumulation by altering their plans for research and development, for expansion, and for updating equipment and processes.

Because of the important role innovation and productivity growth play in an economy, these distortions have consequences for the growth of the economy in the long run."

No serious person advocates for no regulation, but when is enough, enough? Thomas Jefferson envisioned "a wise and frugal Government, which shall restrain men from injuring one another, shall leave them otherwise free to regulate their own pursuits of industry and improvement, and shall not take from the mouth of labor the bread it has earned. This is the sum of good government," Jefferson said.

While interesting in theory, it is unrealistic to think that the U.S. could completely freeze any new regulation for more than three decades. But, the harsh reality is that America is burdened with "duplicative, obsolete, conflicting, and even contradictory rules" as the researchers note. Many dated regulations should be reviewed and eliminated whenever possible.

Thousands of pages of new regulations are written each year without Congressional approval prior to implementation. In 2009, Rep. Geoff Davis (R-GA) introduced the REINS (“Regulations From the Executive in Need of Scrutiny”) Act. REINS would require congressional approval for the hundred or so “major” rules each year that cost $100 million or more. Yet, as common-sense as this idea seems, it has been stalled in Congress. The House has passed it multiple times, but it has failed to get any traction in the Senate. Mike Lee (R-UT) has recently taken up the fight, and hopefully will be successful.

Progressive Democrats, however, don't like the REINS Act. They favor increased government control of our lives, so even if the Republican House and Senate were to pass it, Obama has promised a veto. Democrats are all too happy to have the EPA, IRS, or any other federal agency promulgate rules that Congress never reviews or passes. They claim Congress "doesn't have the expertise"…"doesn't have the time"…and, of course, the "benefits" of their "progressive" regulations always outweigh any economic cost incurred.

All the presidential candidates talk about creating jobs and growing the economy. But, will any of them tackle the ball-and-chain burden of over regulation? Will the next Congress join in the fight, or just continue adding to the pile? Elections have consequences and this one perhaps as much as any in a long while.