An Economy Buried by Regulations

New numbers show that the U.S. economy would benefit from far fewer regulations.

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A recent news report outlined the rather staggering growth in federal regulations over the years. RegData, a tool developed by myself and colleague Omar Al-Ubaydli for the Mercatus Center, documents how many regulatory restrictions have been put in place by the federal government.

While the effectiveness of different rules can vary, this regulatory accumulation is hurting the U.S. economy. A study in the June issue of the "Journal of Economic Growth" – authored by John Dawson of Appalachian State University and John Seater of North Carolina State University – estimates that federal regulations have reduced economic growth by about 2 percent per year between 1949 and 2005. They find that if federal regulations were still at levels seen in the year 1949, current GDP would be $38.8 trillion higher. While that number seems extraordinarily high, a number of other studies have similarly concluded that regulatory accumulation slows down economic growth.

Part of the reason is that regulations act as a hidden tax on individuals. If the Department of Transportation sets a higher fuel efficiency mandate for cars, then cars become more expensive, just as if the government imposed a new tax on vehicle purchases.

[See a collection of political cartoons on Congress.]

Another unintended consequence is the stifling of entrepreneurship. Regulations can create barriers to people interested in selling goods or services or starting a small business. For example, 17 states require an individual to earn a license to do hair braiding. To obtain a license in Pennsylvania, you have to train for 300 hours, pass a practical and theoretical exam and then pay a fee. Barriers such as these give consumers fewer choices, and with fewer practitioners offering their services in a particular field, customers may face higher prices.

Because of the costly impact regulations have on our everyday lives, it is important to measure the effect that these rules and restrictions have on the economy.  At the same time, regulations are so prolific and their effects so varied that it is a herculean task to comprehensively quantify them. 

There have been two notable efforts to measure regulations across a broad group of countries. The World Bank has the publication "Doing Business," which measures the impact of regulations on small- and medium-sized businesses over time, and also ranks countries based on how difficult their regulations make it to set up a new business. (Sidenote: a recent panel recommended doing away with these rankings – that would be unfortunate. The rankings are useful and motivating.) The OECD, meanwhile, has the Indicators of Product Market Regulation Database, assessing how policies either promote or hinder free market competition.

[See a collection of political cartoons on the economy.]

Both efforts do a good job of tying macroeconomic data to real world experiences like opening a business or selling a product, but they also have their shortcomings. The Doing Business index only focuses on only a few regulatory categories. Also, both indexes often focus only on whether a certain type of regulation exists. By doing so, they may not account for the overall complexity of byzantine regulatory codes or the fact that some regulations, even though they exist, may be less or more stringent than others.

Finally, both indexes look at relatively short timelines, even though regulations may take years to fully implement and impact the economy. For their study, Dawson and Seater use the unique approach of analyzing the entire Code of Federal Regulations, which helps account for the complexity of a particular rule (based on length) and allowed them to consider regulations over a long period of time (going all the way back to 1949).

Dawson and Seater's methodology may have some imperfections as well, but economic anlaysis after the fact won't fix the problem. Regulators need to conduct more thorough regulatory impact analyses before implementing rules in the first place. Otherwise we may continue to see rapid regulatory accumulation and suffer the economic consequences.

Patrick McLaughlin is a senior research fellow at the Mercatus Center at George Mason University.

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