Excess Regulation Costs America $5 Trillion

This post quantifies the true cost of excess regulation and explains how it impedes growth.
Excess Regulation Costs America $5 Trillion
By: George Noga – February 26, 2017
     The USA has not achieved 3% economic growth since 2005, a stretch of 11 years and counting. Previously, the longest period without 3% growth was a mere four years from 1930 to 1933! Excessive government regulation is the primary cause, yet few Americans truly understand the grave harm this causes and how it wreaks its damage.
    If the regulatory burden had been held constant at 1980 levels, when regulation already was pervasive, the US economy would be 25% larger today. That translates to unrealized economic growth of $5 trillion, equal in 2017 to $15,000 for every man, woman and child in America, or $60,000 for a family of four, each and every year forever. The regulatory cost for the average business is 21% of payroll. The costs used herein are only incremental costs since 1980; the total costs are vastly higher.
     The cumulative effect of new regulations since 1980 costs us nearly 1% per year in GDP. If the US regulatory burden were its own country, it would be the world’s fourth largest economy, bigger than Germany, France, and the UK. Source Note: Most data cited herein are from the Mercatus Center at George Mason University; some data have been extrapolated from 2012 (when their study concluded) to 2017 by MLLG.
 
    Now that we have quantified the horrific cost of excess regulation, let’s look at how it savages economic growth. The direct cost of compliance alone is $2 trillion per year. Regulation results in less investment, misallocation of resources and increased unemployment. Following are specific insights and examples of how the 1+ million regulations now in existence destroy economic growth and harm American families.
     The first insight is that regulation must be viewed from a cumulative perspective. The effect of adding one incremental regulation onto the mass of existing regulations creates an endogenous effect that is far greater than the impact of just the newly added regulation and is compounded by the uncertainty and likelihood of future regulations.
    Most industries succeed in regulatory capture, i.e. manipulating the regulators and using regulation as a weapon to prevent competition. Big companies use regulation to quash smaller firms. Researchers found that stocks of companies heavily committed to lobbying outperform the S&P 500 by 25%. The lesson is not lost on business: better to invest in gaming government rather than in creating new products and jobs.
      The World Bank Ease of Doing Business Index lowered the US from third to eighth place during the past eight years. During the same period, getting a construction permit increased from 40 to 81 days. Enforcing a contract now takes 420 days compared to 300. Regulatory risk has jumped 80%; capital expenditures dropped $32 billion and jobs shrank by 1.1 million. Alarmingly, many more regulations now carry criminal penalties whereas in the past they were simply civil. Remember the collapse of  Arthur Anderson, the giant CPA firm, when it was slapped with ersatz criminal charges?
      Progressives believe society would be better if governing elites (i.e. progressives) used highly credentialed experts in every field to establish enlightened rules to govern behavior. This is a fundamentally flawed view of human nature and of how the world really works. As has been repeatedly demonstrated throughout human history, free people and free markets work best without the heavy hand of government.
     President Trump recently signed an executive order requiring that every dollar of cost imposed by new regulations be offset by eliminating two dollars of other regulatory costs. This is a good start not only for obvious economic reasons but because it can change the culture and incentives from rule making to deregulation.

Next from MLLG on March 1st – A Personal Perspective on Regulation