The Regulatory Burden

The average American must labor 69 days in 2012 just to cover the costs of government regulations. 2012 regulations consume about 19 percent of gross domestic product. This is down two days from 2011.

The large jump in regulatory costs between 2008 and 2009 is because of an update to the Crain methodolgy used for calculating regulatory costs. Crain uses a World Bank index that is more comprehensive than the OECD index. The index values come from 1,751 data points.  Significant advantages over the OECD index include: 1) larger data series, 2) Regulatory Quality Index (RGI) covering international economic regulations in addition to domestic that newly includes rules and mandates affecting factor markets (for example, Americans with Disabilities Act), and 3) the World Bank index covers all business sectors.

Our conservative estimate of total regulatory costs takes into account only the cost of complying with regulations: the material resources and labor needed to carry out compliance. For example, if a regulation requires new pollution control equipment power plants, compliance costs include the costs of manufacturing, installing, operating and maintaining equipment.

Not counted are the negative economic effects of regulatory requirements—the deadweight loss of these policies. Deadweight loss is society’s valuation of goods and services forgone due to government rules. These hidden costs stifle the growth of the economy because they introduce inefficiences and distortions, while reducing the economic reward left over for productive activity. Regulations may prevent new firms from entering the market or stop exisiting ones from expanding. They may even force some existing firms out of business altogether. In fact, regulations place small manufacturers at a competitive disadvantage relative to large manufacturers since compliance costs per worker are twice as high.23 Overbearing regulations are disastrous for job creation since 64 percent of the net jobs in the last 15 years were created by small businesses.24 The end result of regulation is a reduction in overall output, fewer jobs, lower wages and suppressed economic growth.

Each year, government regulators receive more funding to raise the costs of goods and services that taxpayers buy. In effect, taxpayers pay twice for regulations: once for agencies to monitor growing government regulations and again when regulations increase prices those citizens pay. Although not counted as part of the COGD for regulation, the budget for regulators was $57.3 billion in 2012, or 1.3 days. This was an increase from the previous year of $2.5 billion. Over the last ten years, regulator budgets have grown by 72.5 percent, much faster than the decade’s growth in regulatory costs.

An April 2011 study by the Phoenix Center found that the expansion of federal regulator budgets led to decreased economic growth and private sector job losses. The study found that the regulators’ budget provides a financial gauge of regulatory activity. According to the study, a 5 percent reduction in regulator budgets would increase GDP by $376 billion and expand employment by 6.2 million jobs over the course of five years.

The Reagan Administration attempted to simplify the regulatory burden on taxpayers and businesses in the presence of a slowing economy in the 1980s. An illustrative measure of the regulatory burden, the federal register fell from over 85,000 pages to under 55,000 pages by the end of Reagan’s presidency.

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