The true costs of regulations

by Staff Writer

In 2010, the Federal Register, a publication of all new U.S. federal rules, proposed rules, presidential documents and notices became the largest ever published at 81,405 pages with more than 30,000 individual documents. The 2009 edition was of the Code of Federal Regulations, which contains all U.S. Federal regulations, was 163,333 pages covering 226 individual books.

The costs of doing business includes compliance with the law; But government regulations and mandates often come with very real and often burdensome costs. Moreover, these costs are generally more burdensome for small businesses as large corporations tend to have more government lobbying power as well as the advantageous economy of scale.

Today, with the economy stalling in its recovery and even threatening further recession, such regulations have been brought to the political table as a means for sparking positive economic activity and to create jobs. The problem, however, is that much of the political rhetoric for such arguments are often based on ideology rather than empirical evidence of its effectiveness.

So, in order to cut through political rhetoric on the topic, we will first take a pragmatic look at costs as well as the benefits of regulation. Then, lest this analysis be incomplete, we must face the many (often compelling) arguments from their philosophical opposition.

Costs and Benefits of regulation

According to a 2008 report by the U.S. Small Business Administration regulations on businesses come with an annual cost of $1.75 Trillion which is roughly 13% of the U.S. GDP that year. For employers, this translates to an average of $8k per employee with the smallest businesses hit hardest as those under 20 employees averaged over $10k. And since a majority of these costs are passed on to the customer, it amounts to about $15,586 per household. (if evenly distributed amongst U.S. households)

The above numbers are certainly staggering.  They are often repeated as political talking points, but they tell nothing of the benefits of regulations.  But I’m not just talking about moral or ethical preferences: regulations have quantifiable monetary benefits as well.

In fact, a 2011 report done by the White House Office of Management and Budget and Office of Information and Regulatory Affairs on the costs and benefits of major regulations in the past 10 years that such monetary benefits far outweighed the costs more than 2 to 1 in their [estimated] worst case scenario. Cost estimates ranged from $44 billion to $62 Billion for the 105 major rules, while benefits ranged from $132 Billion to $655 Billion.

The report freely admits that there is a limitation to such estimates as many benefits and costs are difficult to quantify, particularly in dollar amounts, and estimates can be wrong or highly speculative. Regardless, the point is, regulations don’t cost nearly $2 Trillion without any actual social or (indeed) economic benefit.

The relative effect of regulations on economic growth (or the stunting thereof) is also, it seems, greatly exaggerated by opponents. According to the Bureau of Labor Statistics: In the first half of 2011, employers listed regulations as the cause of 0.2 to 0.3 percent of jobs lost as part of mass layoffs.

“There are many instances of regulation causing a specific industry to lose jobs,” said Roger Noll, co-director of the Program on Regulatory Policy at the Stanford Institute for Economic Policy Research. Noll cited outright bans of products—such as choloroflorocarbons or leaded gasoline—as the clearest examples.

“The key point is that regulation affects the distribution of jobs among industries, but not the total number,” said Noll.

“The effect of regulation on jobs has nothing to do with the mess we’re in. The current rhetoric about regulation killing jobs is nothing more than not letting a good crisis go to waste.”

Source: http://www.propublica.org/blog/item/whats-the-evidence-that-regulations-kill-jobs

Philosophical “costs” of regulations

The libertarian movement is a growing force in American politics, particularly for a large section right of the political spectrum. The basic philosophy is that regulations inevitably cause more problems than they solve and that they consequently disrupt free markets cause inefficiency and therefore limit productivity. Moreover, and significantly for libertarians, regulations represent a threat to individual freedom and liberty.

The rule of unintended consequences

Part of the problem with estimating costs and benefits is that they tend to be quite speculative in nature. More than that, they often don’t take into account all variables, which, in practice, can greatly effect the outcome in significant ways. Although such unintended consequences can also go both ways: good or bad.

Regulatory capture

Another common argument from libertarians (and the like) is that regulations tend to attract influence and lobbying from the more powerful corporations capable of influencing regulatory legislation to work in their favor. It’s an argument that might appeal to those from the left who feel corporate influence in politics is far reaching. Keep government out of the way and corporations won’t need to influence policy.

The power of market forces

One of the favorite arguments of the anti-regulation crowd, which seems to be their guiding principal, is that in with a true free market, market forces – not mandatory statutes – are more efficient in working out issues (especially when it comes to consumer protections). And instead of taking a governing role, the U.S. Government should assume a more informational capacity for consumers.

Other benefits of regulation

Regulations aren’t just about creating laws that restrict or compel our actions to prevent otherwise undesirable outcomes.  It’s about creating a society with a well established rule of law for the benefit of all of society.  A guide for conducting business with one another in a healthy and ethical manner – a requirement for any healthy society.  It’s these under-appreciated benefits of regulation that can be lost in the political rhetoric.

Accountability

John Stossel published an article in 2001 with some compelling arguments (including many of the above) for how he came to be generally anti-regulation. In it, however, he highlights how civil action rarely led to any kind of Justice for wrongdoing:

“In theory they should deter bad behavior. But because of how our laws have evolved, this process has gone horribly wrong. It takes years for victims to get their money, and most of the money goes to lawyers. Additionally, the wrong people get sued. A Harvard study of medical malpractice suits found that most of those getting money don’t deserve it, and that most people injured by negligence don’t sue. The system is a mess. “

Source: http://www.hillsdale.edu/news/imprimis/archive/issue.asp?year=2001&month=05

But this seems more compelling of an argument for increased regulation than against it. In a world where the threat of civil suits is the best incentive for businesses to behave ethically, such lack of justice would do little to deter businesses from acting in their own interest. Regulations don’t just make businesses accountable, they can prevent irresponsible actions from the get-go.

Level playing field

Although, economically, regulations tend to hit smaller companies harder due to the economy of scale, that’s an advantage larger corporations have in every aspect of business…hardly the fault of regulation. Otherwise universal rules and regulations create a level playing field amongst businesses. Having to follow the same rules means the end to moral ambiguity on things that can become a problem for the general welfare of the public.

Regulatory Policy Pragmatism and Specificity

Focusing on the $1.75 Trillion costs or the 163,000+ pages of regulations we have might be insightful for getting an idea of the overall landscape of regulatory policy in the U.S. Government, but it’s hardly a comprehensive or pragmatic approach to regulation. Being pragmatic means approaching individual regulations, and the evils they intend to reduce, as individual issues worthy of their own debate.

“Some rules are estimated to produce far higher net benefits than others. Moreover, there is substantial variation across agencies in the total net benefits produced by rules. For example, the air pollution rules from the Environmental Protection Agency (EPA) produced 62 to 84 percent of the benefits and 46 to 53 percent of the costs. Most rules have net benefits, but several rules have net costs, typically as a result of statutory requirements.”

Debating whether or not to implement or reduce certain rules requires that each be given their own individual consideration rather than an ideological one-size-fits-all approach.  That’s the true definition of pragmatism.

Why regulatory debate is healthy

Political ideology often clouds the debate over regulations with empty rhetoric and can sometimes even lead to anti-pragmatic decision processes.   But the simple act of having a debate, weighing the costs vs. the benefits of solutions to established problems is a healthy exercise for the improvement policy and of society as a whole.  Admitting the costs to industry, business, and jobs is a big part of that debate.

It’s not only current legislation that should be debated, either. Retrospective analysis of past regulations to ensure they are performing their intended effects is also a huge part of it.

“The increasing interest in retrospective analysis, inside and outside of government, should produce improvements…above all by ensuring careful evaluation of the actual effects of rules. This process should improve understanding not only of those effects, but also of the accuracy of prospective analyses, in a way that can be brought to bear on such analyses when they are written.”

Comprehensive pragmatism requires such a retrospective look at regulations.  Without it, creating regulations for the good of society is a hypocritical endeavor.

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