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    The Hidden Cost of Regulation

    The Federal Register is the document that compiles all the federal rules and regulations that businesses are required to comply with. As of 2010 the Federal Register was 81,405 pages long. Federal regulations serve as a hidden tax on the economy. Costs imposed by regulation do not end up on any Federal budget, nor do they add to the national deficit. However, 81,405 pages of regulations strain the economy by creating huge costs that business are obligated to meet.


    It is not just large corporations but the entire economy that ends up bearing the cost of regulation. Complying with regulations is not cheap. The cost of complying with federal regulation increases businesses’ expenses by billions of dollars every year. Some of the compliance cost associated with federal regulation comes out of businesses’ profits, but much of the costs are passed down to consumers in form of higher prices. Compliance costs associated with regulations cut into businesses’ profits, while higher prices increase the day to day expenses of all consumers. Because regulations create artificial costs that must be paid by both producers and consumers, they cost the economy money and act as a drag on economic growth.


    Just how much money are federal regulations costing our economy? The answer appears to be quite a lot. Every year economist Clyde Wade Crews of the Competitive Enterprise Institute releases a report, entitled “The Ten Thousand Commandments” analyzing federal regulations and their costs. Crews’ analysis found that in 2010 the federal government spent around $55.4 billion dollars funding federal agencies, and enforcing existing regulation. But these costs barely compare to the compliance costs that regulation imposes on the economy.  Crews’ report cites the work of economists Nicole V. Crain and W. Mark Crain, whose study of the net cost of regulations determined  that in 2009 federal regulation cost businesses and consumers $1.75 trillion, or nearly 12% of America’s 2009 GDP.  As a comparison, in the same year, corporate pre-tax profits for all businesses totaled about $ 1.46 trillion.


    Government regulations are also used by the government as a means to hide spending programs. Instead of creating expensive government initiatives, the government can create new regulations requiring businesses to carry out and bear the cost of the same initiatives. For example, rather than creating, additional, expensive programs incentivizing the use of more fuel efficient cars, the government creates emission standards that auto manufacturers are forced to meet at high cost to themselves and to car buyers. Because regulation expenses do not appear on any federal budgets, the government is not held responsible for the true cost of their regulations. The costs are still there, they are just not as easily traced to the government. However, these costs are born by businesses and passed down to consumers in the form of higher prices.


    In his report, Crews suggests pursuing a policy of deregulation as an economic “stimulus”. Crews makes a valid point. Removing regulations that constrain the economy would lessen the $1.75 trillion cost that federal regulation places on the economy, instantly freeing up resources that businesses could use to invest, expand, create new jobs, and lower prices. Unfortunately, the government seems to be pursuing a policy of increased regulation. Between 2001 and 2011, 38,700 new regulations were added to the Federal Register. Of the over 4000 new regulations that are currently being developed by various government departments and agencies, 224 are estimated to cost the economy more than $100 million each. And the Obama administration appears to be doubling down on regulation, with massive new regulations in the works at the Environmental Protection Agency, new health care regulations, and a host of yet to be written regulations covering financial services.


    Overregulation imposes enormous hidden costs on our economy. It creates huge compliance costs on businesses, which in turn slows economic growth and constrains job creation. As America’s mountain of federal rules and regulations continues to grow, the cost on the economy increases. In light of the persistent economic recession and growing national deficit, our nation needs to be pursuing policies that encourage real growth. Unfortunately Obama’s bureaucrats continue to crank out new expensive regulations at an incredible rate.  Continued overregulation will only drag the economy down. On the other hand, pursuing a policy of deregulation, would free up the economy to grow and prosper.


    1 comments
    Conrad Hom
    12/06/2012

    With a total of 2.8 trillion dollars spent on stimulus packages aimed at allowing the economy to recover over a period of four years (CNN Money), it is extremely disappointing to read President Obama's job creation numbers. Let's give the President the benefit of the doubt and assume that his numbers of creating 4.5 million new jobs are true and that he prevented the loss of an additional .9 million jobs, the higher estimate of job loss given by the Obama administration. That means President Obama spent $518,518.519 to create each new job and the economy is barely back to where it was at the beginning of the recession, considering that we lost more than four million jobs at the beginning of President Obama's term in office. These figures don't account for any new jobs needed to keep up with population growth and as a result, the overall real unemployment rate is about 14.7% and the economy looks like it may enter into yet another recession again (Forbes). However, President Obama would have us believe that the economy is back on track and that this is the perfect time for a general increase in regulations. Regulations are a rather clever way for the government to increase its spending power without putting the money amount on the books. They are expensive for businesses to comply with and increase the overall cost of labor. While the government still has to create new agencies to enforce certain regulations, they don't have to pay for businesses to retool themselves. Since the government doesn't have to pay for that cost, it doesn't add to the national debt and it gives the impression that a president is working hard for the benefit of the people. In the past 90 days, President Obama has proposed 5,820 new regulations that will undoubtedly hurt our recovery. Regulation costs are almost always passed on to the consumer in terms of higher costs.
    Let's summarize the problems with the current economy. It takes the government an average of $518,518.52 to create one new job while we have a real unemployment rate of 14.7%. President Obama now wants to increase regulations on the economy with 5,820 new regulations passed in the last 90 days. Even though I am not an economist, I can tell that this isn't a good situation for any country to be in. The increased regulations on key industries within the United States economy including the auto industry, banking industry, Medicare and Medicaid are likely to slow down economic recovery into the future and prevent future job growth. In order to combat this recession, we need a new plan. Increasing the number of regulations doesn't help anybody to produce new products and grow an economy. Rather regulations are costly to implement and requires an expansion of government in order to ensure that all the rules are being enforced. That means the government needs to hire new workers and in order to pay for those workers, there must be a corresponding increase in taxes, which means that the Obama administrations projections of 12 million jobs to be created over the next four years are very unlikely to occur compounded by the fact that their track record for predicting future job growth has not been very accurate in the past. I think that everyone in politics right now recognizes that the key to economic recovery is to create new jobs. The key difference between the Republicans and Democrats is who should be the driving force behind that growth. Republicans believe that private businesses should be the driving force behind the economy and be responsible for regulating themselves in a responsible manner. The free market system would eventually produce the best goods at the lowest cost. Democrats on the other hand want the government to be the driving force behind the recovery. However, government has traditionally been a very inefficient entity, consuming resources far in excess of what was required to complete a job.
    I believe that going into the future, there are two keys to allowing the economy to recover. First, the government must reduce the number of regulations in the economy so that small businesses have a chance to start up. Secondly, the government must learn to invest in entrepreneurs. If anyone is not familiar with the ABC show Shark Tank, the premise of the show is that entrepreneurs with an idea or business make a presentation in front of venture capitalists with the hope of receiving investments that will allow them to grow or save their business. The venture capitalists themselves are entrepreneurs and self-made millionaire and billionaire investors. They represent real entrepreneurs across America who are often asking for amounts of less than $100,000 to either buy new inventory, expand their manufacturing line, pay for more advertising, etc. Many of these businesses have sales that would ordinarily allow them to receive a loan from the bank but in these uncertain times are unable to receive a loan for whatever reason. These businesses are capable of producing new jobs and new wealth for a relatively small investment. As these businesses grow, they would create new jobs that would certainly help America out of its current recession and any plan for economic recovery that doesn't account for these entrepreneurs is doomed to fail. Mark Cuban, the self-made billionaire investor of Shark Tank presented an interesting challenge to President Obama when he argued that manipulating the tax rate did not have any real impact on the creation of jobs. Mark Cuban stated that the government should try to invest in entrepreneurs who had business models that simply needed capital to get the ball rolling. The government would in essence create a bidding war between businesses granting contracts between businesses who would create the most jobs for the least amount of money. I would like to introduce a twist to his proposal so that instead of creating a bidding war for government contracts, the government would invest in all businesses that demonstrated viability for at least two years with profits and the potential for future growth.
    This plan could be implemented by creating an additional branch of the Federal Reserve Bank that would oversee investments into businesses. Since the Federal Reserve Bank has huge cash reserves, they could afford to invest in multiple new projects at the same time. When the Federal Reserve was lending money to regular banks at the discount interest rate, they expected to see a revival within the American economy. However, many banks just sat on the money and decided to loan the money to other federal institutions which were considered to be a far safer investment. My proposal is to have the Federal Reserve Bank deal directly with the American people, providing loans at the current discount rate, which is basically free. Banks wouldn't be able to sit on the cash, the American people would receive lower interest rates and businesses that need loans for business purposes could actually start growing. The Federal Reserve bank should only loan money to businesses with real sales that can demonstrate their profitability and the potential for future growth for at least two years. If the Federal Reserve was willing to take more risk, they could even invest money for a certain percentage of a potential business with a buyback option that would allow the original entrepreneurs to purchase back stock in their company if they so chose. Next Congress would have to pass a bill removing the majority of regulations that are not necessary and institute more stringent requirements for new regulations to be passed. Businesses that were formerly considered too big to fail should be allowed to crash and allow the system to restart so that we aren't compounding our current economic problems. Business propped up by the government have not been fixed and will simply crash at a later date. It is better to have it crash now when the problem is small then in the future when it will be impossible to manage. This would allow new competition into the marketplace which I believe will ultimately produce better products for lower prices. People will begin to spend more money and with all these benefits provided to them, entrepreneurs would see this as a great opportunity to grow their business hiring more workers and making more money. Since everyone would become richer, they would pay more in taxes regardless of what the tax rate was and we could begin to deal with some of the bigger issues that the United States is facing like the enormous debt crisis. There are obviously risks with this plan. Not every investment will work out but the ones that do will more than pay for itself. Once the current crisis has been resolved, the Federal Reserve would then remove the newly created system and return to the old financial system without the major regulations. Over the long term, I hope that this will teach people that they need to become more self-reliant and that the government is not responsible for their well being.

    Annalyn Censky@CNN Money, Obama may be a Job Creator After all. September 28, 2012

    Chris Isidore@CNN Money, Stimulus price tag:$2.8 trillion. December 10/2012

    Peter Ferrara for Forbes, Obama's Real Unemployment Rate is 14.7% And A Recession's On the Way. October 11, 2012

    Regulations.gov, Newly Posted Regulations. December 6, 2012

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