High-minded regulations cost us all

America’s Founding Fathers were skeptical of power concentrated in the hands of a few, including those who would place restrictions on commerce.

Though those patriotic men would have been disappointed to see the power that central authorities have amassed today, they would not have been surprised.

Government’s innumerable interferences in commerce would be all too familiar to them.

In 2005, there were 3,943 new regulations at the federal level. The Federal Register, which tracks regulatory activity, weighed in at 23,041 pages.

According to Ten Thousand Commandments, a study by the Competitive Enterprise Institute, these regulations cost the nation an astounding $1.127 trillion dollars a year, nearly equal to half the cost of the federal government. Think about that: as large as the federal government’s budget is, the total burden of the federal government is actually fifty percent bigger, once regulations are factored in.

Much of the cost of regulation stems from the complexity of compliance. In 1996, the General Accounting Office, an arm of Congress, tried to study the impact of regulations on businesses. None of the companies it examined could state all the regulations that applied to them, and none could provide comprehensive data on the cost of compliance.

Worse still, most federal regulatory agencies said they could not list which regulations applied to a particular company without a great deal of company-specific information and spending a lot of staff time. Without such information it is difficult to believe that enforcement of regulations could ever be rule-based, and the resulting uncertainty greatly increases cost of compliance.

Clemson University professor Bruce Yandle developed a theory, in which he speaks of “Baptists and Bootleggers,” that describes the political process behind regulations very well. “Baptists” are people who promote regulations for saintly reasons, usually restricting the actions of certain groups of people or businesses in order to better society.

“Bootleggers,” by contrast, are special interest groups that push for similar regulations, but for financially gain.

In Yandle’s example, Baptists pushed for Prohibition on moral grounds, a move that unwittingly helped “bootleggers,” who benefited from the elimination of their legal competitors in the marketplace.

For politicians, the Baptists and bootleggers coalition is a dream come true; they can promote their reelection chances by promoting saintly regulations and collect campaign contributions from industry lobbyists at the same time.

In the popular mind, government creates regulations to protect the little guy from too-powereful companies. But many times, regulations favor the large corporations over both consumers and small companies. Smaller competitors and consumers alike lack the influence or presence to protect their interests in the political marketplace. Directly and indirectly, regulations often limit the ability of upstarts to introduce innovations, and raise the costs of doing business. Large companies, by contrast, can achieve economies of scale with their current business model, and take advantage of efficiencies from in-house regulatory experts. Thus, a regulation can actually help the big players retain their market share and raise costs for potential competitors, as well as consumers.

In one example, if a telephone company wanted to compete nationwide against the cable companies, it would have to acquire licenses from over 30,000 franchises. Competition, if permitted to operate, would benefit consumers through bringing lower prices for video programming as well as greater innovation. Complex regulations, though, make it artificially difficult for new companies to enter the market.

Regulations can go wrong in another way: regulators often become captive to those they are supposed to regulate. Industry trade groups bankrolled by the biggest players push for regulations that provide specific benefits to a small group of firms while dispersing the costs across all consumers. Officials entrusted to curb the power of companies build relationships with those in the industry, and often end up promoting rules that the companies actually want.

Higher prices, less competition, and political favoritism for the already powerful: Baptists wished for none of these outcomes, but the road to regulation is paved with good intentions. The final destination is a regulatory hell, as the democratic political system is exploited in the name of many for the benefit of a few. This result should remind us why the Founding Fathers, after risking their lives in a war for freedom, debated so long and so hard to develop a constitution that would ensure not only a viable government, but a limited one.

Paul Burks is a Cincinnati native and former intern at the FreedomWorks. He is a Buckeye Institute guest scholar.