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.