Even my most libertarian friends will admit to me in moments of weakness that there are some government regulations they dont particularly mind. My favorite is the one governing how many rodent hairs or droppings can be in a jar of peanut butter. And where would dumb sitcoms be without a gag about the infamous prohibition against removing mattress tags?
The big problem with regulations is that theyre the opposite of parties — more is definitely not merrier. And while somebody may or may not benefit from them, somebody always pays for them. Often enough, that somebody is all of us.
Thats the conclusion of two recently released papers from the Center for the Study of American Business (CSAB) at Washington University in St. Louis.
The first, by Ohio University economist Richard Vedder, finds that government regulations cost the U.S. economy $1.3 trillion a year in lost productivity. To give you an idea of how much that is, if you took 1.3 trillion dollar bills and stacked them on top of each other theyd reach — well, awfully damned high.
The second paper, by economist and CSAB Chairman Murray Weidenbaum, finds that the companies that suffer most from regulation are medium-sized firms.
Vedder notes in his report that regulation imposes direct costs, requiring businesses to spend to put into effect government mandates. But its the indirect costs — in the form of reduced productivity growth — that really clobber them. Vedder says this means the economy only grows at a rate of one percent per year, instead of the two percent it should. If regulatory activity remained at 1963 levels, the 1993 U.S. Gross Domestic Product would have been about $7.6 trillion. Instead it was only $6.3 trillion.
That means lost jobs, jobs that never get created, and lower wages. It means a drag on the stock market so that mutual fund youre counting on to support you in geezerhood wont be nearly as big as it would otherwise.
Vedder says environmental regulations make up the lions share of the costs, but he hasnt done a breakdown to see exactly how much it is.
New regulations add less and less to living quality, while taking away more and more of these.
For example, he says, "The first billion spent on particulate matter [a cause of air pollution] probably eliminates a lot, but maybe the tenth or 20th or 50 billionth reduces the pollution by very small amounts. The cost-benefit ratio turns negative at some point. I would suggest those severely diminishing returns had already set in probably over a generation ago and weve been paying the price ever since."
The point of Weidenbaums study is that its the nations medium-sized businesses — not the big multinationals like AT&T and IBM or the mom & pop operations that people are always so concerned about — that bear the brunt of this regulatory onslaught.
Thats because the medium-sized firms fill out pretty much the same forms and meet the same requirements as the big boys. But the big boys have a lot more sales to show for their troubles. In fact, the costs of complying with regulations for companies with 20 to 499 employees averages over $5,000 per worker, says Weidenbaum, compared to just under $3,000 for companies with more than 500 employees.
As for the little businesses, everybody feels sorry for them, so they have lots of exemptions. A lot of regulations only affect companies with 50 or more people.
But dont think these companies dont suffer, too. What happens if theyre at 49 employees — and there are probably one heck of a lot of companies with 49 employees — and just need to expand by a couple more? Generally speaking, they dont. Its too much of a headache.
The answer, as Weidenbaum stresses, is not to raise the level at which the regulations kick in. Make the cut-off 75 employees and youre going to find an awful lot of companies with 74.
Rather we need to re-evaluate our regulatory system completely. We should start with the perverse system of incentives we give regulators.
As it stands, if youre a environmental or health researcher and you dont discover a new problem, youre probably not going to get your grant renewed. So you make darned sure you find a problem.
Then the government regulator hears about the newly discovered problem. He has to implement a regulation to reduce or prevent it or hes probably not going to keep being able to justify his job.
Thats how its possible to end up spending billions more each year on regulations with no discernible increase in benefit to safety, health, or even aesthetics. We need to clean house. We must subject current as well as proposed regulations to a rigorous cost-benefit analysis, keeping in mind that even beneficial regulations are a drag on the economy. Just dont touch the one that keeps Mickey Mouses cousins out of my peanut butter.