August 15, 2013 • No 313 | Archives | Search QL | Subscribe



The Cost of Regulation: Why It's Worth Thinking About
by Bradley Doucet

What would you do with $190,000 a year? That's what the median household income would be right now in the United States if the federal regulatory burden had remained at its 1949 level, according to a recent study by economists John Dawson and John Seater. Instead, it's $53,000. That's still nothing to sneeze at, but it's only about a quarter as much. Imagine, assuming the distribution of incomes retained the same shape it has now, that everyone had four times as much money. I wonder if we can.

What a Drag

The authors of the above-mentioned study point out that while microeconomists have been analyzing the effects of regulation for decades, macroeconomists have only much more recently begun paying attention. The general conclusion they've reached, though, is that regulation reduces economic growth. The authors' purpose: to get specific and quantify just how much of an economic drag it is getting told what to do all the time.

To get a sense of how much regulation has increased, they looked at the number of pages in the Code of Federal Regulations (CFR). They found that the CFR page count had increased from 19,335 pages in 1949 to 134,261 in 2005, a more than six-fold increase. (According to Ronald Bailey, writing about the study for Reason, that number had risen to 169,301 by 2011.) This growth was not steady—in fact, a few years here and there under the Clinton, Reagan, and Kennedy administrations actually saw reductions in the total number of pages in the CFR—but the overall trend has been clearly upward.

What effect did they find exactly? All of those extra regulations piling up year after year produced substantial negative effects on economic growth, reducing it by some two percentage points a year on average. “That reduction in the growth rate has led to an accumulated reduction in GDP of about $38.8 trillion as of the end of 2011. That is, GDP at the end of 2011 would have been $53.9 trillion instead of $15.1 trillion if regulation had remained at its 1949 level.” The American economy is just 28 percent as large as it would have been if it could have gotten by on a mere 20,000 pages of federal regulations. As the world's other industrialized countries have followed similar paths over the last six decades, heaping regulations upon regulations, it is not unrealistic to assume that most of the wealthy nations of the world could be four times wealthier.

Why Rules Are Overrated

Of course, some will object that we need all those rules, or some of them at least—that in addition to costs, regulations have benefits too. The study provides no estimate of such benefits, but its authors do note that economist Arthur Pigou, for instance, “argues that regulation arises from government's attempt to improve social welfare by correcting market failures.” The most obvious such market failure is pollution, a “negative externality” that imposes diffuse costs on people other than the ones who benefit from the pollution-causing activities. Though difficult to quantify, reducing pollution is certainly a benefit.


“Regulation follows rather than leads society and its mores. Rivers are less polluted, the air is cleaner, and forests are better-managed in the industrialized countries of the world not primarily because of regulations, but because we are wealthy enough now to care about such things.”


But, the authors also point out, other economists see regulation as much less benign. George Stigler has argued that the regulatory process is often captured and distorted to benefit the very corporations it is intended to control. Fred McChesney believes that “regulations are created for the benefit of politicians and regulators.” By the light of such public choice arguments, any benefit derived from regulation is purely coincidental.

Another consideration, not raised by the authors of the study, is that regulation follows rather than leads society and its mores. Rivers are less polluted, the air is cleaner, and forests are better-managed in the industrialized countries of the world not primarily because of regulations, but because we are wealthy enough now to care about such things. People want, and can afford, a more pristine environment. We would demand cleaner cars even if regulations did not mandate emissions standards.

How Much Do We Really Need?

There is a different kind of objection to the argument that we would all be a lot richer if there were fewer regulations. It takes the form of such questions as: What's so great about economic growth? Aren't we rich enough already? How much money do we really need, anyway?

To answer these kinds of questions, we need to imagine what your average household might do with $190,000 a year.(1) Some people would surely spend some of their extra cash in ways that others considered self-destructive, like drugs and gambling, or wasteful and frivolous, like ever-fancier cars and houses. As long as it was honestly earned, I personally think we should all mind our own business about the spending decisions other people make, but I'm weird that way.

However, all of that extra income can also buy a lot more in the way of health care, education, art, environmental protection, poverty relief, travel, leisure, space exploration, and any other more socially acceptable amenities you care to name. Are we rich enough already in Canada with one MRI machine per 100,000 people? If everyone in the US were four times richer, would anyone who wanted it lack health insurance? What if the average person could work just 40 weeks a year and spend the other 12 in the Caribbean, or vacationing on the moon colony we would have been rich enough to build by now? What if we were all financially secure enough to stop demanding “protection” from foreign competition and instead traded freely with all the peoples of the world, thus helping them catch up and move into the 21st century, incidentally removing one of the major excuses for war?

How much money is enough? Money is just a medium of exchange, a unit of account, and a store of value. It represents the productive effort we expend in an effort to satisfy our wants and needs. Those wants and needs are potentially endless, limited only by our imaginations. How much money is enough depends, ultimately, on how big we are willing to dream—and on how many regulations we think we can live without.


1. The $190,000 figure is arrived at by taking the current figure ($53,000) and dividing it by 0.28, since the study by Dawson and Seater mentioned in the text found that US GDP today is 28 percent of what it would have been if the federal regulatory burden had remained at its 1949 level. The authors themselves calculate that mean household income is $277,000 less than it would have been, which means it would be $385,000 instead of $108,000, but since the distribution of income is skewed, medians provide a more accurate description of what the “average” household looks like.


Bradley Doucet is a writer living in Montreal. He has studied philosophy and economics, and is currently completing a novel on the pursuit of happiness. He also is QL's English Editor.


From the same author

Is Government a Necessary Evil? A Review of Michael Huemer's The Problem of Political Authority
(no 312 – June 15, 2013)

The Planned Chaos of New Orleans, LA
(no 311 – May 15, 2013)

The Unplanned Order of Houston, TX
(no 310 – April 15, 2013)

Dynamists vs. Stasists: Virginia Postrel's The Future and Its Enemies, 15 Years Later
(no 308 – February 15, 2013)

No Vapour For You! Canada's Ban on Smokeless Electronic Cigarettes
(no 307 – January 15, 2013)



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