There is no denying that the plethora of government regulations spewing out of Washington, D.C., state capitols and local governments impose tremendous costs on economic growth. But a new working paper for the Mercatus Center at George Mason University finds that these regulations are even more costly than the sum of their parts.
Using data from the Bureau of Economic Analysis, U.S. Census Bureau and a custom-made database that quantifies regulatory restrictions by industry, the authors examined regulations in 22 industries between 1980 and 2012 and found that regulation reduced average annual economic growth by 0.8 percent. By 2012, the added regulatory millstone had cost the economy about $4 trillion a year in foregone growth — nearly $13,000 per person.
Interestingly, the cumulative effect of regulations is greater than the total of each individual regulation’s cost. “The buildup of regulations over time leads to duplicative, obsolete, conflicting and even contradictory rules, and the multiplicity of regulatory constraints complicates and distorts the decision-making processes of firms operating in the economy,” the authors note separately in a research summary. “The accumulation of regulation over time leads to greater and greater distortion of investment choices. Moreover, the investment choices of previous years affect growth in future years because knowledge that is not created cannot be implemented next year and the years after to be more productive.”
“By altering investment decisions and disrupting the innovation that comes from investment in knowledge creation, regulations have a cumulative and detrimental effect on economic growth — and, over time, have a real impact on American families and workers,” they concluded.
The Mercatus study underscores that when considering the costs of additional regulation on innovation and economic growth, we must be mindful not only of the administrative costs, regulatory costs and opportunity costs, but also the extra costs of regulatory accretion. The corollary is that reducing regulations and eliminating duplicative and conflicting regulations would free up more resources to stoke innovation and productivity and grow the economy in the long run. Let the cutting of the red tape begin!
The above editorial appeared in The Orange County Register.