The Strangling Vines of Regulation

By Michael Fumento

Copyright 1996 Michael Fumento

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Even my most libertarian friends will admit to me in moments of weakness that there are some government regulations they don’t 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 they’re 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.

That’s 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 they’d 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 it’s 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 you’re counting on to support you in geezerhood won’t be nearly as big as it would otherwise.

Vedder says environmental regulations make up the lion’s share of the costs, but he hasn’t 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.

"I will concede there could be benefits," to some regulations, Vedder told me. Maybe from lots of regulations. "But the problem is we’ve abandoned the principle of moderation. There’s diminishing returns with regulations as with anything."

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 we’ve been paying the price ever since."

The point of Weidenbaum’s study is that it’s the nation’s 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.

That’s 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 don’t think these companies don’t suffer, too. What happens if they’re 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 don’t. It’s 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 you’re 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 you’re a environmental or health researcher and you don’t discover a new problem, you’re 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 he’s probably not going to keep being able to justify his job.

That’s how it’s 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 don’t touch the one that keep’s Mickey Mouse’s cousins out of my peanut butter.

Read Michael Fumento’s additional work on government and on legislation.