Daniel Sutter: Costs of regulation

The federal government issues thousands of pages of new regulations annually (over 90,00 in the Federal Register in 2023). The costs of regulation are largely hidden but can be estimated them. A recent study from the National Association of Manufacturers puts the total at $3.1 trillion annually, over 10% of GDP.

The study was undertaken by economists Mark and Nicole Crain. The total includes both direct costs – the employees and capital used in compliance – and indirect costs – distortions of economic activity.

Measuring the direct cost is conceptually straight-forward albeit Herculean: tally all compliance costs for all federal regulations. Direct costs sum to $1.1 trillion. This does not surprise me as 10% of bank employees reportedly work in compliance.

Indirect costs, however, are far less tangible, including jobs never filled and products never made. How might we estimate this?

First, we need a measure of regulation. Crain and Crain use the International Institute of Management Development’s World Competitiveness ranking, available for numerous countries for over twenty years. They assess statistically if countries with more regulation have lower GDP, controlling for other factors. The answer is a resounding “Yes!”

The average U.S. Competitiveness Index rank is 16th. Crain and Crain use the increase in GDP possible if the U.S. score equaled the average of the five best country scores as the indirect cost. This is not the full indirect cost of regulation, rather the value of a feasible reduction in regulation. The 17% improvement needed to reach this level would increase U.S. GDP $2 trillion annually.

Is this estimate plausible? Inflation-adjusted GDP per capita grew an average of 2.7% annually between 1949 and 1973 versus 1.7% since 1974, the great growth slowdown.  Many factors likely contribute here, but regulation expanded enormously prior to 1974, with establishment of the EPA, the Occupational Safety and Health Administration, and the Equal Employment Opportunity Commission.

If regulation reduced growth by half a percentage point annually since 1974, half of the slowdown, lost GDP would around $7 trillion annually. Crain and Crain’s estimate seems reasonable.

Regulation’s costs fall partly on businesses and partly on others, like workers and consumers. Crain and Crain apportion 56% of the costs as falling on business.  Manufacturing bears the highest costs. Cost per employee offers a good measure of regulatory burden and amounts to $29,000 per employee, or 40% of payroll costs (total employee compensation).

Small businesses face the heaviest regulatory burden. Manufacturers’ cost per employee rises from $25,000 for firms with more than 100 employees to $28,000 for firms with 50 to 100 employees and finally $50,000 for firms with fewer than 50 employees.

American manufacturing is not dead, it just does not employ as many people as in the past. Regulation may be reducing American manufacturing. Regulation essentially involves hiring a second non-working employee for every worker, especially for small startup manufacturers.

States like Alabama dole out billions in tax breaks to businesses, often manufacturers. The burden of regulation explains perhaps why such tax breaks are needed.

Bureaucrats author Federal regulations under the authority of laws passed by Congress. Regulatory agencies have some political accountability as the president appoints top bureaucrats and Congress approves budgets and can override specific regulations. But oversight is limited, meaning that regulations do not receive Americans’ full consent and approval.

The report does not measure benefits and offers no assessment on whether regulation improves life. Environmental regulations enormously reduced pollution and benefited America. But many regulations could not pass a legitimate benefit-cost test.

The Supreme Court is pushing back on the regulatory state. Under the “major questions” doctrine, the Court has rejected attempts to find significant new regulatory authority in old laws. And the Court may be about to overturn the Chevron doctrine of judicial deference to administrative agencies.

Regulations frequently must fill in the details of laws. The costs of Washington’s regulations are significant and not listed in the federal budget. Fortunately, economists can estimate and highlight these significant costs.

Dr. Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.