An Economy Buried by Regulations

A recent news report outlined the rather staggering growth in federal regulations over the years. RegData, a tool developed by myself and colleague Omar Al-Ubaydli for the Mercatus Center, documents how many regulatory restrictions have been put in place by the federal government.

While the effectiveness of different rules can vary, this regulatory accumulation is hurting the U.S. economy. A study in the June issue of the "Journal of Economic Growth" – authored by John Dawson of Appalachian State University and John Seater of North Carolina State University – estimates that federal regulations have reduced economic growth by about 2 percent per year between 1949 and 2005. They find that if federal regulations were still at levels seen in the year 1949, current GDP would be $38.8 trillion higher. While that number seems extraordinarily high, a number of other studies have similarly concluded that regulatory accumulation slows down economic growth.

Part of the reason is that regulations act as a hidden tax on individuals. If the Department of Transportation sets a higher fuel efficiency mandate for cars, then cars become more expensive, just as if the government imposed a new tax on vehicle purchases.

Another unintended consequence is the stifling of entrepreneurship. Regulations can create barriers to people interested in selling goods or services or starting a small business. For example, 17 states require an individual to earn a license to do hair braiding. To obtain a license in Pennsylvania, you have to train for 300 hours, pass a practical and theoretical exam and then pay a fee. Barriers such as these give consumers fewer choices, and with fewer practitioners offering their services in a particular field, customers may face higher prices.

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