Don't Be Fooled, Regulations Cost Jobs

Mitt Romney has made reforming regulations a key, if vague, part of his economic plan. While acknowledging the multifaceted nature of weak economic conditions in America, the presidential candidate's website argues "a major part of the problem over successive presidencies, and one that the Obama administration has sharply exacerbated, is the regulatory burden on the economy."

Naturally, those who are suspicious of the private sector and look to bureaucracies for true wisdom scoff at this claim. They defend regulation by arguing that benefits exceed their costs. Sometimes that is true, sometimes not. Either way, it ignores the fact that often there are less costly ways to realize those benefits. And what is worse are claims that regulations are costless and even economically beneficial, resulting in new jobs!! As Travis Waldron put it at ThinkProgress "the GOP's 'job-killing regulations' rhetoric is built on a myth."

Hmmm. According to a Gallup poll, 22 percent of small business owners say that "complying with government regulations" is the most important problem facing them today, beating out weak consumer confidence and demand as a concern.

Even more awkward, Obama's Small Business Administration (SBA) says that complying with federal regulations alone costs $1.7 trillion annually. That's about half of the federal budget and nearly 12 percent of GDP. Moreover, the SBA says that federal regulations cost on average $10,000 per employee. That means in the absence of federal regulations a typical business with 10 employees would have $100,000 lower costs. Even in this uncertain economy, most businesses of that size would use some of the additional capital to expand business and possibly hire an additional worker.

And that is just federal regulations. State and local regulations often add dramatically to those costs.

Those mere facts have not slowed the "regulations don't cost jobs" mantra from many one bit. Their arguments tend to come in three forms.

First, saying that the economy has grown even while regulations have expanded, so clearly businesses adapt and we are all better off. Second, arguing that data show few layoffs are due to regulations. And third, suggesting that regulations actually drive change and innovations, which in turn create jobs.

Well, wrong on all counts. Lets break it down.

First, let's look at the argument that the economy and jobs have grown in spite of the increase in regulations, therefore there is no problem with more regulations. As Rex Nutting put it at MarketWatch, the businessman fights "regulation tooth and nail, but if it is approved, he finds a way to make money without poisoning the water, fouling the air, employing toddlers or killing his customers." Well, regulations certainly have grown. According to the Regulatory Studies Center at George Washington University, from 2000-2012, the number of federal regulatory officials grew 66 percent and the budgets of federal regulatory agencies (adjusted for inflation) grew 75 percent. Over the same period, the U.S. population grew 14 percent but the number of jobs in the U.S. grew by only 4 percent. Of course, correlation is not causation, but combine this with the experience of small business owners and a pattern seems to emerge. One might imagine that if federal regulatory staff and budgets had grown by an outrageous, but more modest than reality, 33 percent or so, that job growth might have been 5-6 percent.

Yes, business managed to create jobs in spite of exploding growth in regulatory costs. But the pace of job creation did not keep up with population growth. And there are many jobs that businesses had to forego creating because of over regulation This is the insight of economist Frdric Bastiat's "that which is seen and that which is not seen" argument. We can see the regulations and the modest job growth, but we cannot see the jobs that were not created due to regulatory costs, because they are not there to see.

Second, in May, the Bureau of Labor Statistics released data from a survey of reasons for layoffs showing that regulations are a very minor cause. The media and regulation-loving blogosphere lit on fire with variations on the story that, as MediaMatters put it, "Government Regulations Do Not Have A Meaningful Impact On Unemployment." What a classic straw man. The argument has not been that regulations cause layoffs, but that they prevent new jobs from being created. Take the Sarbanes-Oxley Act. Since Sarbox passed, the number of IPOs in the U.S. has fallen 80 percent according to researchers at the University of Florida. IPOs fund businesses to expand and hire. Fewer IPOs, all other things being equal, means fewer jobs created. When businesses must spend money to comply with new regulations, they have less money to spend on other things, including hiring.

Finally, possibly the richest argument in defense of regulations is that in fact regulations drive innovation. As Bill Fulton argued in Governing, just look at renewable energy requirements. By mandating the use of new technologies, they force companies to hire people to innovate, or at least install existing technologies.

In some ways there is truth to this argument. After all, the wind and solar energy industries would be mostly nonexistent right now without renewable portfolio standards ensuring their existence. However, this does not mean employment is higher on net because of the regulations. The Washington Post last November told a story of an old coal plant in Ohio being shut down at the loss of 159 jobs, but an hour north a new natural gas plant opening up with 25 employees. "The two plants tell a complex story of what happens when regulations written in Washington ripple through the real economy. Some jobs are lost. Others are created." And overall the effect of regulations on jobs is a wash, the Post article concludes. Maybe I am not up on the new math, but to me that story looks like a loss of 134 jobs, not a wash. Besides that, the story ignores the fact that all the resources used to replace a working power plant are resources that cannot be used elsewhere to create jobs. Again, the jobs forgone to pay for regulatory costs are not seen (at least not seen by the Post reporter).

But wait, there's more. In the same story Mike Morris, CEO of American Electric Power (AEP), says "We have to hire plumbers, electricians, painters, folks who do that kind of work when you retrofit a plant. Jobs are created in the process - no question about that." Wow, yet another classic fallacy. Anyone that owns AEP stock is brave, because by the CEO's logic if the government said to tear down ALL of his power plants and replace them, that would be a good thing because it creates jobs. Heck, if that is true, lets mandate tearing down and replacing everyone's houses and get another construction boom going!

This is a reminder of another gem from economist Fredric Bastiat known as the "broken window fallacy." Economies don't create jobs and wealth on net by destroying things that are working well or with unproductive busy work. All those jobs have costs, costs that could pay for jobs producing something new rather than complying with regulatory mandates.

None of this is to say that we should have a completely unregulated economy. Rules restricting fraud and theft of consumer property, for instance, are critical for a well functioning financial system. Regulations that are about providing a system of justice and rule of law are necessary for a free market to flourish. However, regulations are not job creators and policymakers should be well aware of their costs.