Regulations Are Stifling Economic Growth

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As the size and scope of government have expanded, regulators have come to play a much larger role in our day-to-day lives. The advent of the administrative state has created a web of regulations covering everything from design standards for electric appliances to new rules that require hotels and restaurants to accommodate miniature horses as service animals. All too often, common sense is being replaced with exacting statutes and regulations that dictate very specific forms of compliance.

While not as widely reported, regulations can be just as damaging to the economy as taxes. Eliminating excessive regulations and unnecessary compliance costs cannot be overlooked when addressing the issue of economic growth. To the extent that tax reform can provide greater incentives to work, save and invest, regulatory reform is imperative to ensure that businesses have the flexibility to absorb the new economic capacity. Tax reform that offers better incentives for economic growth will yield little if investment and employment opportunities are strangled by red tape and regulation. In this sense, regulatory reform serves to amplify tax reform by creating a marketplace more conducive to economic growth.

Unfortunately, the regulatory burden has yet to be addressed in Washington. Vital sectors of the economy remain mired in paperwork and regulations, and President Obama's signature health care law is creating an expansive new regulatory agenda. Elsewhere, technologies that promise significant benefits to consumers and the economy in general have yet to be deployed due to regulatory barriers and uncertainties. And the administration and the EPA are moving forward with tough new restrictions on emissions that could cost consumers billions of dollars with little to show in terms of benefits. Federal agencies continue to churn out regulations of all kinds; in fact, during the 2013 fiscal year, Washington issued more than 3,600 regulations.

If the fundamental role of regulations is to improve social welfare, then regulatory policy must be guided by practices that ensure the benefits of regulation are greater than the costs they impose. Economists rely on cost-benefit analysis for such comparisons, and federal agencies are supposed to incorporate this analysis into the regulatory process. However, with poor data and variables that may be difficult to quantify, regulatory analysis is often left wanting.

Despite the current regulatory burden and its potential to hamper economic activity, little headway has been made streamlining the regulatory burden. The slightest hint of regulatory reform is equated to a "regulatory rollback," and any reform is viewed as a threat to health or safety. However, such claims begin with the assumption that the existing regulatory regime is efficient and cannot be improved - a position that is difficult to justify with regulatory analysis. Many of the most onerous regulations still on the books were developed under the old "command and control" view of regulation, where federal agencies developed detailed regulations that have proved to be costly and not necessarily the most efficient way to meet regulatory objectives.

And it is not just federal regulation. American consumers and businesses face just as many challenges from state and local regulations, with oftentimes inexplicable results. Recent years have seen a rash of shutdowns of illegal lemonade and cupcake stands run by children. In fact, the Illinois General Assembly passed legislation to address concerns about "home kitchen operations," with the following requirements:

(1) Monthly gross sales do not exceed $1,000
(2) The food is not potentially hazardous baked food as defined in Section 4 of this Act.
(3) A notice is provided to the purchaser that the product was produced in a home kitchen.

While all this may seem inane, there are real economic costs to this zeal for regulation. Regulators thwart innovation and competition in the marketplace. Disruptive technologies face an uphill battle because their products do not fit squarely into existing regulatory regimes. Lyft and Uber's challenge to local taxi monopolies and Airbnb's threat to hotels has sparked regulatory battles across the country. While these products clearly provide consumer benefits, the regulatory minefield they face is daunting. Regulators are trying to force them into outdated modes of regulation, and their regulated counterparts are trying to use the regulatory system against them.

The administrative state and its codified laws have transformed markets and economic activity in America. Regulators have become a virtual silent partner to businesses seeking to comply with a wide array of regulations covering virtually every aspect of business. If policymakers are truly concerned about the stagnant economy, it may be time to address the growing regulatory burden.

Wayne Brough, Ph.D is Chief Economist and Vice President of Research at FreedomWorks.  

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