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Regulatory red tape: It's strangling economic growth

| Saturday, March 4, 2017, 9:00 p.m.
For Shughart commentary on regulation
For Shughart commentary on regulation
For Shughart commentary on regulation
For Shughart commentary on regulation

As President Donald Trump has noted, a surefire way to restore the competitive edge America once enjoyed would involve cleaning out the executive branch's Augean Stables from which heavy-handed regulations have been issued at an increasing pace for decades.

Complying with regulations now costs individuals and businesses large and small about $4 trillion every year, according to economists at George Mason University's Mercatus Center. That's about $13,000 per person.

Money spent keeping records, hiring regulatory compliance officers, and dealing with the bureaucrats who promulgate and enforce these regulations — which affect nearly every aspect of daily life — is money not available for families to spend on their own needs.

Indeed, it's money businesses don't have to invest in buildings, equipment and jobs.

Regulations are like a tax on economic activity. And they're a regressive one at that, meaning they fall most heavily on low-income households and small businesses.

Suppose a new safety regulation for cars and trucks — requiring all new vehicles to be equipped with backup cameras, for example — adds $500 to the cost of every vehicle sold. Most of the added cost will be passed on to consumers in the form of higher prices.

Who's hurt more?

Who is more hurt by the price increase: the government bureaucrat making $131,000 a year or an apprentice electrician earning $30,000 annually?

Most regulations are one-size-fits-all. The anti-money laundering provisions of the Patriot Act, passed shortly after 9/11, require all financial institutions to adopt procedures and internal controls to prevent money from ending up in the hands of terrorist groups.

Because the costs of complying with that law essentially were the same for a hometown bank as for a big Wall Street bank, some 3,000 small financial institutions were forced to shut their doors or merge with larger competitors over the following few years.

So-called midnight regulations are another growing problem. That term refers to rules issued by an outgoing administration between Election Day and Inauguration Day.

Every president since Ronald Reagan has signed executive orders requiring government agencies issuing major regulations to conduct cost-benefit analyses prior to finalizing them. Midnight regulations, however, are rushed through the review process and published without full consideration of their economic impacts.

One shouldn't put much faith in regulations issued less hastily, as federal agencies routinely overstate the benefits and understate the costs of the rules they issue.

A district court judge recently reprimanded the Environmental Protection Agency for failing to comply with a requirement that it estimate the number of jobs that would be lost as the result of new regulations. EPA Administrator Gina McCarthy responded by saying producing such estimates is of “limited utility.”

To whom, one wonders?

The EPA's proposed Mercury and Air Toxics Standards, or MATS, was sold as a public health measure that would cut mercury and acid gas emissions from coal mines and power plants. The rule, while promising annual benefits of $4 million to $6 million, will cost electric utilities almost $10 billion per year — a cost that will be passed on to customers.

Unless canceled, MATS will help fulfill President Barack Obama's goal of shutting down America's coal industry and will inflict deep economic pain on states like Wyoming, West Virginia, Kentucky, Illinois and Pennsylvania.

Trump has called for a two-for-one policy requiring the elimination of two existing regulations for every new rule issued. Because not all rules impact the economy equally, the policy will require careful and thoughtful implementation. It's a good starting point.

But there's much more to be done. Pruning back the regulatory state will go a long way toward energizing the economy.

William F. Shughart II is the research director of the Independent Institute and the J. Fish Smith professor in public choice at the Huntsman School of Business at Utah State University.

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