Death by Regulation

J. E. DyerDavid French's column last Monday, "Three Irreconcilable Fiscal Majorities," raised the excellent point that three immutable fiscal concerns of the American people are, in his word, irreconcilable. The popular majorities that 1) decry deficits, 2) resist the raising of taxes, and 3) insist on entitlement payouts collectively demand the impossible: balanced books for the public treasury, with no increase in the tax burden and no loss of benefits.

But there is a stealth factor—a "fourth fiscal majority," as it were—setting limits on our fiscal horizon today, and reinforcing the appearance of an either-or decision between belt-tightening for all and a future of fiscal catastrophe. We rarely think about this factor because it is rarely presented to the people for discussion or decision. But it governs all facets of our economic environment. By exercising a veto every bit as powerful as that of the three popular majorities, it literally sets limits on what is possible for us.

I am speaking, of course, of regulation. The cost of implementing regulation in the United States is felt through higher prices and the loss of industries and jobs. It has become so pervasive we hardly see it anymore. But lifting or loosening regulation would be the single most positive economic step any of our governments, federal or state, could take. If we stopped regulating ourselves so heavily, we would be astounded by the economic synergy it would unleash.

Some level of regulation is deemed necessary by almost everyone. Few appreciate, however, how thoroughly we have regulated our economy, and how extraordinary is the cost. A study conducted in 2009 concluded that regulation in California imposes an average cost of over $13,000 a year on each household in the state.  Of equal importance, the study concluded that the economic output foregone by the state due to its regulatory burden amounts to more than $38,000 a year per household. Meanwhile, the U.S. Small Business Administration reported in 2010 (see the Heritage Foundation summary here) that federal regulations are costing America as a whole $1.75 trillion annually in higher prices and foregone output. That works out to about $15,000 per household nationwide, even for those not in California.

Nature and war sometimes create conditions similar to the loss of jobs, revenue, purchasing power, and opportunity being induced by our regulatory zeal. But the regulatory straitjacket that inhibits us from producing our way out of the current recession is the ultimate man-made fiscal prison. Whether the regulatory constraints involve refusing to drill for oil off our coasts, turning off the water for the farms in California, or phasing in the criminalization of the incandescent light bulb, they are all entirely discretionary. They are as much a matter of human choice—of competing analyses, of predictions, fears, concerns, and demagoguery—as is our embrace of the entitlement society or our antipathy to higher taxes.

The average American household worked until April 9 last year to pay its federal, state, and local taxes. Assuming that the median household income changed little from its 2009 level of $50,221, the tax burden alone had a significant impact on the average family's way of life. When the household impact of federal regulation is added to it—$15,000, or nearly 40 percent of what the family had left after taxes—we can begin to appreciate the size of the burden imposed by the decisions of government. For Californians, of course, the burden is mind-boggling.

In approaching the Golden State's fiscal problems, however, incoming Governor Jerry Brown has proposed a "sweeping realignment" of everything about state government except its regulatory portfolio. In his proposal, entitlement benefits will be subject to painful cuts, public employee salaries will be reduced by 10 percent, recent tax increases will remain in place for at least five years, and cash-strapped local governments—reeling from the housing market foreclosure crisis—will inherit a greater burden for managing public services like law enforcement, firefighting, and the penal system.