Dueling Calculations for the Cost of Federal Regulation

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Recently here at CEI, we’ve been celebrating the release of the 25th anniversary edition of our major report on the costs of government regulation, “10,000 Commandments”. In the midst of our own excitement, though, we don’t want to forget to give a shout out to some similar projects that have tried to grapple with quantifying the economic burden of federal rules.

Study author Wayne Crews emphasizes that macro-scale cost estimates like the one presented in “10,000 Commandments”—$1.9 trillion last year, by the way—are inherently difficult to calculate, writing that “The vastness of the regulatory enterprise remains unknown, as there are numerous categories of untabulated costs.” In fact, Wayne has produced an even more in-depth study on this problem, with a title that neatly summarizes his position: “Tip of the Costberg: On the Invalidity of All Cost of Regulation Estimates and the Need to Compile Them Anyway”. So, while all of the academic projects to tabulate regulatory costs end up producing numbers that are “just estimates”, they’re still the best information we have on a very important topic.

First we have the Mercatus Center at George Mason University and its Program for Economic Research on Regulation. They host online data tools like RegData and QuantGov, and produce a working paper series, including the paper “The Cumulative Costs of Regulation”.  As Wayne explains it:

A 2016 report by the Mercatus Center at George Mason University employs a microeconomic model to attempt to determine “how much regulation distorts the investment decisions of firms and thus hampers long-run economic growth.” According to this analysis, had regulatory burdens remained constant since 1980, the 2012 U.S. economy would have been 25 percent larger. Put another way, during that time, the economy grew by at least $4 trillion less each year than it could have.

Study authors Bentley Coffey, Patrick McLaughlin, and Pietro Peretto explain the value of their unique approach:

Though the topic of regulation and economic growth has been widely studied, most studies focus on a narrow set of regulations, industries, or both. Such designs cannot estimate the cumulative effect of regulation, even though accumulation of an increasingly complex set of regulatory constraints is a dominant characteristic of the regulatory regime in the United States. An analysis of individual regulations is analogous to the choice to throw a rock into a stream. Throwing a single rock, found at the side of a stream, may seem like a good idea because now no one will trip on it. But as more and more rocks are thrown into the stream and accumulate, eventually the stream’s flow is diverted or dammed to a halt. Similarly, a single regulation may appear net beneficial when examined on its own—indeed, government agencies typically claim that all, or nearly all, their regulations create positive net benefits—but may still have a net negative effect on economic growth by virtue of being piled on top of (and interacting with) other regulations.

Wayne also points us to analysis done by the National Association of Manufacturers called “The Cost of Federal Regulation to the U.S. Economy, Manufacturing and Small Business”. The authors here, W. Mark Crain and Nicole V. Crain, echo Wayne’s warnings about insufficient data in the field:

This study estimates the costs of U.S. federal government regulations as of 2012. The paltry amount of public information on regulatory costs may astonish entrepreneurs and job creators who navigate a complex web of regulations on a daily basis—including uncertainty about what the rules are and how they might change from one year to the next. The purpose of this study is to fill in some of that information gap by quantifying the costs of regulatory compliance on firms, particularly manufacturers in the United States, and to extend some of the previous efforts to measure the aggregate regulatory costs. The goal is to provide an estimate of the total cost of federal regulations analogous to the taxes raised to finance the federal budget.

Crain & Crain estimate that U.S. federal government regulations cost $2.028 trillion in 2012 (in 2014 dollars), or approximately 12 percent of GDP. That comes to just under $10,000 per employee per year, with small firms (fewer than 50 employees) incurring costs that are 17 percent greater than the average firm.

The federal government produces some cost estimates of its own, though they are much more narrowly defined that the Mercatus and National Association of Manufacturers reports. Last year the White House’s Office of Management and Budget published “2017 Draft Report to Congress on the Benefits and Costs of Federal Regulations and Agency Compliance with the Unfunded Mandates Reform Act.” According to the compilers:

Consistent with prior reports, OMB, with only a few exceptions explained clearly in this draft report, summarizes the costs and benefits as they were reported by the agencies themselves, upon publication of their final Regulatory Impact Analyses (RIAs). None of these costs reflect retrospective evaluation of their impacts. This applies to rules issued in FY 2016, as well as previous years covered by this Report. We are issuing this report after a change in Administration, and therefore would like to clarify that OMB’s reporting of the results of these RIAs does not imply an endorsement by the current Administration of all of the assumptions made and analyses conducted at the time these regulations were finalized.

The report comes up with an annual cost for 137 selected “major” regulations from 2006 to 2016 at between $78 billion and $115 billion (in 2015 dollars). The estimated range for benefits in the report was $287 billion to $911 billion. We at CEI are, understandably, skeptical of how the regulators calculate “benefits.” The so-called “co-benefits” of the Obama-era Clean Power Plan, for example, are a baseless exercise in numerical sophistry.

Finally, the Small Business Administration also used to produce a regulatory cost estimate study, “The Impact of Regulatory Costs on Small Firms,” until it was discontinued in 2010. The final edition of that report estimated regulatory compliance costs of $1.75 trillion for 2008, much closer to the estimates in “10,000 Commandments”. As the Small Business Administration website states, the goal of the study was “to quantify the economic impact of regulations on small businesses and determine if those impacts are disproportionate when compared to large businesses.” As noted above, though, “as with almost any academic methodology, it was not intended to be considered a precise finding.” The results of the study were apparently taken out of context so often that the page on the SBA website currently dedicated to the project is more a list of ways in which the research has been misinterpreted than an actual explanation of the research itself.

As every researcher says when summing up his conclusions, we know one thing for certain: more research is needed.