Regulation: The Hidden Tax

Appeared: The Sacramento BeeThe Pittsburgh Tribune, St. Paul Pioneer-PressThe Portland Oregonian, The Bradenton Herald, The West Hawaii Today, Press of Atlantic City, Desert News, Tulsa World, and Bellingham Herald.

The federal government is on track to spend more than $3.5 trillion this year. What most people don't know is that government actually costs about 50 percent more than what it spends. That's because complying with federal regulation costs an additional $1.75 trillion – nearly an eighth of GDP. And almost none of that cost appears on the budget.

Regulation is a hidden tax that raises the price of goods. It's tempting to think that businesses bear most of the burden. But consumers are the ones who actually pay, because companies pass on their costs.

Just how regulated is the economy? The just-released 2011 edition of the Competitive Enterprise Institute's annual "Ten Thousand Commandments" study has some answers. At the end of 2009, the Code of Federal Regulations was 157,974 pages long. In 2010, 3,752 new rules hit the books – equivalent to a new regulation coming into effect every 2 hours and 20 minutes, 24 hours a day, 365 days a year.

An additional 4,225 regulations are at various stages of the pipeline right now.

Not all regulations are created equal. Some cost more than others. If a rule costs more than $100 million, it's called "economically significant." There were 224 of those last year – up from 174 in 2009. Agencies aren't required to say how much these regulations cost, aside from acknowledging that each one of the 224 costs at least $100 million. At a bare minimum, last year's economically significant rules alone will cost $22.4 billion. The real number is likely much larger.

The total cost of federal regulation is $1.75 trillion. That's true in terms of money. But money isn't everything. Regulation also has opportunity costs. Workers spend millions of man-hours every year filling out forms and following procedures. That time could be spent on other things instead, such as finding ways to lower costs, improve quality and increase worker productivity. When there's too much regulation, progress and innovation slow down.

There is a second opportunity cost that is often overlooked. Companies don't sit idly by when regulators propose new rules. They try to influence the process. Most companies, especially larger ones, often favor new regulations in their industries. They will pay lobbyists a lot of money to influence the rules in a favorable way – say, by handicapping a competitor.

UPS and FedEx are fighting just such a battle right now in Washington. UPS is subject to stricter labor regulations than FedEx. It could argue that it should be under the looser system, too. But it isn't. UPS wants FedEx to have to abide by UPS' stricter regulations. FedEx, naturally, is fighting back.

All the time and energy that UPS and FedEx are spending competing against each other in Washington is time and energy they aren't spending competing in the marketplace.

When government is given a lot of money and power, lobbyists and their clients will swarm to Washington to fight over a piece of the pie. This is the source of a lot of the city's corruption. The way to reduce that corruption isn't to pass more regulations. It is to repeal them. The best way to keep money out of politics is to keep politics out of money.

There are many reforms that Congress and President Obama can pass to make that happen. One is for Obama to appoint an annual bipartisan committee to comb through the Code of Federal Regulations for old, obsolete and harmful rules. They would pass their findings on to Congress, which would be required to vote on the entire package without amendment. That last step would prevent a lot of backroom dealing.

Right now, Congress doesn't vote on most regulations. The agencies pass them on their own. The problem is that only Congress can pass laws, not the executive branch. To end this regulation without representation, Congress should vote on all economically significant regulations, at least for starters.

Because even good rules go bad as technology changes, all new regulations should automatically expire after five years, like a carton of milk. If a rule turns out to be useful, Congress can vote to renew it for another five years.

Because regulation is a hidden tax, most people don't pay it much mind. They should. Even in this age of trillions, $1.75 trillion is a lot of money.