John Locke Update / Research Newsletter

The opportunity costs of overregulation are massive

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Last week’s newsletter mentioned in passing something that this week’s entry will explore further. It discussed my new report promoting a state REINS Act for North Carolina, in light of findings by Beacon Hill economists that the regulatory burden imposed by North Carolina on the private sector was at minimum $3.1 billion and likely closer to $25.5 billion, per year.

As stated here last week, "Year after year, those costs add up, leaving North Carolina communities, families, and individuals poorer and less well-off than they otherwise would be."

That insight owes to research by economists John W. Dawson of Appalachian State University and John J. Seater of North Carolina State University into the cumulative effects of lost economic productivity from federal regulation over time (from 1949 to 2011). Dawson and Seater found that the U.S. economy is about one-fourth the size it potentially could be owing to regulatory burdens:

Federal regulations added over the past fifty years have reduced real output growth by about two percentage points on average over the period 1949-2005. That reduction in the growth rate has led to an accumulated reduction in GDP of about $38.8 trillion as of the end of 2011. That is, GDP at the end of 2011 would have been $53.9 trillion instead of $15.1 trillion if regulation had remained at its 1949 level.

In my report I explain what those huge numbers mean in practical terms (see the graph below):

On the personal and household level, that foregone wealth is hard to imagine. Dawson and Seater computed the opportunity cost of federal regulations to be $277,100 per household and $129,300 per person (see Chart 2).

That is to say, the average household would have an additional $277,100 per year to spend on caring for their children, taking care of housing needs, saving for college, planning for retirement, investing, enjoying goods and services, and also putting toward charitable causes serving the needs of the community. The average household would be experiencing, in other words, living standards enjoyed now by only the top echelon of society.

Cost per household in 2011 of federal regulations added since 1949

(Click the graph for the full size.)

Reason science correspondent Ronald Bailey underscored the gravity of Dawson and Seater’s finding. As he wrote, "the opportunity costs of regulation — that is, the benefits that could have been gained if an alternative course of action had been pursued — are much higher than the costs of compliance."

Again, Dawson and Seater’s study covers federal regulation. But the same dynamic must hold for state regulation. The unseen lost abilities to meet individual, family, and community needs are the opportunity cost of regulation.

Understanding the full cost of regulation is a key factor in judging whether the benefits (which also must be studied and quantified, not merely assumed and asserted) actually measure up.

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Jon Sanders studies regulatory policy, a veritable kudzu of invasive government and unintended consequences. As Director of Regulatory Studies at the John Locke Foundation, Jon gets into the weeds in all kinds of policy areas, including electricity, occupational licensing, hydraulic… ...

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