Mike’s Financial Pocket – Regulations: The Stealth Tax

Pocket Full Of Liberty

Almost every election cycle, candidates for all levels of office lead the charge on taxation in America. Depending on the political persuasion and the office for which the candidate is running, the promises may range from a move to a flat tax, an abolition of the income tax, to a more progressive tax to have “the wealthy” pay their “fair share” (hello Bill de Blasio). Frankly, I don’t understand how any income tax other than a flat tax can be fair to anyone, but that is neither here nor there.

What we do not hear enough about is the “stealth tax” on the U.S. economy — regulations.

There is no doubt that the “Regulatory State” is out of control in America. When lemonade stands set up by children are busted by cops for “health code violations” or lacking a license, we know that we have hit “Peak Regulation” (or Peak Stupidity, but I repeat myself).

Aside from the War On Lemonade, regulations in America cost an estimated $1.8 trillion per year. Niall Ferguson also points out the last time that government regulations were cut, a “surprising” thing happened — real GDP grew:

The last time regulation was cut was under Ronald Reagan, when the number of pages in the Federal Register fell by 31%. Surprise: Real GDP grew by 30% in that same period. But Leviathan’s diet lasted just eight years. Since 1993, 81,883 new rules have been issued. In the past 10 years, the “final rules” issued by our 63 federal departments, agencies and commissions have outnumbered laws passed by Congress 223 to 1.

Now, there certainly was other economic stimulation in the Reagan Years besides cutting of regulations, including major tax reform and an accommodating monetary policy from the last Federal Reserve Chairman who understood anything about economics.

But I hardly think that it is a coincidence that cutting regulations boosts GDP. Indeed, the converse is also true: increasing regulations decreases GDP.

Regulations under the Obama Administration rose between an estimated $70 billion to $216 billion thus far. This is on top of previous regulations from other administrations including Republican George W. Bush. Unfortunately, regulations are not the exclusive province of the Democrats.

$216 billion is an incredible amount of money being sucked out of the economy to “regulate” business. Another study done for the SBA estimates that regulations cost over $10,000 per employee each year. This is without the (un)Affordable Care Act’s impact being fully felt yet.

Some may not particularly care about regulations and their costs. After all, corporations are flush with cash. They can afford regulatory costs, right?



First of all, corporations are people. I say that half-jokingly, but it is true. Corporations are associations of people. As such, they do not simply absorb the regulatory costs. Corporations will filter the costs of the regulations down the pipe, so to speak. By this I mean that either the consumer will pay more — or get less — from the product being offered by the corporation. Alternatively, the corporation’s employees may bear the brunt of the regulatory costs by either no pay increases, a cut in benefits, less hiring, or layoffs. Is this “fair?” It depends on your definition of “fairness.” But it is an economic reality — businesses that are faced with higher costs will not simply absorb them. Indeed, they cannot. Corporations are to act in the best interests of the corporation.

Accordingly, corporations will offset increased costs by cutting expenses over which they have control, as described above, or increasing prices to the extent that they can. Consumers and employees lose.

Second, big business can shoulder the effects of increased regulation better than small business. This is intuitive. Big business has the resources to handle regulation. They have more employees that can handle the paperwork aspect, for example. A large corporation also has pricing power, so they can raise prices to offset the cost of regulation. Such corporations have attorneys or lobbyists who either help draft regulations or who can pick them apart and find loopholes for which the large corporations may qualify.

Why do you think that in banking — one of the most heavily regulated industries (yes, this is true) – small banks are struggling and have all but disappeared or have been bought out?

Moreover, who can shoulder a $10,000 per employee regulatory burden better? A company with gross sales in the billions or a company with gross sales in the hundreds of thousands?

Yes, that might not be an exact comparison, but there is really no question that barriers to entry in the form of regulation hurt smaller competitors more than large competitors. That hurts the marketplace and the consumer.

In fact, Reason concluded that the regulatory state has hurt the US economy to the tune of over $330,000 per household in terms of median income. This conclusion is based on a study concluding that the United States’ economy is operating at less than a third of the capacity that it was operating at in the 1950s, due to the exponentially increasing system of federal regulations:

Recall that Dawson and Seater have calculated that if the regulatory burden had remained the same as it was in 1949, the U.S. economy would be about $38 trillion bigger than it currently is. So the upshot of this wildly optimistic set of assumptions regarding the benefits of regulation is that Americans have foregone $33 trillion in income that we otherwise would have had. Or in the alternative case, where a lower rate of growth results in a GDP of only $31 trillion, that would mean that Americans have foregone about $10 trillion in income due to overregulation.

Again, regulations and economies do not exist in a vacuum. The United States was transitioning from a wartime economy to a peacetime economy in 1949. However, even if the numbers are not exactly correct, one has to give pause and consider: what exactly are we spending all of this money on? Given the impact that dollars spent by corporations and individuals have in terms of stimulating the economy, imagine the economic growth which could be had if we cut the cost of existing regulations in half?

If the private sector spends less in the private sector in anticipation of or in order to comply with government regulation — it follows that a decrease in regulation opens up private sector capital to be spent on hiring, product development, advertising, etc.

I am sure the first left-leaning critic who reads this piece will begin to scream about dirty water and air. Here is the thing: this is not the early twentieth century. Cutting back on some of the federal regulations is not going to mean that companies will start dumping toxins into public water sources the next day. People are very aware and connected. Whistleblowers are generally hailed and glorified by the media. With the internet, smartphones, social media, and the instant consumption of news, do we really think that “evil corporations” are going to get away with violating basic environmental codes and norms, for example?

Maybe we should begin to focus on people regulating businesses in this manner, than outsourcing regulation to the inefficient federal government.

As always, free markets are better markets.
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Look forward to earnings season to continue this week, as well as an initial claims announcement (estimated at 335,000). But the economic news of the week will likely be overshadowed by Wednesday’s Federal Reserve announcement. As I argued after the failed “September Taper,” look for no taper by the Fed this month, and perhaps an increase in mortgage-backed securities purchases.