The federal government issues thousands of pages of new regulations each year (over 90,000 pages of new regulations). Federal Register in 2023). Although the costs of regulation are largely hidden, they can be estimated. A recent study by the National Association of Manufacturers puts the total at $3.1 trillion annually, or more than 10% of GDP.

The study was conducted by economists Mark Crane and Nicole Crane. This total includes both direct costs (employees and capital used for compliance) and indirect costs (distortions of economic activity).

Measuring direct costs is conceptually simple, although it is a very difficult task of aggregating all compliance costs for all federal regulations. Direct costs total $1.1 trillion. This is no surprise to me since it is reported that his 10% of bank employees work in compliance.

But indirect costs are less visible, such as jobs that are never filled or products that are never made. How should we estimate this?

First, regulatory action is needed. Crain and Crain uses the International Institute for Management Development's World Competitiveness Rankings, which have been available in many countries for over 20 years. They statistically assess whether countries with more regulation have lower GDP while controlling for other factors. The answer is “Yes!”

The average rank on the U.S. Competitiveness Index is 16th. Crain and Crain use the increase in GDP that would occur if the U.S. score were equal to the average of the scores of the top five countries as an indirect cost. This is not the full indirect cost of regulation, but the value of the regulatory savings that can be achieved. Reaching this level would require a 17% improvement and increase U.S. GDP by $2 trillion annually.

Is this estimate reasonable? Inflation-adjusted GDP per capita grew at an average annual rate of 2.7% from 1949 to 1973, but 1.7% after 1974, when growth slowed considerably. Although many factors may have contributed here, regulation expanded significantly prior to 1974 with the establishment of the EPA, the Occupational Safety and Health Administration, and the Equal Employment Opportunity Commission.

If regulations reduced growth by half a percentage point each year after 1974, the loss in GDP, equivalent to half the slowdown, would be about $7 trillion a year. Mr. Crane and Mr. Crane's estimates seem reasonable.

The costs of regulation are borne partly by businesses and partly by others, such as workers and consumers. Crain and Crain allocates 56% of its costs to the business. It is the most expensive to manufacture. The cost per employee would be a good measure of the regulatory burden and would be $29,000 per employee, or his 40% of payroll costs (total employee compensation).

Small businesses face the heaviest regulatory burden. The cost per employee for manufacturers goes from $25,000 for companies with 100 or more employees, to $28,000 for companies with 50 to 100 employees, and finally to $50,000 for companies with fewer than 50 employees. rise.

American manufacturing isn't dead, it just doesn't employ as many people as it used to. Regulations may be shrinking U.S. manufacturing. The regulations essentially involve hiring a second non-working employee for each employee, especially for small start-up manufacturers.

States like Alabama are giving billions of dollars in tax breaks to businesses, often manufacturers. Perhaps the need for such a tax cut is explained by the regulatory burden.

Bureaucrats create federal regulations based on the authority of laws passed by Congress. Because the president appoints top bureaucrats and Congress approves the budget, regulators have a certain degree of political responsibility and can override certain regulations. But oversight is limited, meaning regulations do not have the full consent and approval of the American public.

The report does not measure benefits or assess whether the regulations improve lives. Environmental regulations have greatly reduced pollution and benefited America. However, many regulations have failed the legitimate benefit-cost test.

The Supreme Court is pushing back against the regulatory state. Based on the “serious question” doctrine, the court rejected attempts to find significant new regulatory authority in old law. And the court may seek to overturn Chevron's principle of judicial deference to the executive branch.

Regulations often require legal details. The costs of Washington state regulations are significant and are not included in the federal budget. Fortunately, economists can estimate and highlight these significant costs.

Dr. Daniel Sutter is the Charles G. Koch Professor of Economics at Troy University's Manuel H. Johnson Center for Political Economy and host of the TrojanVision Conversation. The opinions expressed in this column are those of the author and do not necessarily reflect the views of Troy University.