Regulation is essential to market economies. It establishes the rules of competition, ensures a level playing field, governs participants’ behavior, and protects consumers, public health and safety, private property, and environmental resources. In this important sense, economic growth and wealth creation depend on the promulgation and enforcement of sound regulation.
But regulation isn’t free, or without consequence. Regulation imposes costs – costs by businesses. A wave of new regulations, inconsistent or outdated regulations, or complex and confusing regulations can distract business owners’ focus and time away from their product line and the marketplace, and impose costs that consume resources that could otherwise be invested back into businesses. Regulation can create economic distortions, entrenched and powerful constituencies, and can lead to cronyism and dependency. Regulation can also entail unintended consequences, as incentives created or destroyed by new rules can lead to unforeseen outcomes that negate or even more than offset the intended benefit.Perhaps most insidiously, regulation and its costs operate like an invisible and, therefore, easily overlooked, tax. Unlike on-budget spending, regulatory costs remain largely hidden from public view, which can make regulation attractive to policymakers. Often difficult to identify and diffused throughout the economy, rules and their costs have accumulated for decades.
An annual report based on federal government data and other contemporary studies produced by Clyde Wayne Crews of the Competitive Enterprise Institute estimates the total economic cost of federal regulations alone (not counting state and local regulations) to be $1.96 trillion annually – an amount equivalent to the world’s seventh largest economy, 10 percent of U.S. gross domestic product, and more than all federal individual and corporate income tax receipts combined.
Importantly, the stifling effect of regulatory burden, complexity, and uncertainty is particularly acute for new businesses. Start-ups lack the scale of larger firms over which to absorb and amortize the costs of compliance. Moreover, unlike larger or more established firms, entrepreneurs typically don’t have the resources to hire a chief regulatory or compliance officer to navigate a complex and ever-changing regulatory code – they do it themselves. And uncertainty regarding future regulations can discourage or even punish calculated risk-taking. Entrepreneurs distracted with regulatory compliance rather than focused on their product, service, and the marketplace much more likely to make mistakes, miss opportunities, or even fail.
Roundtables conducted with entrepreneurs in twelve cities across the country in 2011 revealed regulatory burden, complexity, and uncertainty to be among the top obstacles to new business formation, survival, and growth.