The Impact of Regulation on Investment and the U.S. Economy

The total cost of regulation in the United States is difficult to calculate, but one estimate puts the cost at $1.75 trillion in 2008. Total expenditures by the U.S. government were about $2.9 trillion in 2008. Thus, out of a total of $4.6 trillion in resources allocated by the federal government, 38% of the total is for regulations.

If regulations always produced goods and services that were valued as highly as market-produced goods and services, then this would not be a cause for alarm. But that is precisely what is not known. In fact, there is evidence to the contrary for many regulations. Where regulations take resources out of the private sector for less valuable uses, overall consumer welfare is diminished. For example, if regulations address minor risks (such as de minimus risks from pesticide residues), the additional resources used to address those risks are not used by consumers to address major risks privately, for example, buying safer cars.

Regulation also impacts the creation and sustainability of jobs. For example, regulation can create regulatory compliance jobs at the expense of jobs that are more highly valued by the market (i.e., consumers). Economists refer to this as the misallocation of resources—when capital and labor are directed to less productive or unproductive uses. This can have very real consequences for the economy. For example, when government instituted policies to increase homeownership, people were encouraged to make larger investments in housing than they otherwise would have made. The capital to produce those homes—many of which are now in default and are selling at rock bottom prices—might have been used more productively, purchasing education or saving for retirement.

From an economic perspective, however, it is important to note that the total number of jobs can be a misleading measure of the costs and benefits of regulation. Bad policies can increase total jobs, and good policies can decrease total jobs.