April, 2022

The Regressive Effects of Regulations in Indiana

  • Dustin Chambers

  • Colin O'Reilly

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KEY FINDINGS

Regulations have unintended consequences, and these consequences can disproportionately affect low-income households. For example, more regulations are associated with higher consumer prices, fewer small business start-ups, and fewer new jobs. Recent research also shows that a greater regulatory burden is associated with increased poverty rates and higher levels of income inequality.

Within the state of Indiana, federal regulation growth since 1997 is associated with 189,694 more people living in poverty and a 6.5 percent increase in income inequality.

POVERTY

Given the growth of federal regulations affecting Indiana residents and businesses between 1997 and 2017, we estimate that regulation growth over this period is associated with an additional 189,694 people living in poverty in 2019 (773,367 actually in poverty versus 583,673 if there had been no regulation growth) and an increase in the poverty rate of 2.92 percentage points (11.9 percent actually living in poverty versus 8.98 percent if there had been no regulation growth).

The Mercatus Center’s Federal Regulation and State Enterprise (FRASE) index measures the effective federal regulatory burden upon a state (defined as “the degree of impact federal regulations have on a state’s economy relative to federal regulations’ impact on the national economy). Using the FRASE index, researchers have found that states with a higher incidence of federal regulations tend to exhibit higher poverty rates. Specifically, a 10 percent increase in the effective federal regulatory burden upon a state corresponds to about a 2.5 percent increase in the poverty rate.

From 1997 to 2017 (the period for which FRASE estimates are available), the effective federal regulatory burden upon Indiana increased by 130 percent and is associated with an increase in Indiana’s poverty rate of 32.5 percent.6 As of 2019, the overall poverty rate in Indiana stood at 11.9 percent. If the increase in the regulatory burden had not occurred, our research suggests that the poverty rate could have been as low as 8.98 percent in 2019. Though this may not seem like a large difference in relative terms, it would have amounted to 189,694 fewer people living in poverty in Indiana in 2019.

INCOME INEQUALITY

We estimate that the accumulation of federal regulation affecting Indiana residents and businesses between 1997 and 2017 is associated with a 6.5 percent increase in income inequality.

Using the FRASE index, researchers have found that states with a higher incidence of federal regulations also have higher levels of income inequality. Specifically, a 10 percent increase in the effective federal regulatory burden upon a state corresponds to an approximate 0.5 percent increase in the state’s Gini coefficient (the most commonly used measure of income inequality).

In view of the link between rising poverty and federal regulations, the increase in income inequality in Indiana is not surprising. From 1997 to 2017, the effective federal regulatory burden upon Indiana increased by 130 percent, and that increase is associated with a 6.5 percent increase in Indiana’s level of income inequality. As of 2018, Indiana was the 43rd most unequal state in terms of income inequality (1 = most inequality, 50 = least inequality).1