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The Regressive Effects of Regulations in California
The impact of federal regulations from 1997 to 2015 on the California economy is associated with the following regressive effects:
- 512,906 people living in poverty
- 2.3 percent higher income inequality
- 1,211 fewer businesses annually
- 14,939 lost jobs annually
- 7.35 percent higher prices
With regard to the volume of state-level regulations, California ranks 1 of 44 states for which data are available (where a rank of “1” is most burdensome).
Regulations have unintended consequences. Recent research shows that a greater regulatory burden (as measured by the number of regulatory restrictions—instances of the words and phrases shall, must, may not, prohibited, and required—included in rules and regulations) is associated with increased poverty rates, higher levels of income inequality, reduced entrepreneurship, and increased consumer prices (especially for the products consumed by individuals living in poverty). Focusing specifically on California, this snapshot describes each of these regressive effects.
The increase in California’s regulatory burden from 1997 to 2015 is associated with an increase in the number of people living in poverty by 512,906 (4,972,955 after vs. 4,460,049 before) and an increase in the poverty rate of 1.32 percentage points (12.8 percent after vs. 11.48 percent before).
Using the federal regulation and state enterprise (FRASE) index, which “represents the degree of impact federal regulations have on a state’s economy relative to federal regulations’ impact on the national economy,” researchers have found that states with a higher incidence of federal regulations also tend to exhibit higher poverty rates. Specifically, a 10 percent increase in the effective federal regulatory burden upon a state is associated with about a 2.5 percent increase in the poverty rate.
From 1997 to 2015 (the period for which FRASE estimates are available), the effective federal regulatory burden upon California increased by 46 percent and is associated with an increase in California’s poverty rate of 11.5 percent. As of 2018, the overall poverty rate in California stood at 12.8 percent. If the increase in the regulatory burden had not occurred, our research suggests that the poverty rate could have been as low as 11.48 percent in 2018. Though this may not seem like a large difference in relative terms, it amounts to 512,906 fewer people living in poverty in California in 2018.
The increase in California’s regulatory burden from 1997 to 2015 is associated with an increase in the state’s income inequality by 2.3 percent.
Given the association between rising poverty and federal regulations, it is no surprise that income inequality has also increased. 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 is associated with an approximate 0.5 percent increase in the state’s Gini coefficient (the most commonly used measure of income inequality).
From 1997 to 2015, the effective federal regulatory burden upon California increased by 46 percent, and that increase is associated with a 2.3 percent increase in California’s level of income inequality. As of 2015, California was the 5th most unequal state in terms of income inequality.
The average annual growth rate of industry-specific federal regulations (measured from 1999 to 2015) is associated with an annual loss of 1,211 small firms and 14,939 jobs in California.
One reason a greater regulatory burden may increase poverty and inequality is that regulation can reduce entrepreneurship. Researchers matched data from the Mercatus Center at George Mason University on industry-level federal regulation (from the RegData dataset) with Census Bureau data on the number of small and large firms and the number of employees per industry. They estimate that a 10 percent increase in the number of regulatory restrictions pertaining to a particular industry is associated with a 0.42 percent reduction in the total number of small firms (that is, with fewer than 500 employees) within that industry and a corresponding 0.55 percent reduction in small firm employment. Moreover, the researchers find that consecutive years of rising regulatory burden on an industry have a compounding effect, whereby the negative effects of regulation are amplified if preceded by above-average regulation growth.
In 2017, California had 757,458 small firms, collectively employing 7,224,945 workers. Between 1999 and 2015, industry-level federal regulatory restrictions increased, on average, by 3.78 percent per year. The results of the research mentioned earlier suggest that in an average year, if industry-level federal regulations uniformly increase by 3.78 percent, California loses about 1,211 small firms (0.16 percent of total small firms) and 14,939 jobs (0.21 percent of small firm employment).
The increase in industry-specific federal regulations (measured from 1999 to 2015) is associated with a 7.35 percent increase in consumer prices in California and the rest of the nation.
A 2018 study combines consumer expenditure and pricing data from the Bureau of Labor Statistics with regulation data from RegData to determine the impact of industry-level regulation on the prices of consumer goods. Given that regulations drive up compliance costs, it is not surprising that the researchers find that a 10 percent increase in federal regulations is associated with a 0.9 percent increase in consumer prices. The study also finds that the poorest households spend an outsized share of their income on the goods that are most regulated. Consequently, between 1999 and 2015, the average annual increase in prices for the households in the lowest income group was 2.46 percent, significantly more than the 2.08 percent increase in average prices experienced by households in the top income group.
Over the same period, industry-level federal regulations increased by an average of 3.78 percent per year, which, based on the research mentioned earlier, is associated with 0.34 percent higher prices nationally. To put this into perspective, the annual rate of inflation from 1999 to 2015 in the United States averaged 2.19 percent, but it could have been as little as 1.85 percent per annum if there had been no growth in regulation. Whereas this may seem like a small difference in the inflation rate, the effects compound over time.
California’s State-Level Regulations
In terms of the number of state-level regulatory restrictions, California ranks 1 of 44 states, with 395,608 regulatory restrictions (where a rank of “1” is most regulated). California also ranks 1 in the nation in terms of occupational licensure burden (where a rank of “1” is most burdensome).
Although California cannot unilaterally reduce federal regulatory burdens impacting the state, it can reduce homegrown red tape. An example of state-level red tape is occupational licensure, which can impose a costly barrier to entering a profession. California requires a license to work in 76 low-income occupations and requires an average of 827 days of education, training, or apprenticeships to obtain a license. California is the 1st most regulated state in terms of the breadth and burden of occupational licensing, according to the Institute for Justice. Using a more comprehensive measure of regulation, California’s administrative law code measured 21,284,860 words in total length in 2020 and contained 395,608 distinct regulatory restrictions. Compared with 43 other states for which data are available, California ranks 1 as the state with the most regulatory restrictions (Idaho ranks 44, as the state with the fewest regulatory restrictions).