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How regulations stifle the economy

I often give talks around the state based on our report The State of Minnesota’s Economy: 2018. I present evidence showing various measures on which our state under performs economically and show how our state’s taxes are above national averages. I always close by asking the question, “If its not taxes, what is it?” If our high taxes aren’t driving these below average economic outcomes, what is?

How do we measure regulations? 

One plausible answer is regulation. Sadly, regulatory burdens are hard to quantify and, so, hard to analyse. One attempt to do so at the state level, at George Mason University, illustrates this. Their methodology is to search state regulatory codes for certain words and phrases such as ‘cannot’, ‘must’, and ‘are required to’.

But there are problems with this. A state may have lots of these words in its regulatory code because it is quite precisely written. By contrast, a more vaguely worded regulatory code would contain fewer and, as a result, look less regulated. But, from a business point of view, it might be preferable to deal ten precisely worded regulations than one vaguely worded one. So, while I welcome the attempt, I’m not convinced the resulting data shows what its purports to. As a result, and as I readily admit, this is an area we need to investigate further.

Examples of bad regulations

What we have instead are examples. These aren’t much use for quantitative analysis, but they do illustrate how excessive regulation can be an economic problem.

Over the weekend, the Pioneer Press collected a number of these from St. Paul alone.

A year after opening her Work It Co-Working offices on St. Paul’s Fairview Avenue, Anne Hendrickson found herself trying to justify to a city inspector the lock on her extra exit door.

Hendrickson was told the thumb lock was not up to city code because it was on the wrong side of the door, which leads to a parking lot.

“So they told me I either had to take down the exit sign or flip the thumb lock,” said Hendrickson. She recalled having little time or patience to deal with that and other code concerns as she launched a new business.

“I was like, really? We are wasting all our time discussing this? It obviously doesn’t have to do with safety because I can leave it if I get rid of the exit sign.”

The damage done by excessive regulations

It is easy to see how high taxes reduces economic activity; if they swallow up most of the return from an activity they reduce the incentive for undertaking it.

But regulations also impose a cost. Some of it is financial, as with minimum wage hikes and paid sick time laws. Some of it is in terms of hassle, such as the 45 day waiting period for liquor licences (there is a financial aspect to this also). And some of it is plain prohibitive, such as St. Paul’s longstanding limit on the number of outdoor events that downtown businesses can host on their own to three temporary entertainment licenses apiece.

Who do regulations protect?

Often, when you speak out against regulation, people think you want to have little kids licking lead pipes. But, as Ms. Hendrickson observed in the Pioneer Press, once you look at the regulations we have, very few of them seem to serve the ‘public interest’ in any way. They are just there, for no apparent reason, imposing costs, disproportionately, on smaller businesses.

John Phelan is an economist at the Center of the American Experiment. 

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