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New research shows regulatory growth increases operating costs for businesses

Regulations are undoubtedly an essential part of doing business. They can help protect customers and businesses as well as property. However, regulations, especially overbearing ones impose costs on individuals as well as businesses. Businesses generally do face increased operating costs if they have to change the way they operate in order to adhere to existing regulations. These costs, in addition, go up with each additional new rule businesses are mandated to follow.

Unlike other things that affect the economy, like taxes, regulation is hard to quantify. But through existing efforts, we have come to see just how much the economy loses when businesses and individuals are forced to jump through so many hoops in order to conduct economic transactions.

The most recent effort to quantify the effect of regulation on the economy is a new study from the Mercatus Center at George Mason University, which aims to “investigate the effect of recent regulatory growth on operating costs per unit of output across a variety of US industries.” Authors of the study, Tyler Richards and Richard Fullenbaum found evidence suggesting that the “average level of annual regulatory growth (3.55 percent) increases operating costs per unit of output by 3.3 percentage points per year relative to a baseline of no regulatory growth.” Additionally, the effects of this increase in the regulation compound over time. And moreover, the effects seem to be more pronounced the time that regulation is passed and when compliance takes place.

To give an idea of how much relief cutting regulation would provide, the authors conduct a study estimating the hypothetical impact of regulatory reduction on operating costs. Their findings suggest that holding everything else constant, reducing the total volume of regulation to their 1998 levels would cut operating costs nearly in half. This would increase economic growth even if technological innovation remains constant.

Regulations hurt all businesses, but they disproportionately affect small businesses since they are the most likely to not be able to absorb new costs. But small businesses make up the majority of businesses and account for the majority of job creation. At a time like this, when small businesses have been hurt the most and are scrambling to recover, regulatory reform will certainly go a long way in ensuring improved economic outcomes.

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