The regressive effect of regulation
When policymakers increase regulation they impose costs on individuals that disproportionately fall on low-income individuals rather than on high-income individuals.
In our new report ‘The State of Minnesota’s Economy: 2020‘, we wrote:
Tax rates and, to a slightly lesser extent, their actual burdens, are, by their nature, relatively easy to quantify. But how do we quantify a regulatory burden? A great deal of work has been done to quantify the burden of federal regulations but much less work has been done on calculating the burden of state regulations.
The leaders in this field are economists at the Mercatus Center at George Mason University. They, too, have a new report out, ‘A Snapshot of Regulation in Plains States‘, which attempts to quantify their regulatory burden. Out of these states, Minnesota is about the average. As The Center Square report:
Minnesota ranked in the middle of the pack for average word counts in state administrative codes with 5.7 million words, below the national average of 9.18 million words.
The seven Plains states averaged 5.68 million word counts in state administrative codes, with Iowa leading the most-regulated pack with 9.82 million words. Meanwhile, Kansas scored the least-regulated with 3.21 million words.
A second measurement is the number of state regulatory restrictions.
Minnesota ranked second for most regulatory restrictions with just over 98,000, behind Iowa’s 160,630 — 30,000 more than the national average. Nebraska followed at third with 95,660, while South Dakota won the least-regulated state with 43,251 restrictions.
Meanwhile neighboring state Wisconsin, which has a similar population to Minnesota, has 168,000 restrictions.
A third measurement is the complexity of regulatory codes, ranked by the amount of information and energy exerted to comply with regulations.
Minnesota ranked first in regulatory code complexity with a “Shannon entropy” score of 8.25, leading Iowa (7.68) and North Dakota (7.66).
The Plains average was 7.54.
Another measurement is the Federal Regulation and State Enterprise (FRASE) index that measures federal regulation’s impact on states.
Nebraska receives a FRASE score of 1.24, a ranking relative to the nation’s FRASE score of 1.
A 1.24 score means that Nebraska’s industries are targeted by federal regulation 24% more than industries across the country.
Minnesota scored a .95, meaning it’s below the national average.
The last measurement is population-adjusted regulatory restrictions since states with greater populations tend to enact more regulatory restrictions because it’s relatively cheaper for them to impose regulation compared with less populous states, the report said.
North Dakota (69.08 restrictions per 1,000 residents) is the most regulated Plains state, adjusting for population, while Missouri (15.30) is the least regulated Plains state. Minnesota (17.39) scored just above Missouri in second place for least restrictions, adjusted to population.
On average, when adjusted for population, Plains states are more regulated (28.65) than the national average (19.42), the report found.
While I applaud this effort, I do think the findings need to be taken under advisement. As we wrote in our report:
…there are two problems with it at present. First, how tightly drafted are the regulations? It might be less burdensome to have 10 precisely worded regulations containing words like “shall,” “must,” “may not,” “required,” and “prohibited” than one loosely worded one. In the former case, individuals know exactly what the situation is. In the latter, there will be substantial uncertainty. For a business, the former situation will usually be preferable to the latter.
Second, the regulatory burden is only partly a function of the wording of regulations. It is also partly a function of how those regulations are enforced. In 2007, for example, the Supreme Court ruled that the Environmental Protection Agency (EPA) was required to regulate greenhouse gases but, citing the so-called “Chevron deference,” the Bush administration ignored this ruling. Then, when the Obama administration took office, the EPA issued new rules to comply with the decision. The regulatory burden was markedly different because of their enhanced enforcement, not because any wording had changed.
Even with these misgivings, however, we applaud this effort and hope it will be refined over time
John Phelan is an economist at the Center of the American Experiment.