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How Much Does Government Regulation Cost?

Written By: A. Wilt

May 2015

The subject of government regulation is one of the most heated and contentious political debates in the country. Supporters argue that good regulation protects the public from pollution, health risks, and corporate greed. It can make markets more transparent and equitable for society at large. Critics argue that such regulation interferes with the efficiency of the economy, discourages innovation, and increases corruption. Most importantly regulation costs taxpayers an inordinate amount of money. Who’s right? What’s the cost of government regulation? What’s the cost of no regulation?

Regulation History

Though the Founders did allow for regulation of commerce in the Constitution, their personal writings show that they wanted a limited amount of regulation. John Adams wrote how he feared that the...

"...regulation of prices will produce ruin sooner than safety. It will starve the army and the country, or I am ignorant of every principle of commerce, coin, and society."



Indeed, the Founders relied much on the economic principals of Adam Smith, who in Wealth of Nations, wrote...

"No regulation of commerce can increase the quantity of industry in any society beyond what its capital can maintain. It can only divert a part of it into a direction into which it might not otherwise have gone; and it is by no means certain that this artificial direction is likely to be more advantageous to the society than that into which it would have gone of its own accord."

It’s understandable, given their recent history with Great Britain, the Founders would be suspicious of excess government regulation, and their writings bear that out.

Back in the USA News Story: How Much Does Government Regulation Cost?.

Fast forward to the late 1800s and the early 1900s and you come to the Gilded Age; a time where the free market was king and there were few regulations in place. Public outcry about monopolies was high and many argued that the freedom of businesses must be prevented from causing harm to individual consumers. Specifically, there was large protest over the railroads’ pricing structure, which charged higher rates for shorter distance travel. Many saw this practice as discriminatory against small businesses.

In response, Congress passed the Interstate Commerce Act in 1887 and it became the first federal legislation to regulate an entire industry – railroad transportation. And with that Act, the first regulatory agency, the Interstate Commerce Commission, charged with investigating complaints about the railroads, was also born. Though the federal government was still hesitant to regulate industry too much, it had dipped its toe in the pool.



Following the Great Depression, Franklin Roosevelt’s New Deal lead to the National Recovery Act and the establishment of many agencies, including the Food and Drug Administration. Lyndon Johnson’s vision of a “Great Society” saw further regulation with programs such as Medicare, Head Start, and the development of the Department of Housing and Urban Development. With each of these regulations came additional agencies and additional economic costs, and with each of these regulations individuals and society benefited.

Recent Regulation

In the last several years, major regulation, such as the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, has typically been passed in response to a scandal, such as the Enron scandal and the Wall Street meltdown. The exception to this is clearly the Affordable Care Act, which was passed not in response to a specific scandal, but in an attempt to combat rising costs of insurance and numbers of uninsured Americans. Regulations are considered “major” when they are expected to cost the economy $100 million or more annually.

Each of these three acts call for increased regulation of an industry and either create a new regulatory agency or grant additional power to an existing agency in order to enforce the law.

Each Act’s Constitutional authority has had pages of ink devoted to it, and that’s a debate for another day.



However, all have costs tied into their enforcement and regulation; with these regulatory bodies creating what some have referred to as a fourth branch of the government. Indeed the costs are high. In quantifying the costs of U.S. regulation, Wayne Crews, the Vice President of Libertarian think tank CEI, claims:

If it were a country, US regulation would be the world’s tenth-largest economy, ranking behind Russia and ahead of India.”

Those are big numbers and can be difficult to envision, since they seem so abstract. A trillion here, a billion there - what does that look like in terms of specific regulation costs?

Housing Crisis

In the early 2000s, high-risk mortgages became readily available to many consumers. In many cases, these mortgages were approved with little financial documentation, to borrowers with poor credit and who had little ability to repay the loans.

At the same time, because housing values were rising, there was a false sense of security that housing values would always rise, and many people were pulling equity out of their homes. Some of this equity was pulled out for traditional reasons, but much was also pulled out in order to maintain a standard of living at a time when wages were not keeping up. Human greed, both on the parts of bankers and individual homeowners, played a part in these conditions.



In 2007, the mortgage bubble burst and the US economy entered a mortgage crisis that caused financial turmoil for the rest of the economy, and indeed, economies around the world. The mortgage crisis kicked off a recession that officially lasted until June of 2009, though effects are still being felt. Foreclosure rates skyrocketed, the US economy lost 8.4 million jobs, and many lost any personal wealth or savings accumulated.


Enter the  Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. In July of 2010, the Act was signed into law, with 8-major parts of regulation, mostly related to banking and mortgage regulation, but also including some insurance and credit rating organizations.

There were several regulatory bodies created within the Act, including (but not limited to):

  • The Consumer Financial Protection Bureau (CFPB), which is run under the umbrella of the Treasury Department. The CFPB oversees credit reporting agencies, lenders, credit and debit cards, and mortgages. It requires banks to verify borrower’s income and credit history.
  • The Financial Stability Oversight Council, which is run by the Treasury Secretary and looks out for risks affecting the financial industry. It also regulates non-bank financial organizations, such as hedge funds. One of its major tasks is to watch for firms that are too large and make recommendations to the Fed about these firms' reserves, in an effort to prevent another ‘too big to fail’ bailout, such as the AIG bailout.
  • The Office of Credit Ratings, under the SEC, regulates the credit reporting agencies, such as Standard and Poor’s. Many felt that these agencies over-rated financial organizations, misleading consumers.
  • The Government Accountability Office was granted additional responsibility and authority to audit the Federal Reserve, ensuring that the Fed cannot make loans to single party financial organizations, such as Bear Stearns, without Treasury Department approval. It also is required to disclose any institutions that receive any loans.

One other major piece of the Act was the Volcker Rule, which banned banks from using or owning hedge funds for its own profit, since they would often use customer funds to do so. This rule was implemented in 2014, after several years of banks lobbying against it, and the banks have until July 2015 to fully implement it.

The Financial Tally

On the surface, the regulation looks to be a reasonable response to the financial crisis that led to its passage. But, as is usual, the story is more complicated, and the costs are difficult to quantify.

This is not to say that organizations representing both sides of the issue aren’t trying to quantify the costs. The American Action Forum estimates that the costs of Dodd-Frank will be “roughly $895 billion in reduced Gross Domestic Product (GDP) over the 2016-2025 period, or $3,346 per working-age person.” This includes an estimated $20.9 billion in paperwork costs from 2007 through 2014.

On the flip-side, ValueWalk points out the flaws in the AAF’s estimate, with one major flaw being that the AAF does not account for any benefit of the regulation in its cost analysis.

Setting that flaw aside and taking the $895 billion at face value, the cost of the regulation still might be appropriate given the cost of the crises it’s meant to prevent. In July of 2013, the Dallas branch of the Federal Reserve “conservatively” estimated the financial cost of the Recession was between $6 and $14 trillion dollars, representing 40-90% of one year’s financial output in the United States.

If the $895 billion proposed by the AAF as the true costs of Dodd-Frank represents $3,346 per working age person over the next ten years, that’s a cost of roughly $334.60 per year, per person because of Dodd-Frank.

Taking the middle of the road $10 trillion that the Fed estimates the recession cost to be, and averaging it out per working person, gives us a cost of $37,162 per person. That cost hit the US economy in a much shorter time frame than ten years, but even extending that cost over the full ten years AAF used for its Dodd-Frank calculations, that’s $3,716.2 per person, per year, per capita cost more than 10 times that of the Dodd-Frank regulation, and a cost that came as a direct result of lack of regulation in the banking industry prior to 2007.



These numbers aren’t perfect. Either number represents risk. It’s possible for another financial crisis to happen, even with regulations in place to prevent it. What we take on as an economy when we take on the cost of regulation is essentially loss mitigation.

Beyond the financial spreadsheets, one also needs to look at the costs of the regulation that are not easily tallied. One major, though difficult to quantify benefit, is, with such regulation, the playing field is leveled for smaller community banks, making them more likely to succeed. This can also translate into more small business, because smaller banks are more likely to lend to small businesses.

Further, the Act also holds CEOs and other top executives personally responsible, rather than granting them the ability to hide behind a corporate shield. That means that individuals who participate in bad banking practice could face jail time. The value of that deterrent is another difficult to quantify cost and benefit of the regulation.

So, who’s right?

Back to the original question, which side is “right” on this issue? Have the regulations gone too far? Are the costs of regulating industry too high?

Though I’ve focused on one set of regulations, the point applies to other regulations. The financial questions are more complicated than a simple cost tally. Regulation naturally comes with a cost. Under Dodd-Frank, regulation of banks might make loans more expensive. Regulations might eat into the profits of banks.

But that’s not necessarily a bad thing. Indeed, those increased costs to the industry could force it into taking some responsibility, and take on the $895 billion costs of their own risky business practices, rather than relying on the average American to bear the $6 to $14 trillion in costs in the midst of another financial crisis.

Whether that math works out in favor of other regulations is a case-by-case calculation, and one that deserves in depth discussion as lawmakers craft future regulations. It’s important to balance these laws with enough teeth to get the job done, without more administrative and financial burden than is necessary to accomplish the regulatory goals.


Other Articles of Interest:

The TPP: Politicians Aren't Ashamed of Taking Our Jobs

The Widening Gap between the Rich and the Rest of Us

Update: America's Retail Stores Continue to Fail

Government Math: The Fiction of the Unemployment Rate


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