Will Regulators Continue to Get Away with Murder?

President Obama has been traveling around the country touting the robustness of the nation’s economy during his two terms. You might call it the Wishful Thinking Tour.

“From 1950 to 2000, the U.S. economy grew at an average rate of 3.5% annually,” Hoover Institution economist John Cochrane pointed out in a recent Wall Street Journal op-ed. “Since 2000, it has grown at half that rate — 1.76%. Even in the years since the bottom of the great recession in 2009, which should have been a time of fast catch-up growth, the economy has only grown at 2%.”

A Wall Street Journal editorial on February 5 provides context to that slow economic growth: “The overriding problem continues to be a lack of business confidence and investment, which leads to slower growth, which gives the U.S. economy a lower margin for absorbing growth shocks from around the world.”

But the crisis in business confidence and investment is only a symptom. The underlying disease is the panoply of anti-innovation policies, actions, and attitudes of the Obama administration. Obama’s White House has been an outlier — to the high side — in the number of “economically significant” regulations (those that are expected to cost Americans $100 million or more annually) it has added. According to Daniel Pérez, of the Regulatory Studies Center at George Washington University, “As of the end of January 2016, Obama had 393, with 12 months remaining in his administration,” and the most recent of the administration’s “unified agendas,” released last November, indicated that more than 2,000 regulations are in the pipeline, of which 144 are deemed economically significant, a new record.

The regulations cut a huge swath through the American economy. They include labeling requirements for pet food, new test procedures for battery chargers, mandated paid sick leave for contractors, and speed governors for trucks, and a host of new rules that will limit energy consumption and increase the price of household appliances.

As we move into the home stretch of the Obama administration, we can expect more debilitating, innovation-killing regulations as well as continued ineptness from regulators. Susan Dudley, the director of the Regulatory Studies Center at George Washington University, wrote at Forbes earlier this year:

Historically, the 3-month period between Election Day and Inauguration Day has witnessed a flurry of regulatory activity. During this “midnight regulation” period, agencies have rushed to get their regulatory priorities finalized before the clock strikes twelve on January 20th and a new president is sworn in. Based on past patterns of final years’ regulatory activity, a midnight rush could drive the final Obama Administration regulatory tally to 500 economically significant rules during his tenure.

Most Americans don’t think a lot about the scope, magnitude, and impacts of regulation on our lives. The FDA alone, for example, regulates products that account for more than a trillion dollars annually — 25 cents of every consumer dollar — and the Environmental Protection Agency micromanages the quality of the water in our lakes and streams and of the air in every breath we take. But the reassurance that regulation provides us also has costs, direct and indirect. Regulation that is wrong-headed or that merely fails to be cost-effective actually costs lives, so the number of lives saved or other benefits derived from government regulation should always be large enough to offset the costs. 

The diversion of resources to comply with regulation — good, bad, or indifferent — exerts an “income effect” that reflects the correlation between wealth and health. It is no coincidence that richer societies or segments of the population have lower mortality rates than poorer ones. (This is demonstrable at the local level as well: California’s Marin County, just north of San Francisco, ranks No. 1 in both health and per capita income, while the poorer parts of the state, such as the Central Valley, score poorly on measures of health.)

To deprive communities of wealth via regulations that lead to inflated consumer prices, therefore, is to enhance their health risks, because wealthier individuals are able to purchase better health care, enjoy more nutritious diets, and lead generally less stressful lives. Conversely, the deprivation of income itself has adverse health effects — for example, an increased incidence of stress-related problems, including ulcers, hypertension, heart attacks, depression, and suicides.

The poorest and most vulnerable in society disproportionately bear the costs and impacts of excess regulation, while they enjoy relatively few benefits.

Although it is difficult to quantify precisely the relationship between mortality and the deprivation of income, academic studies suggest as a conservative estimate that approximately every $7 million to $10 million of regulatory costs will induce one additional fatality through this indirect “income effect.” Because unnecessary deaths result from regulators’ “erring on the side of safety,” excessive regulation has been dubbed “statistical murder” by John D. Graham and other risk-analysis scholars.

Not surprisingly, the poorest and most vulnerable in society disproportionately bear the costs and impacts of excess regulation, while they enjoy relatively few benefits. In her study “Regressive Effects of Regulation,” University of Utah economist Diana Thomas describes the harm that attends regulation that fails to consider the real-world impacts on consumers of increasing costs of goods and services or lowering wages:

People make private decisions determining their diets, how safe of a car to buy, whether to install smoke detectors, the type of neighborhood in which to live, and counseling for drug and alcohol problems. As regulatory agencies address smaller and smaller risks — thereby driving up the prices of many consumer goods and lowering wages of workers in regulated industries — they crowd out expenditures people would make in their private lives that address larger risks and perhaps cost less than government risk regulation. This crowding-out phenomenon will affect the less well off before it affects the wealthy because lower-income consumers may face higher risks in some areas of their lives and might wish to spend less on risk reduction overall. In this sense, regulation of health and safety risks, particularly regulation of small risks that are expensive to mitigate, can have a regressive effect on household income.

In other words, Thomas concludes, not only do current trends in regulation make the less wealthy less safe, but “by focusing on the mitigation of low-probability risks with higher cost, regulation reflects the preferences of high-income households and effectively redistributes wealth from the poor to the middle class and the rich.” Arguably, the Obama administration’s aggressive, expansive regulatory initiatives have actually increased the income inequality that Democrat politicians so often decry.

The EPA is the prototype of agencies that spend more and more to address smaller and smaller risks. An analysis by the Office of Management and Budget found that of the 30 least cost-effective regulations throughout the government, the EPA has imposed no fewer than 17. For example, the agency’s restrictions on the disposal of land that contains certain wastes prevent 0.59 cancer cases per year — about three cases every five years — and avoids $20 million in property damage, at an annual cost of $194 to $219 million. (Using the figure above of $10 million per death, that translates to about 20 fatalities per year.) 

In his excellent book Breaking the Vicious Circle, written shortly before he became a U.S. Supreme Court associate justice, Stephen Breyer cited another, similar example of expensive, non-cost-effective regulation by the EPA: a ban on asbestos pipe, shingles, coating, and paper, which the most optimistic estimates suggested would prevent seven or eight premature deaths over 13 years — at a cost of approximately a quarter of a billion dollars. Breyer observed that such a vast expenditure would cause more deaths than it would prevent from the asbestos exposure, simply by reducing the resources available for other public amenities. Nevertheless, political pressures from environmental activists pushed the EPA into making a decision that actually increased health risks.

Another example of flawed decision-making at the EPA is the imposition of overly stringent ambient-air standards under the Clean Air Act. Clean air is desirable, of course, but an EPA rule finalized in February 2012 that created new emissions standards for coal- and oil-fired electric utilities was ill conceived. According to an analysis by Diane Katz and James Gattuso of the Heritage Foundation:

The benefits are highly questionable, with the vast majority being unrelated to the emissions targeted by the regulation. The costs, however, are certain: an estimated $9.6 billion annually. The regulations will produce a significant loss of electricity generating capacity, which [will] undermine energy reliability and raise energy costs across the entire economy.

If not offset by benefits, $9.6 billion in regulatory costs translates into almost a thousand deaths per year.

The EPA is relentlessly anti-science, anti-technology, and anti-industry. Its officials routinely ignore that regulation has costs, direct and indirect, and that enlightened regulation should always strive to limit the intrusiveness of oversight to the level that is necessary and sufficient.

Policy by policy and decision by decision, federal regulatory agencies have eroded the nation’s competitiveness, ability to innovate, and capacity to create wealth. An analysis from the Competitive Enterprise Institute estimated that the annual cost of compliance with EPA regulations alone is more than a third of a trillion dollars. (That’s more than 30,000 fatalities per year, using the $10 million figure.) 

John Cochrane has the final word on why we need to rationalize and moderate regulation to free the nation’s scientific and technological prowess:

Looking ahead, solving almost all of America’s problems hinges on re-establishing robust economic growth. Over the next 50 years, if income could be doubled relative to 2% growth, the U.S. would be able to pay for Social Security, Medicare, defense, environmental concerns, and the debt. Halve that income gain, and none of those spending challenges can be addressed. Doubling income per capita would help the less well-off far more than any imaginable transfer scheme.