For a generation, perhaps longer, one of the major political parties in the U.S. has had “cutting regulations” as a standard campaign promise, while the other major political party has touted the benefits of regulation. However, many of those who are making the “we have too much regulation” argument are not really explaining why that is a problem, as if they consider it to be self-evident. Their lack of willingness to explain themselves means that what most voters hear is that too much regulation is something that business owners, not people like themselves, should be concerned about. In other words, most voters don’t necessarily connect excessive regulation with economic stagnation.

So how does excessive regulation rob a country of economic dynamism and result in economic stagnation? While history is littered with such examples, this is not a good explanation as it does not explain HOW the process works. The way regulations impact economic growth (and through this living standards) starts with what a regulation actually is. A regulation is a command for someone (or some entity) to do something that they would not do of their own free will. This means taking time, energy, effort and money to accomplish some task that is being done under duress. Because this regulation is mandating an action that is not being produced on its own in the market, the resources being expended are not necessarily being used in an “economically productive” manner. While it is certainly possible that the regulation in question is actually correcting a market failure (i.e. accomplishing an economically productive task that the unique market conditions at a specific place and time are hindering), the fact that regulations are being imposed and administered by people with neither the information (markets are way too complex and contain way too much information to be managed efficiently by humans), expertise, or often interest to manage markets means that it is not likely that most regulations that are proposed and administered are going to be of the market correcting sort.

The second problem with regulations is that they often create a situation in which people who spend their lives doing certain tasks are being overseen by people who have no experience doing the tasks that are being micromanaged.  It is hard to imagine a worse way to organize an economy than one in which those who know are forced to, in a sense, answer to those who don’t know. Furthermore, the people who are paid to manage the regulations (including people who are employed by private companies to ensure that those companies are in compliance with the regulations) are engaging, in most cases, economically unproductive activity (except in those cases in which they are managing regulations that are correcting a market failure).

Take the IRS as an example. The purpose of the IRS is to move money from Point A (taxpayers) to Point B (government). Every year, Americans spend over $100 billion dollars complying with the tax code. It would be possible, with elimination of income tax and its replacement with a national sales tax, to move the same amount of money to the government, with relatively little cost. In other words, the IRS and the armies of accountants, tax preparers, tax lawyers, etc. etc. are engaged in the economic equivalent of digging a hole and then filling it in. They add no additional tangible products to the market. They are effectively involved in a large federal jobs program. We would have the same level of economic production (industrial products, agricultural products, standard of living, etc) if they all went home and had their checks paid by the people who are actually engaged in economically productive activities. Economically, they are no different than welfare recipients, which certain segments of the political culture tend to disparage.

In short, as more and more regulations are created, more and more economic resources and workers are pulled into economic unproductive activities, which creates a drag on economic dynamism that slows (and in extreme cases stops and/or reverses) the growth of living standards. While there can be disagreement at which point one can say that there is “too much regulation”, there can be no serious disputing that this point exists. The sluggish economic growth of the last 5 years, when compared with economic recoveries of a generation ago, indicates that we are likely operating in a “too much regulation” environment.