As the economy seems to be turning a corner while at the same time dark economic storm clouds appear to be gathering on the horizon, economists are still trying to come to terms with why the latest economic recovery has been so sluggish to the point that more than half of all Americans still believe us to be in a recession. While partisans on both sides have their favorite explanations, which often are the same explanations that they always have for everything, one explanation that I believe has some merit is that we simply have an economy that is over-regulated.

One way to think of regulation in general is that it imposes a cost on business. This doesn’t mean that there should be no regulation, far from it. But to ignore that each regulation costs businesses money is to simply deny that there is any downside to any regulation at all. But regulations have costs. People must be hired to ensure compliance. Paperwork must be filled out. Monitoring systems must be put in place. Lawyers must be hired. And as various state and federal agencies generate more regulations, more paperwork must be filled out, more lawyers hired, etc. etc. All of these costs add to the overhead expense of a business, costs that may or may not be able to be passed on to the customer.

While regulation costs businesses and, to the extent that the businesses can pass on those costs, consumers, it also costs the economy as a whole. This is because all of the resources that go into the regulatory structure of producing and complying with regulations are resources that can’t be used in economically (i.e. wealth-creating) productive ways. The highly intelligent lawyer engaged in regulatory compliance is a highly intelligent person who is not figuring out a way to produce tangible products using fewer resources. A pencil-pushing bureaucrat stamping regulatory forms is one more potential factory worker who could be making cars. And the small business owner who is spending his time complying with regulations is not spending that time figuring out how to build more houses, or fix more cars, or plant more crops. The extreme case of this involves the tax code, which costs Americans over $100 billion dollars annually to comply with. That is $100 billion dollars simply to move money from point A to point B, something that could be effected for almost nothing by scrapping the tax code and going to a national sales tax. This $100 billion dollars is a dead-weight loss to the economy in that we are spending the resources and getting the same result as we would have with a national sales tax.

As for whether we are producing too many regulations, consider the sheer volume of regulations that have been produced since 2000. Are Americans really visibly that much better off than they were in 2000? Since 2000, the real size of the economy has grown by 28% over the last 14 years, compared with 60% over the 14 years before that. And all of that regulation didn’t prevent the tech bubble or the real estate bubble, even though very smart regulators had their finger on the pulse of it at all time. If all of those regulations didn’t prevent the near collapse of the global financial system, were they really necessary?

In short, some regulations are clearly necessary and some are not. Many safety regulations and environmental regulations that were put in place in the 60’s, 70’s, and 80’s  have made the air cleaner, workplaces safer and Americans healthier. If you don’t believe me, look at pictures of 30-40 year olds in 1970 and look at them today. You will see that the people today tend to look about 10 years younger than they did then. But as necessary as some regulations are, there will always be a point at which the costs outweigh the benefits. At this point, more regulations will drag the economy down.

I believe that the idea that we are past the point where regulatory costs largely outweigh the benefits is extremely compelling.