Only 10,000 Commandments? You Wish!

The Competitive Enterprise Institute (CEI) has just released its annual report on the growth of the regulatory State in the US, entitled '10,000 Commandments' (the full report can be downloaded here, pdf). If only it were just '10,000 commandments'! In reality, there are far, far more, and they are growing like weeds year-in, year-out.

A few statistical highlights from 2013:

 

  • Combined with $3.454 trillion in federal spending, Washington’s share of the economy now reaches 31 percent.
  • Costs for Americans to comply with federal regulations reached $1.863 trillion in 2013. That is more than the GDPs of Canada or Australia.
  • This is the 21st edition of Ten Thousand Commandments. In that time, 87,282 final rules have been issued. That’s more than 3,500 per year or about nine per day.
  • The “Unconstitutionality Index” is the ratio of regulations issued by agencies compared to legislation passed by Congress and signed into law by the president. The ratio stood at 51 for 2013. That means there were 72 new laws and 3,659 new rules – 51 rules for every law, or a new rule every 2 ½ hours.
  • Regulatory costs amount to an average of $14,974 per household – 23 percent of the average household income of $65,596 and 29 percent of the expenditure budget of $51,442. This exceeds every item in the household budget except housing – more than health care, food, transportation, entertainment, apparel, services, and savings. Some 63 departments, agencies and commissions have regulations in the pipeline.
  • The 2013 Federal Register contains 79,311 pages, the fourth highest ever. The top two all-time totals are 81,405 pages in 2010 and 81,247 in 2011, both under Obama.
  • The top six federal rule making agencies account for 49.3 percent of all federal rules. In 2013, these were the Departments of the Treasury, Commerce, Interior, Health and Human Services, and Transportation and the Environmental Protection Agency.
  • Small businesses pay more in per-employee regulatory costs. Firms with fewer than 20 employees pay an average of $10,585 per employee, compared to $7,755 for those with 500 or more employees.”

 

(emphasis added)

These developments are quite scary. Keep in mind in this context that the US economy is still considered relatively free and unhampered compared to the regulatory monstrosities that have been erected in Europe and elsewhere.

 

Lost Opportunities – An Unmeasurable Cost

There are two ways in which the State can burden the productive sector of the economy: taxes and regulations. Historically, states that have emphasized taxation over regulation have been economically more successful, as the effects of over-regulation are doing a lot more more follow-on damage to the economy than taxation alone. Taxation is a direct expropriation of wealth that can be calculated with some precision. It is essentially a classical protection racket: the State supposedly 'protects' its citizens from a great many evils, and the latter are forced to pay for this, whether they want to or not. However, as long as people are otherwise free to pursue their entrepreneurial ideas relatively unmolested, this can simply be treated as a cost of business. It is certainly an obstacle to wealth creation, but not an insurmountable one.

By contrast, every new regulation will stifle the entrepreneurial discovery process. For instance, we cannot even know if a better alternative to road transport exists, because the roads are fully run by the government. There is no longer an incentive for entrepreneurs to discover and try better methods, as no profit motive exists with respect to roads.

In short, the monetary costs of regulations as calculated by CEI above probably don't even come close to representing the actual costs in terms of lost opportunities,  knowledge that has never been gained, and consumer satisfactions that will never be attained as a consequence. The statement that regulatory costs devour 29% of all household income is sobering enough as it is, but it cannot possibly convey how much economic progress has already been forever lost due to regulations.

 

The Sham of 'Democracy'

The fact that every law spawns on average 51 new rules that fall under so-called 'administrative law' should give everyone pause. Regulatory democracies are not really democracies anymore: they are quasi-tyrannies, in many respects ruled by faceless bureaucrats.

Administrative law is an evil that permeates regulatory democracies all over the Western world. There is no democratic control to keep this Moloch in check. No-one can vote out bureaucrats when they e.g. decide to pass rules (as has just happened in the EU) such as the one that toilets may no longer release more than 6 liters of water per flush (1.58 gallons), or that vacuum cleaners may no longer be powered by more than 700 Watts. There is no way to get redress for the damage such regulations do. If it is no longer possible to properly clean one's carpets, or if one is forced to handle a filthy plunger every time one tries to flush the toilet, one is simply out of luck.

These are of course comparatively harmless examples. If a new rule is thought up every 2 ½ hours, 7 days a week (weekends included) in the US alone, you can be sure that many of these rules are not merely absurd, but many will be downright harmful. As an aside, the two EU regulations mentioned above will have the exact opposite effect from that intended: no water or energy is going to be saved by them (it should be easy to figure out why).

The main point is however that there is no way to change any of this. For instance, shortly after lobbyists dispatched by Philips,  Osram and other members of the light bulb manufacturing cartel managed to get the EU bureaucracy to enact an EU-wide ban of incandescent light bulbs, German politicians conceded that they had been 'overrun' by the decision and had not considered its implications in time. The alleged environmental blessings of the new poisonous mercury-filled 'energy saving' bulbs are non-existent, but the makers of the bulbs have certainly increased their profits quite a bit. However, even though numerous politicians conceded later that the decision was wrong and that they would not have let it pass if they had 'only realized in time what was happening', it hasn't been repealed. Apparently it is not possible to repeal it (although the reasoning behind this escapes us thus far). So it isn't going to help to e.g. vote for different politicians. The ban will remain in place either way – the bureaucrats rule.

 

incandescentbanNo more incandescent light bulbs in the EU – and although many German politicians conceded the decision to ban them was wrong, the ban hasn't been repealed.

 

Slowly but surely, all this rule-making is strangling the economy, not to mention that it strangles individual liberty bit by bit as well. As Hans-Hermann Hoppe remarks in his monograph “Government and the Private Production of Defense”:

 

We are supposedly protected from global warming and cooling; from the extinction of animals and plants; from the abuses of husbands and wives, parents and employers; from poverty, disease, disaster, ignorance, prejudice, racism, sexism, homophobia, and countless other public enemies and dangers.

In fact, however, matters are strikingly different. In order to provide us with all this “protection,” the state managers expropriate more than 40 percent of the incomes of private producers year in and year out. Government debt and liabilities have increased uninterruptedly, thus increasing the need for future expropriations. Owing to the substitution of government paper money for gold, financial insecurity has increased sharply, and we are continually robbed through currency depreciation. Every detail of private life, property, trade, and contract is regulated by ever higher mountains of laws (legislation), thereby creating permanent legal uncertainty and moral hazard.

[…]

“In short, the more the state has increased its expenditures on “social” security and “public” safety, the more our private property rights have been eroded, the more our property has been expropriated, confiscated, destroyed, or depreciated, and the more we have been deprived of the very foundation of all protection: economic independence, financial strength, and personal wealth. The path of every president and practically every member of Congress is littered with hundreds of thousands of nameless victims of personal economic ruin, financial bankruptcy, emergency, impoverishment, despair, hardship, and frustration.

 

(emphasis added)

The harm done by politicians is then multiplied by the bureaucrats tasked with making up the 'finer details' of new laws in the form of administrative regulations. By now it would probably be easier to enumerate the things that are still allowed, as opposed to those that are expressly forbidden. The plethora of rules and regulations is bound to turn almost every law-abiding citizen unwittingly into a criminal.

 

Crushing the Entrepreneurial Spirit

What is especially noteworthy is that regulations are far more costly to small businesses than big ones. Consider this point made in the CEI report:

 

“Small businesses pay more in per-employee regulatory costs. Firms with fewer than 20 employees pay an average of $10,585 per employee, compared to $7,755 for those with 500 or more employees.”

 

The reason for this is that larger businesses benefit from economies of scale and from privileges they are able to obtain. However, every large business has once begun as a small one. Big business organizations don't just drop from the sky after all. However, it is clear from this why big business is often unconcerned about the growth in regulations: it helps keep competition from start-ups at bay. Unfortunately, it is also extremely harmful to society at large when competition is suppressed. At the Personal Liberty Digest, we have found this slightly dated chart that illustrates the decline of entrepreneurial dynamism in the US:

 

declining_business_dynamism_figure1The US economy is becoming progressively less entrepreneurial.

 

This is surely a direct result of the massive growth of the regulatory State. It undermines the economy more and more over time, but not only that, it also crushes the entrepreneurial spirit that once characterized US society. With every new regulation, it becomes not only more difficult to start a new business or run an existing one, there are also fewer and fewer areas in which entrepreneurial activity can be profitably exercised. Instead, there is an unhealthy growth in business activities that depend entirely on government subsidies and thus destroy rather than create wealth (see e.g. all the subsidies that are paid to keep 'alternative energy' businesses afloat). Crony capitalism only increases the wealth of a selected elite with the required political connections, to the detriment of society at large.

Another way of looking at the decline in business activity is by considering the ratio of the self-employed to all employees:

 

Ratio-self-employed to all employeesThe ratio of self-employed people to all employees in the US: an inexorable secular decline is underway as the State grows ever bigger – click to enlarge.

 

There was a brief interruption in this secular downtrend after Ronald Reagan won the presidency and promised to roll back the growth of the State. People became optimistic again after the misanthropic decade of the 70s, and much malinvested capital had been liquidated due to Volcker's tight monetary policy, paving the way for genuine and sustainable economic growth. However, in many respects. these promises soon turned out to be empty rhetoric.

For one thing, Reagan had evidently underestimated the power of well-entrenched vested interests, from the bureaucracies themselves to the powerful private interest groups lobbying for government privileges. He also started spending like a drunken sailor in order to outspend the Soviet Union on defense. What he didn't consider was that the communist system was already doomed economically: since economic calculation is not possible under socialism, the system is bound to self-destruct once all the capital that was accumulated prior to its adoption has been consumed. It was entirely unnecessary to try to 'outspend' the communist bloc on armaments. The legacy of this policy was a burgeoning federal debt that remains out of control to this day and ensures, as Hoppe notes above, an increase in “the need for future expropriations”. We should add that to some degree these expropriations are accomplished via inflationary policy, which harms the economy even more.

The fact remains that fewer and fewer people are trying to make a living by taking the risk of becoming self-employed. This definitely results in lower economic growth. At the same time, government's promises regarding future payments to citizens (the famed 'unfunded entitlements') have grown like weeds, as has the government's already existing debtberg. Considering that the private sector is continually decimated by the issuance of more and more regulations, how do politicians expect these government promises to ever be funded?

To us it looks like a big crisis is going to be unavoidable, and it is to be feared that when this crisis arrives, a great many very stupid ad hoc decisions will be taken by members of the ruling class. The aim of these decisions will be to protect their own status, and that can only mean even more economic repression for the rest of us.

 

Small business

Job creation, business start-up rates and loans to small business, by Citigroup – click to enlarge.

 

Conclusion:

Issuing mountains of regulations gives bureaucrats something to do, but there is a price to be paid. It is impossible to tell how much economic progress has already been sacrificed due to the massive growth of the regulatory state, but it is a good bet that its growth cannot continue forever without dire consequences for the liberty and property of the citizenry. We don't know how this parasitic Leviathan can possibly be stopped, but unless it is stopped, it will one day end up devouring its host.

 

 
Charts by: Personal Liberty Digest, St. Louis Fed, Citigroup
 
 

 

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One Response to “The Parabolic Expansion of the Regulatory State”

  • I don’t know where we start, but maybe this is a start. Pass regulations all bureaucrats must follow each day prior to working on any new regulations. Forbid overtime and keep imposing regulations until it is estimated the average bureaucrat needs 7 hours and 59 minutes to comply with these regulations. Being most of them will need to go to the bathroom at some point, that should stop most of them from ever proposing another. Exempt those charged with getting rid of regulations from compliance.

    Early in the development of the USA, most people were self employed and most of those that weren’t, were working to get money to join the others. The industrialist needed employees, so they set out to produce the climate to provide them. Today, I suspect the idea is to limit competition. We are all managed for the needs of a few.

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