Various agencies and the federal government departments issue regulations to fulfill the purpose of legislation decreed by Congress. Regulations are normally implemented to ensure that there is uniform application of the law, as well as creation of economic and social benefits that cannot occur naturally in a pure market economy or avoiding hidden costs that are not fully reflected by the market economy. Government regulations are used for various reasons, such as benefiting politicians, enriching well-connected firms, remedying market failures, or centrally planning an economy. Federal government regulation affects the cost of living and our quality of life in every waking moment. Effects of federal government regulations are varied and the economy is highly influenced by them. Some regulations have benefits whereas others have negative impacts on the U.S. economy. The purpose of this paper is to address how government regulation of the economy in the 20th century, as an element of political policy, has hurt the economy. To achieve this, the paper will raise several negative issues associated with government regulations.
It is very difficult to calculate the total cost of regulation in the U.S., but an estimate provided in the year 2008 put the cost at $1.75 trillion. In the same year, the U.S. government expenditures were about $2.9 trillion. From these figures, it is possible to conclude that, 38% of the total resources allocated by the federal government are used on regulations. According to these statistics, the government is spending a lot of resources in regulations, yet the benefits accrued may not be worth that much. For instance, regulations might be used to address minor risks, but the additional resources used to address such risks are not used by citizens to address major risks on their own.
Regulation is known to cause misallocation of resources. That is, directing labor and capital to unproductive or less productive uses. Misallocation of resources has impacted the economy negatively. A good example of a government regulation that misallocated resources is when the government established policies to increase homeownership. These policies encouraged people to make larger investments in housing than they would otherwise have made. The capital used to establish those homes would have been used in other productive ways, considering the fact that those homes are now selling at very low prices.
Regulation also affects the sustainability and creation of jobs. It affects employment in two critical ways. First, some firms are forced to delay investments due to uncertainty concerning future regulation until they have a clue about how future regulations might affect their operations. Delayed investment causes a delay in job creation. If the uncertainty is extended, some firms might direct their investments into countries with less regulation, and the resulting jobs will be created in a foreign country. This means that regulation can create huge monopolies since it discourages new investors, thereby causing consumers to pay more for the monopolized products. Second, by changing the mix of services and goods our economy produces, regulation alter employment in some industries. Although the overall effect of regulation on employment is very little, the effects on specific industries are very large. In short, we can say that regulation destroy some jobs in one way or another and, in some cases, create others.
Government regulations enforce a variety of costs on consumers and producers. Regulations force some sectors, specifically the private sector, to produce a different mix of services and goods and produce them in a different manner than they are supposed to do. Due to this, the private sector is forced to use more resources in production than necessary, and consumers are forced to switch to the products that they may not like. These changes cause an increase in the cost of production creating a reduction in the value of income and output. That is, people offering capital and labor to the production process get fewer benefits than if there were no regulation. The reduced motivation to work and save causes investors, businessmen, and workers to make changes in their production. Some of them withdraw part of their labor from the market while others save and invest less, thus creating less capital. Reduction of labor supply and capital cause a reduction in the output of services and goods. That is, a reduction in labor supply and capital create a reduction in income and GDP. Due to the increased cost of carrying out businesses, companies are forced to charge higher prices for their services and products. Consequently, the consumer ends up paying more for a product he or she would have paid much less if there were no regulation.
According to economists, regulation hurts small businesses in a number of ways. Regulatory compliance hurts small businesses in that they are usually unable to pay the fixed costs, which is easier for larger firms. According to Crains, the cost of complying with federal regulations for a company with less than 20 employees is estimated at $10,585, while that of a company with 499 employees is estimated to be $7,755. Thus, small businesses are subjected to large percentage of costs hindering their growth. Regulation creates additional overhead costs, which are used for oversight of those regulations, reporting and ensuring compliance. Established companies are not spared from regulation either. Their expansion/growth is limited by regulations, which control their operations by defining what is and is not permitted.
In conclusion, there is uncertainty in future government regulation in the United States, as regular political shifts keep dangling the federal government from a pro-consumer attitude to a pro-business attitude and vice versa. Therefore, government regulations are here to stay and their implications will keep changing from time to time depending on which side they are supporting (business or consumer). Some of the issues highlighted in this paper are that regulation affects production by blocking innovation as well as discouraging risk taking, creating a decline in employment. High costs of regulation, in terms of business compliance, are passed to the consumer and sometimes force businesses to close. The government overkills in its regulations by forcing companies to make products that meet their standards, when it could allow businesses to set their own objectives for their business. To curb the negative effects of government regulation on the economy, all federal agencies should be encouraged to carry out a regulatory analysis so as to determine which regulations are hurting the economy. This will ensure that all the regulations hurting the economy are withdrawn and the ones benefiting it are maintained.