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The Poverty of Regulation

Ronald Reagan famously asked voters during the 1980 presidential campaign, “Are you better off than you were four years ago?” A similar test can be applied to government regulation: Has it left us safer and healthier than we would have been without it? Just like the voters in 1980, we can answer that question with a clear and emphatic no.

Regulation, or intervention in the marketplace by government, makes us worse off. Regulation routinely imposes harms that even the most intelligent reformer cannot foresee. Interventionists, as Ludwig von Mises argued in Critique of Interventionism, are “seriously deluded regarding the extent of the productivity loss caused by government interventions.”[1] We need only scan reams of evidence to see why Mises was right.

According to Cato Institute chairman William A. Niskanen, a former member of President Reagan’s Council of Economic Advisers, the total cost of federal regulation is on the order of $500 billion a year. And this figure excludes banking regulation and regulation by state and local governments. Niskanen concludes that the total regulatory burden might be as much as a whopping 10 percent of GDP.

Richard Vedder, an economist at the Center for the Study of American Business, finds that federal regulations cause $1.3 trillion in economic output to be lost each year. This is roughly equivalent to the entire economic output of the mid-Atlantic region, which includes Delaware, the District of Columbia, Maryland, New Jersey, New York, and Pennsylvania.[2] It is often wrongly assumed that state and local governments are wiser or more efficient in enforcing regulations. But they are often just as intrusive and destructive as the federal government. The microcosm of state and local bureaucracies can render businesses helpless before a raft of crippling zoning and environmental laws.

Enforced Inefficiency

When faced with federal, state, and local regulations, businesses must respond to the detriment of workers and consumers. According to Vedder, businesses are forced to use their resources less efficiently. They operate in a less productive, more costly manner. The result is lower wages, higher prices, or both. In any case, the result is a decrease in the standard of living for workers and consumers.

Mises flatly disproved the notion that regulation and other coercive economic measures make us better off. He argued that “intervention necessarily is illogical and unsuitable, as it can never attain what its champions and authors hope to attain.”[3] Take the Occupational Safety and Health Administration (OSHA), which Congress established in 1970. OSHA’s mandate was to assure for all workers safe and healthful working conditions “by encouraging employers and employees in their efforts to reduce the number of occupational safety and health hazards at their places of employment.”

Yet, unsurprisingly, OSHA’s 30-year record has been marred by failure. According to a regulatory analysis performed by the Cato Institute, while OSHA supporters cite evidence attesting to the agency’s effectiveness, “the vast majority of studies has found no statistically significant reduction in the rate of workplace fatalities or injuries due to OSHA.”[4] Interventionists are hard-pressed to maintain that OSHA meets even the minimum criterion for any government program: Does it have any desirable effect on the problem it is supposed to solve?

Worse, OSHA’s failure has been bad for business. A 1995 study by the Employment Policy Foundation found that 19 percent of the productivity slowdown in the 1970s was directly attributable to regulations imposed by OSHA and that nearly half of the slowdown in long-term productivity can be explained by rising government regulatory activity.[5] OSHA’s poor track record even forced Vice President Al Gore to admit that the agency “doesn’t work well enough.” Yet despite its failures, OSHA continues to intimidate businesses with the heavy hand of regulation. And it continues to make us worse off. As with almost any form of persistent government meddling, regulation stifles the very forces that drive growth and, hence, prosperity. It becomes the ever-visible hand that swiftly punishes the pursuit of profit, and in turn, those of us who indirectly benefit from it. According to economist Hans Sennholz, government regulation is harmful “because it hampers man’s productive efforts where, from the consumers’ viewpoint, they are most useful and most valuable.”[6]

Blithe Assumption

Interventionists proudly champion greater regulation and control over the economy because they blithely assume the market cannot by itself solve seemingly intractable social and economic problems. It is the state, they grandly proclaim, that most productively and efficiently solves what the market most assuredly cannot.

But meddle as they may, interventionists only succeed in making things worse. Health-care reform offers another telling example of this. Interventionists clamor that the ranks of the uninsured continue to swell because the private insurance market won’t cover them. Little do they realize that prices in the health-care economy have been driven up precisely because of government interventions such as Medicare and Medicaid.

Why? Health-care interventionism distorts the price mechanism that allows doctors and patients to negotiate the costs of various treatments. More interventionism inevitably results in an increase in health-care costs, which in turn means fewer people who can afford private health insurance. Interventionists then decide that we need more regulation. This is the vicious circle of regulation. As Mises explained, when regulations make problems worse, more regulations are passed to make up for the harm caused. Interventionists typically capitalize on perceived market failures, and then deceive an unsuspecting public into believing in the inadequacy of the market and pressing for more regulation.

This explains the 69,684-page Federal Register. It is rife with rules and restrictions that alter the way entrepreneurs act in the marketplace. Its mandates are costly, redundant, and ultimately destructive of the market forces that create prosperity for everyone. Yet it continues to grow. But as history has amply shown, it is free markets, not government regulation, that make us better off. Would that the interventionists could learn this most simple of lessons.


  1. Ludwig von Mises, Critique of Interventionism (Irvington-on-Hudson: Foundation for Economic Education, 1996 [1977]), p. 14.
  2. Richard K. Vedder, “Federal Regulation’s Impact on the Productivity Slowdown: A Trillion-Dollar Drag,” Policy Study No. 131, Center for the Study of American Business, July 1996, p. 16.
  3. Mises, p. 33.
  4. Cato Handbook for Congress (Washington, D.C.: Cato Institute, 1999), p. 356.
  5. Wayne B. Gray, “The Cost of Regulation: OSHA, EPA and the Productivity Slowdown,” American Economic Review, December 1987, pp. 998-1006.
  6. Hans F. Sennholz, introduction to Critique of Interventionism, p.v.
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