The Magazine

All Benefits, No Costs

The false promises of Obama’s regulators.

Apr 11, 2011, Vol. 16, No. 29 • By IKE BRANNON and SAM BATKINS
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Many companies complain that the Obama administration has increased the cost of doing business by issuing loads of new regulations. The administration does not deny being aggressive in issuing new rules or that compliance costs may ultimately total in the billions of dollars. Instead, it has rejected logic and common sense and argues that increasing the costs of doing business benefits the economy. The chain of reasoning by which it reaches this conclusion is breathtakingly audacious, not to say absurd.

Factory workers

When economists talk about the cost of a regulation, they typically refer to how much businesses have to spend to comply with the rules, as well as to the government’s cost to administer and enforce those rules. The benefits of a regulation are what society gains from the regulations—such as a cleaner environment or a safer workplace.

Quantifying the costs and benefits is anything but straightforward. For example, the ostensible benefits of a rule intended to limit emissions from all-terrain vehicles might be a reduction in premature deaths due to respiratory disease as well as fewer hospital admissions and workplace absences and a general improvement in the quality of life.

The rule would increase costs by forcing companies that make all-terrain vehicles to purchase emission-mitigation equipment that may also require expensive engineering changes to avoid compromising performance or durability. Estimating the cost involved in such a change, as well as quantifying the benefits from the cleaner environment, can be incredibly difficult.

The complexity means that there is a lot of leeway to justify new regulations from a cost-benefit perspective, which this administration has been quite aggressive in exploiting. This is not new—the Clinton administration tortured the estimates of costs and benefits to justify regulations as well—but the Obama administration has taken the concept of obfuscation to an entirely new level by conflating what constitutes a cost and what constitutes a benefit.

For instance, the additional workers that businesses must hire to comply with a new regulation are typically chalked up as a cost in a straightforward economic analysis. This administration, however, suggests that such hiring, although it increases the cost of doing business, is actually a “stimulative effect” that benefits society. 

In its recently proposed regulation governing waste incinerators, the Environmental Protection Agency argues that “an increase in labor demand due to regulation may have a stimulative effect that results in a net increase in overall employment.” The EPA didn’t end the nonsense there, going on to opine that “regulated firms demand labor workers to operate and maintain pollution controls within those firms.” This is not an isolated example: In its industrial boiler analysis, the EPA wrote that “environmental regulations create employment in many basic industries.”

According to this bureaucratic ethos, purchasing equipment mandated by the government can be “job creating during the period before firms must comply with the rule.” Under the EPA’s logic, running an industry out of business could also be a boon for bankruptcy lawyers, creating growth in the struggling legal sector.

Arguing that onerous new regulations create jobs is nonsense, of course. If the government makes a business spend more money, that is a cost. The government may or may not have a good reason to make them spend that money. Regardless, what the businesses—and our economy—spend to comply diverts people and capital from other productive uses. To suggest that this is somehow a benefit is duplicitous.

A former colleague now working for a U.S.-based multinational firm just returned from his company’s quarterly meeting where they analyze potential investments around the globe. He said that the biggest change in these meetings in the last four years is that U.S. investments now come with geopolitical risk, thanks to the potential impact of the expanding public debt and the threat of more onerous regulations.

It’s hard to see this changing under the current administration.

Ike Brannon is director of economic policy and Sam Batkins is director of regulatory issues at the American Action Forum.

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