NCPA - National Center for Policy Analysis

Unseen Regulation Harms Economic Growth

October 9, 2015

Out of 157 countries ranked in the Economic Freedom of the World report, the United States fell from the 12th slot in 2014 to 16th in 2015. The most worrying part is that the U.S. ranked 49th in the business regulations category.

Federal restrictions on business activities increased 28% from 1997 to 2012 and it's well known that excessive rules and restrictions can have a harmful effect on the economy.

  • A new study discloses that more regulated industries experience a decline in new hiring and additionally there are fewer new entrants because entrepreneurs are discouraged by all that red tape.
  • Even though a single restriction or regulation may not seem like a big deal, the cumulative effect of federal and local regulations overburden businesses and discourage new entrepreneurs.
  • Regulation can also distort the valuable signals generated by firm openings and failures. These signals transmit information about the local economic environment such as the level of demand, availability of financing, and quality of the labor force.
  • Regulatory barriers to entry do not provide the same level of information to other entrepreneurs that traditional failures do.

Although federal regulations get most of the attention, each local government has its own set of building codes, permit procedures, tax remittance laws, zoning regulations, etc., which every new business must comply with.

Cities and states that are struggling with population decline and business flight should streamline their regulations and create a friendlier environment for new ventures, which can generate economic growth in both the short and long run.

Source: Adam Millsap, "How the Unseen Effect of Regulation Harms Economic Growth," Inside Sources, October 1, 2015.

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