DEI: Reduce Regulation

By Patrick Price, Government Practice Section Executive Committee

In times of crisis, there is inevitably a call for the government to pass additional laws or regulations; however, the cost of regulation disproportionately impacts the poor. As explained by Patrick McLaughlin, Senior Research Fellow at the Mercatus Center at George Mason University in testimony before the House Committee on the Judiciary, Subcommittee on Regulatory Reform, Commercial and Antitrust Law:

Some people maintain the notion that the costs of regulation are limited to compliance costs, and that these costs are paid primarily by businesses. This belief is incorrect. I will highlight two specific ways that the costs of regulation can actually be regressive, meaning that the costs are disproportionately borne by low-income households:

1. Regulations have regressive effects by increasing the prices of basic necessities, such as electricity, housing, and telephone services, which typically consume a larger share of the budget of lower-income households than of wealthier households.
2. Some types of regulations are associated with higher levels of income inequality, most likely because entrepreneurs at the lowest segments of the income distribution have relatively greater difficulty surmounting costly barriers to entry created by regulations.

With those points in mind, I hope to present this problem as an opportunity for policymakers to take positive steps toward regulatory reform—steps that will reduce the harm of federal regulations that are acting to impoverish, rather than help, low-income households.

The regressive impact of regulations can have significant impacts on poor and disadvantaged groups by locking them out of the opportunity to enjoy the American dream and improve their conditions. In a May 2020 working paper for the Mercatus Center entitled “Regulation and Income Inequality in the United States,” Dustin Chambers and Colin O’Reilly demonstrate that increased regulation hurts entrepreneurship, slows employment growth, and increases poverty. Some of their noted findings include:

• Small businesses. Regulations disproportionately affect small businesses. For example, the costs of complying with regulations are 29 percent higher per employee for small businesses than they are for large firms.
• Fewer startups. An increase in industry-specific regulations is associated with fewer small firms. It is also associated with a reduced number of workers in small firms.
• Barriers to entry. Occupational licensure increases the cost of entering a profession. The wages of existing license holders also tend to increase.
• Higher poverty rates. States exposed to greater federal regulations (owing to the particular mix of industries in that state) tend to have higher poverty rates. A 10 percent increase in regulatory burden is associ¬ated with a 2.5 percent increase in the poverty rate.

Indiana is generally rated as one of the best states in the nation for its regulatory environment. This is one of the major factors that has contributed to our ongoing success story in creating jobs in the state.

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