Government Regulations: Costs and Dangers

A government regulation is a set of rules written by some executive branch agency to organize a certain economic activity. They start when the legislature passes a law to organize some economic activity and as part of that law, it creates a new executive agency or tasks existing agency to create the rules that people and businesses have to follow to comply with that law. The agency then maintains these rules, updates them as it sees fit and enforces them through either financial penalties or prosecution for violation.

Federal Government regulations are violating the Constitution because the Congress is delegating lawmaking to the executive branch. The Constitution has a clear separation of power between the three branches and it doesn’t give the power to any of the branches to delegate its powers to another branch. Not only does Congress delegates its power to write law regarding a certain area, but also it effectively loses that power. Once created, the regulatory agencies can write as many regulations as they want and Congress can only repeal a regulation by passing a bill, but given that the President still has the veto power the Congress can repeal a regulation only if it has a two-thirds majority support for that repeal. This effectively eliminates the power of Congress in every area regulated by an executive agency. According to the information on the federal register, which maintains all the federal rules, Congress had  only disapproved one rule since 1996.

Given the inability of Congress to act, the only way to repeal a regulation is to sue the agency that wrote it but only parties that can prove harm can sue the government and the lawsuit may go all the way to the Supreme Court taking years and the outcome depends on the views of the judges. Also, the courts only look into whether the regulation violated the law or rulemaking procedure not whether they make sense or not.

Several of the agencies, such as the SEC, have their own administrative courts, they decide if people or businesses are violating the regulations and issue penalties and only after defendants lose in those courts can they go to the federal courts to challenge the verdict. So executive branch agencies act as the three powers of government and use that power to extract large penalties from companies. The Wall Street Journal published a report recently about the bias in the SEC administrative courts.

In addition to the constitutional issues associated with regulations, they also impose huge costs on the economy. They create barriers to entry for new businesses into regulated economic areas. Some sectors such as financial services have so many regulations that only large businesses can survive and compete in the field because they have the scale to handle the legal overhead of regulations. This prevents new small companies from entering regulated business fields and forces existing businesses to consolidate in larger ones to face the costs. This contributes to the decreasing number of businesses in the U.S. over the years. Businesses pass costs of regulations to consumers raising the prices of goods and services.

Advocates of regulations claim that they achieve public good by protecting consumers from business abuse. These claims don’t pass the test of reality, businesses have the incentive to meet their customers’ demands because they want to stay in business and the legal system exists to punish people or businesses who violate the rights of others. A customer who got cheated by a business can use the legal system to press charges against that business. A group of people who live close to a factory that pollutes their water or air can sue that business for damages. When the legal system enforces contract and property rights only businesses or people who misbehave will pay for their abuses while businesses that run honestly and people who follow the law will not pay unneeded costs.

Regulations don’t make businesses safer or protect consumers from dangers. They create jobs for bureaucrats, increase the cost for the people and rob them of their liberty.