Commentary | Regulation

The economic—and other—benefits of regulations

“We hear about the cost of the regulations without considering the value of the benefits,” says Isaac Shapiro, who joined EPI earlier this year to launch and direct EPI’s new program on Regulatory Policy Research. At a time when Congress is attempting to roll back many regulations that protect the environment and guarantee worker protections, EPI has launched its regulatory policy research program in an effort to promote better understanding of the role of regulations and to examine the popular claim that they impede job creation. Here, Shapiro outlines some of the goals of EPI’s new program and discusses the controversy surrounding many regulations.

Why has EPI decided to pursue this area of research?

The current Congress has launched a full-scale assault on regulatory agencies and policies, which they justify on the grounds that regulations are significantly impeding job creation. EPI will attempt to investigate that claim, which appears to be significantly overstated.

Is it really true, as many claim, that regulations damage the economy and undercut job creation?

First, studies have generally shown that that is not the case. Second, the current Congress essentially has amnesia about recent history. In the past few years, the movement to deregulate contributed to the development of a financial crisis that led to the loss of 8 million jobs, lax regulation substantially increased the likelihood of something like the BP Deepwater Horizon disaster occurring, and the dangers of a weak FDA were underscored by  significant incidences of tainted food – from spinach to cookie dough. In these cases, the lack of regulation undermined the economy and particular industries. The potentially positive role that strong regulations can play in stimulating economic growth and a well-functioning economic system should also be considered.

The topic of regulation is extremely broad, covering everything from the environment to Wall Street. How is it possible to address this as a single subject, and what are some of the common threads?

It is an extraordinarily broad area of government activity. It is also an area that has probably received less attention than it deserves. We will look at broad studies of regulations that do exist, but we will also devote significant attention to the effects of particular regulations related to the environment, labor policy, and other areas.

Our special emphasis will be on labor policy regulations, an area of longstanding interest to EPI, on which we’ve done much research in the past. We will also focus on the environment. Important environmental regulations are being advanced this year and have become the focal point in the debate over regulations.

What is at stake today?

Fundamentally, what is at stake is whether appropriate regulations that will make our air cleaner and regulate the abuses of the financial industry will be enacted, as well as whether the health reform act will be able to be implemented in a manner that will benefit tens of millions of Americans. Many of the provisions of the financial services act and the health care act are going to be implemented through regulation: the design of those regulations and the ability of government to enforce them will ultimately have enormous implications.

You recently published the paper, An Unmistakable Pattern, where you state that many of the benefits of regulations go beyond cost/benefit considerations, and that some benefits “defy quantification.” Is it even possible to measure these benefits accurately, and is cost a reasonable way to measure the impact of regulations?

I think financial measurement provides a general sense of the usefulness of regulation, but it can be a far from sufficient perspective. There are certain effects of regulations that we can’t even quantify. Some pollutants have significant effects on health, but since we can’t adequately measure them, we cannot quantify the effect. Also, a large portion of the benefits of many regulations actually boil down to lives being saved. The government now quantifies that in terms of dollars, but to some degree that process produces less understanding of the true implication of the policy. The Clean Air Act amendments enacted in 1990 will soon have saved approximately two million lives in this country. That finding comes from EPA’s latest ‘Section 812’ report, one of the most comprehensive and well-done cost benefit analyses that the federal government has ever undertaken. In describing the effects of that regulation, people often focus on the equally astonishing fact that the benefits will amount to about $1.3 trillion in 2010. The issue then becomes: Is the dollar figure more meaningful or is the number of lives saved more meaningful?

What do the criticisms of the high cost of regulations miss?

They miss a couple of things. First and foremost they are usually one-sided: We hear about the cost of the regulations without considering the value of the benefits. A series of studies over the past several decades find that the value of the benefits of regulations has consistently and significantly exceeded their costs. Also, the cost estimates typically made by the government and industry representatives have tended to be significantly overstated. When regulations are implemented they tend to be much less costly and more efficient than expected. In part, that reflects the adaptability of the American economy and the firms in it: Given a new regulation, they go out and spend time coming up with the best technology to respond.

EPI has also recently published a series of reports on a Chamber of Commerce study on the cost of workplace regulations. Can you summarize EPI’s findings?

Two of EPI’s initial regulatory reports focused on a Chamber of Commerce study that purported to find that state labor policy regulations lead to higher unemployment. We spent a considerable amount of time looking at the Chamber’s study because we see it as symptomatic of the studies being advanced on this topic. The studies took no heed of the potential benefits of the regulations put forward, whether it is family leave or requiring employers to warn workers in advance that their plants are about to close. Overall the study itself was fundamentally flawed. They basically constructed a statistical model that did not meet simple tests of reliability, and they ignored studies that show that state labor policy regulations do not undercut employment

Some of the regulations covered by the Chamber of Commerce study were things like living wage laws and enforcing the minimum wage. Why is there so much opposition to some of these basic worker protections?

I think that in the discussion over regulation, it is much better to look at the effects of particular regulations than to just think about regulation generally. Regulation in general has the implications of big government guiding and determining our every decision. But when you look at most regulations that have been approved and are being considered, they are actually common sense regulations that most people support . People want clean air. They want safe toys. They want basic worker protections. They want to know that when they put money into a bank that it will be there for them. When the debate focuses on particular regulations and what they do rather than on regulation in general, support for those regulations grow.

What sorts of regulations are most needed today?

There are several aspects to the current regulatory agenda of the Obama administration. Some relate to implementing legislation that was passed in recent years with broad support, such as financial reform, health care reform, and the F
ood Safety Modernization Act. For those pieces of legislation to be effective, appropriate regulations must be adopted.

A second set of regulations has to do with the environment. A number of regulations that had been delayed or put off during the Bush administration have recently emerged from the Obama administration. These regulations by and large are likely to have health benefits far in excess of any compliance cost. The Environmental Protection Agency has also begun to regulate greenhouse gas emissions because they are an endangerment to public health. Indeed, current law requires the EPA to issue regulations in this area. Such regulations are not going to solve the problem of climate change. Their scope will simply not be large enough. But they can be an important first step on the path for reducing greenhouse gas emissions and moderating future damage from climate change.

Also, new regulations should be considered in areas such as enforcing labor standards and OSHA (Occupational Safety and Health Administration) policy, where the government for a long time has neglected its responsibility. 

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