Good News For Cronies: Study Shows Regulations Are Strangling New Businesses at Birth

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Guy Bentley Research Associate, Reason Foundation
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Businesses are being strangled at birth and prevented from hiring workers, according to a new study looking at regulations across 215 industries.

Using data on the extent of federal regulations, the Mercatus Center finds that a 10 percent increase in regulation leads to 0.5 percent fewer firm births and 0.9 percent fewer hires. Not only are regulations hampering America’s economic potential, but they are rarely achieving their own goals.

“Stricter regulation of entry is not associated with higher-quality products, better pollution records or health outcomes, or livelier competition, as the public-interest model of regulation would predict,” the paper says.

Written by James Bailey and Diana Thomas, the paper argues the torrent of regulation flowing from the federal government is deterring entrepreneurship and damaging the life prospects of many Americans.

Using the RegData tool which tracks the how many of rules on the Code of Federal Regulation apply to certain industries, the academics found that between 1998 and 2011 there were clear negative effects on firm creation and job growth for the most regulated industries.

However, the study said that established larger firms were unlikely to be killed off the by the regulatory overload. Larger firms with strong legal teams and a healthy balance sheet can often absorb the cost of new regulations. Small firms and start-ups on the other are often not able to shoulder the burden of these extra expenses.

In a press release, the Mercatus Center said the study suggests that “existing firms actually benefit from regulation, and may have an incentive to encourage more regulations to discourage competitors from starting rival businesses.”

In some instances, larger firms may even use their financial muscle to lobby politicians to pass onerous regulations that stifle or even eliminate their competitors. (RELATED: Cronyism ‘Biggest Threat To Free Enterprise Right Now,’ Experts Say)

Mercatus has been a leading voice in the fight against crony capitalism, publishing a host of work attacking the Export-Import Bank, whose charter expired in June but stands a strong chance of being  reauthorized.

Bailey and Thomas in their conclusions stress the importance of humility on the part of regulators as to how effective they can actually be in advancing the public good.

“Regulators need to understand that there is a tradeoff between any benefits of regulation and its negative effect on business creation and economic growth,” the report’s authors said.
“Before promulgating new federal regulations, regulators must carefully consider their consequences and justify regulation in light of its likely negative impact on economic growth.”

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