Cutting the Red Tape

Dismantling the regulatory industrial complex

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The modern automobile was arguably invented in Britain, but the industry didn’t take off there. Soon after this new machine’s emergence, England’s Parliament passed the Red Flag Act. The Act required a crew of three to operate all autos. One person to do refueling, one to drive, and one to stand out front waving a red flag warning of the vehicle as it plodded along at 2 mph.

The Red Flag Act was the result of intense lobbying by the stagecoach industry which was threatened by this new innovation. Needless to say, the regulation stifled the nascent auto industry in Britain and it was the United States that gained predominance over this industry. While some regulations are necessary to maintain a functional civil society, many, if not most, regulations serve the interests of the incumbent industry heavyweights. If left unchecked, the accumulation of rules threatens growth and innovation.

Unchecked Growth

In the United States, The Code of Federal Regulations, the repository where all Federal rules are codified, has grown in length from roughly 70,000 to 170,000 pages from 1975 to 2010. And this is only Federal regulations. Each of the fifty states piles on its own unique rules, especially in the Occupational Licensing arena, which I addressed in a prior article.

Each new rule imparts an accumulating cost to innovation and economic growth. One study in the Journal of Economic Growth estimated that since 1949, the growing regulatory thicket in the United States slowed economic growth by some 2 percent per year through 2005. That is astounding since growth is cumulative, which that meant had the regulatory levels stayed frozen in their 1949 state, the US economy would have been three times larger in 2005.

To be fair, many regulations enacted in that time frame are arguably socially beneficial, like the Clean Air Act. That said, when we start regulating things like hair…