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Regulations: Innovation Friend of Foe?

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In our latest Insights, John Dearie, Founder and President of the Center for American Entrepreneurship, shares his proposal on how to break the regulatory red tape.

Why are there so many regulations?

Regulation is essential to market economies. It establishes the rules of competition, ensures a level playing field, governs participants’ behavior, and protects consumers, public health and safety, private property, and environmental resources. In this important sense, innovation, economic growth, and wealth creation depend on the promulgation and enforcement of regulation.

But regulation isn’t free, or without consequence.

Regulation imposes costs — costs borne by businesses. A wave of new, inconsistent or outdated regulations, or complex and confusing regulations can distract business owners’ focus and time away from their product line and the marketplace. They can impose costs that consume resources that could otherwise be invested back into businesses. Regulation can also create economic distortions, entrenched interests, and powerful constituencies, and lead to cronyism and dependency. Perhaps most insidiously, regulation and its costs operate like an invisible and, therefore, easily overlooked, tax.

Michael Mandel, chief economist at the Progressive Policy Institute, has pointed out that the sheer accumulation of regulations over time can begin to suppress innovation and growth — even if every individual regulation, considered in isolation, is determined to be sound and reasonable.

“The problem is that it’s possible for every individual regulation to pass a cost-benefit test, while the total accumulation of regulation creates a heavy burden,” he says. “I call this the ‘pebble in the stream effect. Throw one pebble in the stream, nothing happens. Throw two pebbles in the stream, nothing happens. Throw one hundred pebbles in the stream, and you have dammed up the stream. Which pebble did the damage? It’s not any single pebble, it’s the accumulation.”

Read more: Regulation: Innovation enabler, or destroyer? (https://www.1776.vc/insights/regulation-innovation-enabler-or-destroyer)
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