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Sunday, September 27, 2009

California Says Its Regulations Cost Half-Trillion Per Year

by Jason Gonella

A report was recently released by the State of California detailing the cost of regulation to the state's economy. The results are damning.  Regulation costs just under half a trillion dollars annually. It costs the state four million jobs. It costs the state twelve billion in taxes.

The cost to the state's economy is equal to what is currently one third of the state's GDP. The twelve billion in taxes would close the existing budget gap without resorting to fancy accounting. The four million jobs would put the state's unemployment rate below, instead of above, the national average.

This report was actually commissioned by the State of California. It was due in 2007, and it was submitted in 2007, but the governor, showing the well-known small-government leanings that are commonly associated with the Republican Party, sat on it fro two years until forced to release it.

It is truly a damning report, especially given that it was released by an agency of the state government. Those who see the government as the solution to various problems are faced with the government saying that the government is the cause of problems.

Because the authors are professors of the social sciences at state universities, that gives them all the qualifications a statist would ever need - had this been done privately the criticism would be that because it is done privately there is an agenda that discredits the report. Because the report is printed in the Small Business Administration of the State of California, that gives the report all the credibility a statist would ever need - had this been printed privately the criticism would be that because it is done privately there is an agenda that discredits the report.

The Report

This study measures and reports the cost of regulation to small business in the State of California. It employs an original and unique approach using a general equilibrium framework to identify and measure the cost of regulation as measured by the loss of economic output to the State’s gross product, after controlling for variables known to influence output. It also measures second order costs resulting from regulatory activity by studying the total impact – direct, indirect, and induced. The study finds that the total cost of regulation to the State of California is $492.994 billion which is almost five times the State’s general fund budget, and almost a third of the State’s gross product. The total cost of regulation results in an employment loss of 3.8 million jobs which is a tenth of the State’s population. Since small business constitute 99.2% of all employer businesses in California, and all of non-employer business, the regulatory cost is borne almost completely by small business. The general equilibrium framework yields the following results:

• The direct cost of the regulatory environment in California is $176.966 billion in lost gross state output each year. The direct cost does not account for second order costs.

• The total loss of gross state output for California each year due to direct, indirect, and induced impact of the regulatory cost is $492.994 billion.

• In terms of employment this total output loss is equivalent to the loss of 3.8 million jobs for the state each year. A loss of 3.8 million jobs represents 10% of the total population of California. In terms of labor income, the total loss to the state from the regulatory cost is $210.471 billion. Finally the indirect business taxes that would have been generated due to the output lost arising from the regulatory cost is $16.024 billion.

• The total regulatory cost of $492.994 billion is four to four and a half times the total budget for the state of California, and almost five to six times the general fund alone. Further, given the total gross state output of $1.6 trillion for California in 2007, the lost output from regulatory costs is almost a third of the gross state output.

• The indirect business taxes lost could have helped fund many of the state’s departmental budgets. As an example, the indirect business taxes lost are 60 times the budget of the Office of Emergency Services, and would have paid for almost half the budget of the Department of Education.

• The total cost of regulation was $134,122.48 per small business in California in 2007, labor income not created or lost was $57,260.15 per small business, indirect business taxes not generated or lost were $4,359.55 per small business, and finally roughly one job lost per small business.

• The total regulatory cost of $492.994 billion translates into a total cost per household of $38,446.76 per household, or $13,052.05 per resident. The total cost per household comes close to the median household income for California.

This study provides the most comprehensive and complete analysis of the total regulatory burden in California. The study and findings have implications for policymakers and those in charge of the regulatory environment. The results also suggest that future research should attempt to understand how to minimize the intended and unintended costs of regulation. Since small businesses are the lifeblood of California’s economy constituting 99.2% of all employer businesses, efforts to make the regulatory environment more attractive will make California a more attractive state for doing business. This in turn will improve the state’s output, employment, labor income, indirect business taxes, economic climate, quality of life, living standards, and growth prospects.

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