How Do Federal Regulations Affect Consumer Prices? An Analysis of the Regressive Effects of Regulation by Dustin Chambers & Courtney A. Collins of Mercatus.
"Summary
Regulators and policymakers often claim that regulations are intended to protect the poorest and most vulnerable consumers. However, the effects of regulations are most harmful to the poor because regulations drive up the cost of doing business, resulting in higher prices. Unfortunately, the goods and services to which the poor devote much of their limited budgets, such as energy and food, are also the most heavily regulated.
When the federal government introduces new regulations for
an industry, there are numerous potential consequences for both
producers and consumers. Often, complying with regulations is costly for
firms, and these higher costs may in turn drive up prices for
consumers. Higher prices caused by regulatory growth are unlikely to
affect all consumers equally. High-income and low-income households tend
to have different spending patterns, and regulations may have a larger
impact on one group than on another.
This study examines the relationship between regulatory
expansion and higher prices and finds that price increases caused by
regulation have a disproportionately negative effect on low-income
households. The poorest households tend to spend a larger proportion of
their income on goods that are heavily regulated and subject to both
high and volatile prices. This cost should be recognized in
policymakers’ efforts to consider the costs and benefits of new and
existing regulations.
STUDY DESIGN AND DATA COLLECTION
While several previous papers have documented potential
costs associated with the burden of federal regulations, none have
provided a comprehensive empirical analysis of the effect of regulations
on consumer prices. This study uniquely combines data from the Consumer
Expenditure Survey with industry-specific regulation information from
the Mercatus Center’s RegData database as well as information on price
changes over time from the Consumer Price Index.
KEY FINDINGS
Regulations in the Aggregate Lead to Price Increases
The stated purpose of regulations is often to help protect
consumers from a variety of problems in the market. However, the
benefit of any sort of protection must be weighed against the cost of
higher prices. The data show evidence of a statistically significant
relationship between regulation and increased prices.
There is a period of time between the publication of new
regulatory restrictions and when they have a measurable impact on
prices, so it is important to evaluate both variables over time. After
the impacted production processes have been altered to comply with a new
regulation, there is an associated jump in the price of the affected
goods and services. Comparing the growth rate of prices over time
against the growth rate of regulations over time, the data show that a
10 percent increase in total regulations leads to a 0.687 percent
increase in consumer prices.
Poorer Households Spend More on More Heavily Regulated Goods
The data also show that households from the poorest income
groups experience the highest overall levels of inflation and the
highest levels of price volatility. In comparison to wealthier
households, poorer households spend a substantially larger proportion of
their income on more inflation-prone, volatile, and heavily regulated
goods and services.
In the two most stable price quartiles of consumer
expenditures, wealthier households allocated 15.3 percentage points more
spending than the poorest households. By contrast, the poorest
households allocated 15.3 percentage points more spending than the
wealthiest households in the two most volatile quartiles.
CONCLUSION
Regulators and policymakers often claim that regulations
are intended to protect the poorest and most vulnerable consumers.
However, the effects of regulations are most harmful to the poor because
regulations drive up the cost of doing business, resulting in higher
prices. Unfortunately, the goods and services to which the poor devote
much of their limited budgets, such as energy and food, are also the
most heavily regulated.
Another unintended effect of regulation is that the poor
face a higher overall rate of inflation in the goods they tend to
purchase. In addition to undergoing larger price hikes, these heavily
regulated products also display greater volatility, meaning that
low-income households face more uncertainty in their household budgets
than do wealthier households. Policymakers must understand the
unintended effects of higher, more volatile prices on the poor when
considering new regulations."
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