Industry Market Trends

What Are the True Costs of Regulation?

Feb 26, 2013

The effect of government regulation on American manufacturing has been a hotly debated issue since the introduction of federal clean air and water guidelines about 40 years ago. Here we look at what manufacturing trade groups consider the real economic impact of regulations on U.S. manufacturers and consumers.

A recent study from NDP Consulting assesses the Environmental Protection Agency's (EPA) cost-benefit analyses for six of its proposed regulations and attempts to provide hard numbers for the long-term financial costs of these measures. The study examines the EPA's final Utility MACT and Boiler MACT rules, the proposed Coal Combustion Residuals and Cooling Water Intake Structures regulations, the expected Cross-State Air Pollution Rule and the National Ambient Air Quality Standards for Ozone.

According to NDP, in the worst-case scenario, the regulatory burden could cut annual U.S. output by as much as $630 billion and 4.2 percent of gross domestic product (GDP). The EPA counters with lower estimates, while balancing the cost of regulations with the value of the benefits achieved. The EPA has estimated the value of the benefits arising from the Clean Air Act, such as health effects and visibility improvements, at almost $2 trillion.

The National Association of Manufacturers (NAM) claims that annual compliance costs for all six regulations range from $36 billion to $111.2 billion (by EPA estimates) and from $63.2 billion to $138.2 billion (by industry estimates), with total capital expenditures for all six regulations ranging from $174.6 billion to $539.3 billion (by EPA estimates) and from $404.5 billion to $884.5 billion (by industry estimates).

Manufacturing groups often have a negative view of increased regulation. NAM President and CEO Jay Timmons said that over the past 30 years, "more than 2,000 regulations have been imposed on manufacturers. It is already 20 percent more expensive to manufacture in the United States compared to our largest trading partners."

And if it seems as if there is more red tape and regulations to cope with, you may be right. "The average number of major federal regulations - those expected to have an economic impact in excess of $100 million - has risen with each recent administration," the Washington Post notes. "Under President Bill Clinton it was 27 per year. The number rose to 35 under George W. Bush and stands at 44 per year between 2009 and 2011 under President Obama."

A 2012 study from the Manufacturers Alliance for Productivity and Innovation (MAPI) on the impact of federal regulations on the manufacturing sector found that since 1998, regulatory costs have exceeded manufacturing growth by an annualized rate of 7.6 percent, while the Obama administration has instituted 106 new major industrial regulations that have cost Americans approximately $46 billion.

The study zeroes in on the effect new regulations would have on the cost of manufacturing. Most of the EPA's six proposed rules affect electricity generation, and the manufacturing sector uses 28 percent of all the electricity produced in the U.S. "One immediate and incontrovertible impact of these new regulations would be an increase in electricity prices," the study finds.

As a result, consumers would see prices of manufactured goods rise as the cost of production increases. "The cumulative impact of the proposed regulations will increase the price of electricity 6.6 percent annually," leading to less competitive products, lower sales, and job cuts among U.S. manufacturers. In the short-term, utilities would incur costs of up to $142 billion to comply with only three of the dozens of EPA rules.

The original Clean Air and Clean Water acts were passed in the early 1970s, and most analysts agree that they've done a great deal to improve or slow the deterioration of local environments. And while the EPA's assessment that the Clean Air Act alone has generated $2 trillion in savings since its inception, the direct benefits of future regulations remain murkier.

The question now is whether the regulatory system has reached a point of diminishing returns, and if additional measures will or can provide the type of widespread beneficial effects that would justify their cost. In other words, there's a clear imperative to ensure water reserves are clean and safe, but it may not be cost-effective to implement billion-dollar measures to improve water purity by a fraction of a percent.

What's your company's perspective on industrial regulations? Share your experiences in the comments section below.