Consumer Prices and Federal Regulations

In April I'll be presenting a paper at the Association of Private Enterprise Education meetings on the relationship between EPA regulation and food prices. I'll talk more about that when I get a draft of the paper together, but I want to summarize a paper that caught my eye the other day.

Dustin Chambers (Salisbury University) and Courtney Collins (Rhodes College) recently published a working paper with the Mercatus Center on the relationship between consumer prices and federal regulations.

Here's the intro to the on-line summary:

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.

The authors use data from the Consumer Expenditure Survey and the Mercatus Center's RegData database, which is comprised of data on industry-level federal regulation, in a statistical model to determine the impact of federal regulations on a range of consumer prices from 2000 to 2012.

They summarize their key findings:

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.

While this effect seems small, there are distributional issues at play. The authors conclude:

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.