The Marginal Cost of Bureaucracy Is Hidden

An old classmate reminded me recently that when we were in school together I had disclosed my personal interpretation of economics: every theory in economics is some version of the statement, “marginal cost equals marginal benefit.” Different models vary in the conditions they explain, but the conclusion is always some form of that simple equality.

This aphorism is a flippant nod to the fact that economics is a study of tradeoffs, often in the presence of distortions and uncertainty. It refers to the equilibrium buyers and sellers obtain.

When we say marginal cost, we refer to the cost to produce an incremental item, given a current level of production. If we produce only one fighter jet, the marginal cost will be very high. If we produce nine hundred and ninety-nine fighter jets, what is the cost of producing the one-thousandth plane? Presumably it will be lower because we have learned how to be more efficient and we have already incurred the fixed costs of putting in place the production line, etc.

When a bureaucrat imposes a new cost or regulation, what is the marginal cost of that incremental requirement?

It could be trivial, or it could be massive. It could mean the difference between a pipeline’s construction and the loss of billions of dollars in sunk engineering costs.

The truth is we don’t know what it is until it has been put into place and we can see its impact and we can see who is bearing the burden. It is fair to say that it is hidden before its implementation.

But even once the rule is put into place, some participants may still not understand its impact, even as it is obvious for others.

For the obvious costs, we can compare legal and compliance fees, before and after. Or we could compare the cost curves for various market participants across time. Even then, there could be multiple conflating factors, so that we cannot say with definite certainty the cost of the rule on industry was $X.

We might be able to compare the approval timelines for affected projects, concluding that the incremental rule extended the timeline by some provable amount. Again, this calculation takes place against a dynamic background in which all kinds of market, economic, and political conditions fluctuate.

These are all estimates. Generally, they are true enough to provide an order-of-magnitude sense for the cost of the regulation.

When we say that the marginal cost of the regulation is hidden what we mean is that the people who promulgate them likely neither pay attention to the effect they are having on users nor see them in their own metrics.

The bureaucrat sees each rule as having a marginal cost of zero.

For the bureaucrat, new rules do not appear in their financial statements as anything other than a justification for increasing their staff and budgets. New rules do not appear as distinct factors underlying the metrics they seek to deliver. If they claim that the rule will increase employment, lower inflation, or clean the environment, there is no shortage of other factors they can blame should the metrics fail to show progress, even as the bureaucrat can claim credit if things work out according to plan.

If something has a marginal cost of zero, there is no reason not to expand it ad infinitum. If one rule is good, one hundred must be better.

According to GovInfo, the “Code of Federal Regulations (CFR) annual edition is the codification of the general and permanent rules published by the Federal Register by the departments and agencies of the Federal Government.”

Witness the growth over time. Here is the Competitive Enterprise Institute.

“In 1960, the CFR contained 22,877 pages. Since 1975 until the end of 2019, its total page count has grown from 71,224 to 185,984, including the index – a 161 percent increase. The number of CFR bound volumes stands at 242 for the past four years, compared with 133 in 1975.”

One might think that over time, we would learn to consolidate regulation more efficiently, discarding rules that did not work for ones that did. Or, optimistically, that technology might make regulation more efficient.

The counter-argument here is that the sheer volume of regulatory growth roughly matches the growth in the economy. A dynamic economy generates new activities to regulate.

Even so, one could imagine a “meta-rule” that required one to discard an existing rule for each new rule put into place to avoid regulatory bloat. With such a policy in place, there would be an incentive to prune the regulatory vine before it choked off growth in unanticipated ways.

Tying this back to the definition of bureaucracy, a bureaucracy is an organization in which the promulgation of rules proceeds unimpeded by consideration of costs, costs that others outside the organization will bear.

Beware the proliferation of rules. The road to hell is paved with good intentions.