Crews’s study also makes category mistakes, such as classifying time spent preparing tax forms or waiting in security lines as a “cost to GDP,” akin to costs of environmental or occupational safety regulations. In fact, there is no probative evidence that time spent in airport security reduces GDP compared to the alternative of no airport security, or that the time spent filling out tax forms reduces GDP compared to what it would be if no one bothered to file or pay taxes.

The above quote is from Richard W. Parker, “Hyping the Cost of Regulation,” The Regulatory Review, June 25, 2018. Professor Parker is a law professor at the University of Connecticut School of Law and policy director of the Center for Energy and Environment Law.

This is an excerpt from his skeptical look at how various economists–Mark W. Crain and Nicole V. Crain, and Clyde Wayne Crews–came up with an estimate that regulations costs the U.S. economy about $2 trillion annually. To put that in perspective, that’s about 10% of GDP.

I do not defend their estimate. I would want to know more before defending or criticizing it. But I do want to defend Wayne Crews from the criticism I’ve quoted above.

My defense starts by reminding you of why we use GDP. It’s a handy–and very rough–way of quantifying economic well being.

What would happen if people spent less time in lines at TSA or filling out tax forms? They would have more time to work, which means more time to create GDP. Would they work more? Probably. But they would also have more leisure.

Why is the leisure part important? Because the fact that people would use some of that time in leisure means that they  would use it to create something even more valuable than GDP.

Assume for a minute that each person can choose his or her work hours. Then when you observe someone taking leisure instead of working, what do you know? You know that he/she must value that leisure more than the hourly wage he/she can earn. So, for example, if someone’s annual income is $40,000, that person’s hourly wage is approximately $20 per hour. If that person could choose to work another hour–and chooses not to–then that person’s loss from an hour in a TSA line is more than $20. (I’m ignoring–which I shouldn’t–that person’s marginal tax rate. Taking the average marginal tax rate for Americans into account–it’s about 40%–means that that person’s loss from an hour in a TSA line is more than $12.)

My point is that that person doesn’t have to use the hour to work for us to be able to conclude that the loss from being in a TSA line is substantial. The same thing with filling out tax forms. One of the potentially huge benefits from the 2017 tax reform is that many people will cut the number of hours they spend on saving data on charitably contributions and on doing their taxes by 3 to 4 hours–because they won’t bother itemizing. That gain–across a few tens of millions of households–could be substantial. Assume 20 million households no longer itemize. 20 million times 4 hours times $25 per hour = $2 billion.

Back to TSA. TSA provides little security. Assume that 10 million travelers a week spend an hour less in line (because we eliminate TSA) and that their time is worth $40/hour. (Why so high? Because the people who travel most have very high time values.) So we have 10 million times $40 times 0.5 hours = $200 million. Multiply that by 50 weeks and we have $10 billion.

My analysis depends on the assumption that people choose their own work hours. We know that for at least 70% of the 130 million people employed full time, that’s false. But how false? Not very. The number of hours worked per week is, roughly speaking, an equilibrium number that reflects the desires of the majority of the work force. Doesn’t it reflect a government’s decision to set the work week at 40 hours? Not really. When the government set it at 40 hours some decades ago, it was simply tracking, with a lag, what the market had yielded for the majority of workers.

 

HT2 Mark Thoma.