By Drew Godsell
A report from the Mercatus Center comparing regulatory burdens in different states ranks Alaska 24th in the nation for the largest occupational licensure burden. While regulations and licensures are usually justified as a means of keeping consumers safe (and while a select few do this well) mountains of regulations can easily get out of control, become counterproductive, contradict each other, and harm the economy.
The Mercatus Center report uses the federal regulation and state enterprise index, or FRASE, to measure “the degree of impact federal regulations have on a state’s economy relative to federal regulations’ impact on the national economy.” It finds that an increase in regulations in Alaska from 1997 to 2015 is correlated with negative economic consequences including an additional 7,623 Alaskans living in poverty, 2.1 percent higher income inequality, an annual loss of 26 businesses, an annual loss of 284 jobs and 7.35 percent higher prices.
As of 2018, a 42 percent growth in Alaska’s regulatory burden is correlated with a 10.5 percent increase in the number of impoverished Alaskans, or those that have less than enough income to supply an Alaskan household with essential goods. The report says that without the regulatory increase, the 2018 poverty level in Alaska could have been as low as 10.05 percent instead of its measured 11.5 percent, resulting in 7,623 fewer impoverished Alaskans.
The same growth in regulatory burden is associated with an increase in income inequality of 2.1 percent. 2018 research using statistics from the Bureau of Labor Statistics and the Mercatus Center’s RegData shows poorer households disproportionately purchase goods whose prices are most affected by increases in regulations. Between 1999 and 2015, prices for low-income households increased on average by 2.46 percent while increasing only by 2.08 percent for top-income households. Firms selling essential goods often face inelastic demand from consumers, so when their costs rise to comply with regulations, they can raise their prices without large losses in sales because consumers will still purchase their goods. As a result, lower-income households unable to afford substitutes for these essential goods often are the ones to suffer the costs of regulations.
All consumer prices rise with regulations, regardless of income level. The Mercatus report found that an increase in industry-specific regulations measured from 1999 to 2015 is associated with a 7.35 percent increase in consumer prices. 2018 research using data from the Bureau of Labor Statistics and Mercatus’ RegData associates a 10 percent increase in regulatory burden with a 0.9 percent increase in consumer prices, likely due to increasing compliance costs for firms who must raise their prices to meet their increasing production costs. This data suggests that the average inflation in the United States, including Alaska, from 1999 to 2015 could have been as low as 1.85 percent instead of its measured 2.19 percent.
Mercatus scholars say the increase in industry-specific federal regulations between 1999 and 2015 was on average 3.78 percent per year and is associated with an annual loss of 26 small firms and with them 284 Alaskan jobs. When compliance with regulations is difficult and confusing, people often may forgo projects or entrepreneurial ideas that would have benefitted the community and economy. Alaska misses out on talented entrepreneurs every year by increasing regulatory burdens on their businesses. Imagine the additional losses Alaskans would have experienced without the on-going roll-back of state-level regulations that the current administration is working on.
Alaska is ranked 24th in the nation for the most burdensome state-level occupational licensing regulation. Overregulating occupations often disincentivizes or prevents people from pursuing an occupation that they may be passionate about and excel at, further robbing Alaska of goods and services and a flourishing economy that could have been enjoyed. Reducing state-level occupational licensure also may be among Alaska’s easiest fixes for the issue of overregulation, since federal regulations are much harder for a state to influence. A good start would be to grant licensed doctors in good standing in other states the ability to practice telehealth in Alaska, which is not currently permitted without an Alaska-specific license. Five other states allow all US licensed doctors to practice telehealth across borders without issue. Arizona recently passed a law allowing this, citing an increase in options for quality care for people in Arizona and an increase in competition in medicine to keep prices down. Alaska also permitted this during the COVID-19 pandemic as a special exception. Making this a permanent change would help solve Alaska’s current shortage of doctors, especially considering its lack of a state medical school, and allow for greater competition within Alaska’s medical industry, which would help increase the quality of care and lower prices.
Another change Alaska might consider to lessen the effects of harmful regulations is the introduction of regulatory sandboxing. Regulatory sandboxes allow temporary freezing of regulations on innovations to allow for some self-regulation. After observing, regulators are able to apply the most necessary regulations without overstepping. Since growth in innovation often greatly outpaces changes in legislation and regulation, regulators often either preemptively overregulate out of fear or apply regulations from similar industries that may not fit. Sandboxing gives regulatory policy a chance to keep up. Arizona implemented some regulatory sandboxing in “fintech,” technology used for financial services, in 2018 and Utah introduced it in its financial and legal industries in 2019. It is also being utilized by several other countries around the world. Regulatory sandboxing could be an excellent way to prevent overregulation through experimentation while possibly opening the eyes of politicians to the real impact of regulations and markets’ potential to self-regulate efficiently.
The cost of complying with regulations is often great enough to disincentivize innovation and competition within industries, including cases of intentionally high compliance costs designed to protect industry monopolies. These compliance costs can also be so high that individuals or firms may be incentivized to illegally forgo regulations altogether, resulting in goods and services that may truly be unsafe. The consequences of this almost always fall on consumers and the lower class. Overregulation is clearly a failure with serious consequences including measurable increases in unemployment, inflation, loss of businesses, and income inequality. Fortunately, it is also very solvable. Taking steps towards cutting back on Alaska’s regulations, particularly occupational licensing, will measurably save Alaskans money, improve equality, and stimulate entrepreneurship.
Drew Godsell is Summer 2021 Policy Intern at Alaska Policy Forum. He is currently studying economics and German at Hillsdale College.