Do Small Countries and Small States Have Lower Levels of Red Tape?

When I write about regulation, I mostly focus on cost-benefit analysis.

Simply stated, red tape makes it more expensive for people and businesses to do things, much as adding obstacles makes it more difficult for someone to get from Point A to Point B.

So a relevant question is whether proposed regulations generate enough benefits to justify the added expense (I’m generally skeptical, but those are empirical matters).

But there’s another question we should ask, which is why governments create new rules and red tape in the first place?

• Are they genuinely trying to solve problems?
• Are they responding to “public choice” pressures?
• Are they trying to control and limit behavior?

Those are all plausible explanations.

But one thing that never occurred to me is that we may get more regulation if we live in a state or nation with lots of people.

That’s a topic that James Bailey, James Broughel, and Patrick A. McLaughlin investigated in a new study from the Mercatus Center. Here’s a description of their methodology.

…very few academic studies have advanced scholars’ understanding of the relationship between regulation and population. This article is intended to help fill this gap in the literature. We aim to test whether this population-regulation connection holds using more recent, more refined, and more comprehensive measures of regulation. …This study is the first to use RegData to measure why some polities are more regulated than others, the first to use the full State RegData (released in October 2019) for any econometric analysis, and the first to combine federal and state RegData for the United States with RegData datasets for other countries (Australia and Canada).

Here is some of the key data from the United States, Canada, and Australia.

The United States has about an order of magnitude more people than Canada, along with about an order of magnitude more regulatory restrictions than Canada. Conversely, Australia is less populous than Canada but has nearly twice as many regulatory restrictions. On a per capita basis, Canada, with only 0.0023 restrictions per capita for the entire time period examined, appears somewhat less regulated than the United States (at about 0.0032 restrictions per capita) and significantly less regulated than Australia (whose restrictions per capita rise from about 0.0053 in 2005 to a peak of 0.0095 in 2012, and taper slightly to 0.0092 in 2018). We note, however, that both the Canadian and the Australian regulatory systems are fairly decentralized compared to that of the United States, delegating a considerable amount of autonomy and authority to provincial governments.

The study includes some interesting charts.

First, we see that there are a lot more regulatory restrictions in the United States than in Canada and Australia.

Though if you adjust for population size, Australia has the most red tape.

Kudos to Canada for having the lowest level of red tape, both in absolute terms and in per-capita terms. As I wrote a few years ago, there are many Canadian policies we should emulate.

One common feature of the U.S., Canada, and Australia is that all three nations have some degree of federalism, which means that some government policies are handled at the state/provincial level.

And this means the Mercatus study has another way of measuring the relationship between population and red tape. In the United States, we learn that more people means more regulations.

Figure 3 compares the 2000 population and 2018 regulatory restriction counts of 46 US states and the District of Columbia. We see a strong positive correlation between population and regulatory restrictions. Running a basic linear regression with no controls, we find that, on average, an increase in population of 1,000 people is associated with a statistically significant increase of 9 regulatory restrictions. …we next take the log of both population and regulatory restrictions and run a simple linear regression on these variables…which show that, on average, a 10 percent increase in population is associated with a 3.27 percent increase in regulatory restrictions.

Here’s the relevant chart from the study.

Congratulations to South Dakota for having the lowest level of red tape (the state also scores well on fiscal policy).

Canada and Australia have fewer subnational governments, but the study finds a similar relationship between population size and regulatory restrictions.

While Canada and Australia do not have enough provinces to support proper regression analysis, Figures 4 and 5 plot their subnational populations against their subnational regulatory restrictions. The results are also suggestive of a positive population-regulation correlation.

Here’s the chart for Canada.

And here’s the chart for Australia.

The relationship between red tape and population isn’t a perfect fit, either in the U.S. or in the other two countries. But there certainly seems to be some level of correlation.

But why?

The authors offer some potential answers.

…we show that larger polities consistently have more regulation. This provides support for previous theoretical work that posited a fixed cost associated with regulating. Specifically, the fixed costs of establishing new bureaus, staffing them, and funding them to implement and enforce regulations may fall on a per capita basis with a larger population. In addition to the fixed cost explanation, Mulligan and Shliefer offer other alternative explanations for why regulation may increase with population levels…the scope of activities to regulate becomes larger as population increases.

Sounds like we should turn the 50 states into 500 states (to help ensure good political outcomes, let’s leave California, New York, and Illinois alone and subdivide the libertarian-leaning states).

Not only would we get less red tape, we’d also benefit from additional regulatory diversity and additional regulatory competition.

P.S. Our friends on the left want to go in the opposite direction, favoring global regulation.

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