Idaho recently got some positive press from Elon Musk and others on X for our government’s progress in cutting regulations from state code. I posted a brief thread about this last week but wanted to expand on it a little bit here on the blog. Why is this an important consideration for real estate investment? What impact does deregulation have on economic growth?
First, it’s important to define what we’re talking about with the term “deregulation”. At the risk of being overly simplistic, “Regulation” is the same as “Law”. In the United States, this includes both rules passed by government agencies and rules passed by legislatures. To further complicate things, both federal and state legislatures and agencies enact their own regulations. Even in a state like Idaho (one of the least regulated states), we have over 130,000 regulations totaling almost 10 million words across our legislative statutes and agency regulations. In case that doesn’t sound like a lot, this would take an average adult about three months to read if you read for 10 hours each day.
Some regulation is vital for property owners (protection of private property, lease enforcement, eviction capability, etc.). These are areas where you want strong protection. Conversations around deregulation are aimed more at the mass of laws around certain industries, business practices, environmental activities, and the thousands of other niche activities that governments push their way into. When you consider the whole mass of regulation in our federal and state governments, the overwhelming majority falls into the latter category.
How did we get here? Mark Andreessen described this well in a recent interview with Joe Rogan. He calls it the “Wall of Regulation” that lobbyists and interest groups will push to codify that protect individual businesses or the incumbents in an industry from new competition and innovation. Naturally, these are worked out with bribes and other forms of corruption, but that’s too much of a rabbit trail for this conversation. A great example of this is how new bank startups disappeared after the Dodd-Frank Act in 2010. The Act’s 848 pages of new regulations (and the creation of new agencies, spawning exponentially more regulation) created a compliance burden that no new banking startup could possibly play along with. Over time, this constant enactment of regulation grew into the astronomical mess that we have today.
Let’s look back at Idaho. Here is the high-level breakdown of our regulatory restrictions:
I should point out that this is only for restrictions coming from state agencies – it doesn’t count the more than 90,000 statutory regulations in our legislature. If we take out categories that won’t have much of an impact on economic activity, we’re still left with about 30,000 agency regulations that govern actions from horse hair sample collection for veterinarians to water circulation standards for hot tubs.
It doesn’t take a lot of reasoning to see how this mass of regulation negatively impacts economic growth. Excessive regulation:
One could go on, but the baseline is that excessive regulation makes individuals and organizations less productive and thus inhibits economic growth.
Further, productivity is only one ingredient of economic growth. The other is population. Unnecessary regulation has a less direct – but just as serious – effect on population growth.
On a national scale, I’d argue that cutting regulation would lead to more births and less deaths (a.k.a. population growth). There’s not room to flesh out the details of this here, so you’ll just have to take my word for it. To take just one example, though, if you could free the medical industry from its current regulatory chokehold, you would see lower costs for care and more rapid advancements in technology. This element alone would lead to population growth.
At a smaller scale, states (and specific regions within states) are going through massive shifts in population due to migration. This is a big area where regulation impacts growth: people are leaving regions with oppressive regulation and moving to regions that offer more liberty. The regulatory environment of a state or city is like air quality: yes, some cities are pleasant places despite the smog, but no place is made more pleasant by the smog. Unnecessary regulation stifles the agency of individuals and will deter those who value such liberty.
I’ve written elsewhere on the relationship between regulation, economic growth, and RE investment returns. One objection that I’ll touch on quickly is that sometimes regulation actually boosts RE investment returns, to the point where investors find success by only investing in high-regulation regions like Los Angeles or New York City. This happens via a “wall of regulation” (to use Andreessen’s term) that protects property owners from new competition. The few who know how to navigate the political environment to get new developments approved will also be better off.
While this is true right now, it’s a short-term view that will blow up in the long run. A region with oppressive regulation will eventually lose its companies, people, and general economic productivity. I don’t agree with Ayn Rand’s solutions, but she was great at recognizing problems. Her novel, Atlas Shrugged, shows the inevitable end of societies that operate this way.
If you look at some of the news reports and articles shared on X last week, one would think that Idaho is leading the charge in deregulation. There is some truth to this that’s worth recognition: Idaho legislators generally recognize the issues that excessive regulation causes and have taken steps to combat that. As others have documented, though, these efforts over the past half-decade haven’t been as fruitful as advertised.
I’d argue that Little’s post above is misleading: while I agree with his point that cutting red tape leads to economic growth, this data is a case where correlation does not equal direct causation. Our economic success is much more likely an effect of population growth over the last two decades – in which our regulatory environment played a part – but isn’t tied to cutting regulation that wasn’t there before. Idaho has always been a destination for those who value personal liberty.
The best thing that could happen to Idaho is for our legislators to recognize the ineffectiveness of the current approach to deregulation and take aggressive action to truly cut our red tape. We cannot consider ourselves a government “by the people” if the people cannot reasonably know what all the government requires of its citizens. If we make real, significant cuts to our regulations, we will create a fertile environment for sustainable economic growth for decades to come.