The White House and Congress agree: yes, some government regulations stifle innovation.

The cost of government regulation is enormous. The nonpartisan Heritage Foundation released a video explaining the effect of a massive growth of government regulations in 2010-2011, noting that $38 billion worth of new regulations were created in those years, and the number of government regulators grew by 16% in 2010 alone. Heritage Foundation economists estimated the total cost of government regulation at $1,750,000,000 annually, twice the amount the federal government collects in individual income taxes. The Economist magazine said in February 2012 that “The home of laissez-faire is being suffocated by excessive and badly written regulation,” citing as an example: “The Federal Railroad Administration insists that all trains must be painted with an ‘F’ at the front, so you can tell which end is which.”

The effect of those regulations on job growth is a topic of much debate. In July 2011, two titans of American economic intellectualism and innovation faced off at FreedomFest in Las Vegas: George Gilder, who wrote “Wealth and Poverty,” and Peter Thiel, co-founder of PayPal and angel investor at Facebook (Thiel has a video explaining the effect of regulation on innovation). Richard Rahn reported on the discussion and summarized at the end:

There is a titanic struggle now going on in Washington over the size of the U.S. government. Those who want a smaller government are, in effect, saying they want to unleash the future with all of its benefits by removing many of the regulatory and tax restrictions that impede human progress, while those who seek a bigger government are, in reality, pushing for a less prosperous and less kind future.

Jia Lynn Yang, of the Washington Post, begs to differ:

There is no question that a regulation can add costs for businesses and sap the resources and time of busy executives. Companies have long complained that spending money following rules means there’s less left over to invest in research or expand their businesses. Economists who have studied the matter say that there is little evidence that regulations cause massive job loss in the economy, and that rolling them back would not lead to a boom in job creation.

“This kind of sustained attention to jobs impact is new,” said Cass Sunstein, the White House’s regulatory chief. “I think it is very important to make sure regulations are compatible with our economic goals. But the idea of brandishing ‘job-killing regulations’ as a near-epithet is probably less nuanced than is ideal.” Sunstein said he is sensitive to the possibility that when there is higher unemployment, there could be a higher risk that people working in regulated industries may have to wait longer to find new jobs.

Government over-regulation is a solvable problem, but to solve the problem, you must first understand it. Author Philip K. Dick, head of the national organization Common Good, wrote in the Wall Street Journal that the problem begins with the way regulators operate: “Regulators try to imagine every possible mistake and then dictate a solution. The complexity is astounding.” He noted that:

Regulation is deliberately designed to avoid human discretion—to create a regulatory code that is self-executing. By making rules as precise as possible, we hope to avoid bad judgment. The unfortunate side effect has been to preclude good judgment. Modern regulation doesn’t just control undesirable practices—it indiscriminately controls all the work of regulated entities.

Taking responsibility is basically illegal in the modern regulatory state. A teacher can’t maintain order in the classroom without filling out forms and facing a potential legal hearing. Judges sit on their hands, letting people sue for almost anything. An inspector feels that he has no choice but to shut down an unauthorized neighborhood lemonade stand—a rule is a rule.

This approach ignores the fundamental rule of a free enterprise economy: central planning cannot address all problems. Adam Smith’s “invisible hand” teaches that innovation stems from competition among ideas – exactly the opposite of the bureaucratic impulse. Incentives, responsibility and accountability are all suppressed in a bureaucratic system, yet these are the hallmarks of an innovative system.