Media reports suggest President Trump and Democratic leaders have agreed in principle to a $2 trillion infrastructure plan “to upgrade the nation’s highways, railroads, bridges and broadband.”
Minor details such as how to finance it have yet to be agreed. White House Chief of Staff Mick Mulvaney doubts the deal will come to fruition anyway, given differences between the parties on environmental regulations surrounding new projects.
But it’s difficult to think of a worse way to make major policy than to dream up a big round number and then work backwards in deciding how money is spent.
Indeed, if $2 trillion is the answer, then what, exactly, is the economic question?
Is $2 trillion the amount needed to invest in targeted public goods that the market would not or could not provide? Is $2 trillion the amount the politicians think is needed for specific projects to enhance long-term economic growth? Is $2 trillion the amount politicians feel is necessary to repair existing infrastructure? Is $2 trillion what they feel the federal infrastructure contribution needs to be to alleviate negative externalities such as pollution? Or is $2 trillion maybe what they think is necessary to create shovel ready jobs to minimize unemployment?
Judging by the joint post-meeting statement from Speaker Pelosi and Senator Schumer, the Democrats have no coherent answer here. Within their 224-word statement, they outlined no fewer than 9 distinct policy aims or ambitions that any infrastructure package would be trying to meet:
- “creating jobs immediately”
- “bolstering commerce”
- “advancing public health with clean air and clean water”
- “improving the safety of our transportation”
- “expanding broadband to…underserved areas”
- “being for the future”
- paying “the prevailing wage”
- involving “women, veteran and minority-owned businesses in construction”
- addressing needs in “every congressional district”
Whatever the economic case for a major infrastructure program (and for my thoughts on that, read here), it should be obvious that these aims contradict one another.
Lots of projects with high returns take extensive planning and won’t “create jobs immediately.” Investment in safety might come at the expense of other projects that bolster commerce. Paying “the prevailing wage” will likely leave fewer resources to address needs in more districts. Selecting contractors based on the demographics of the owners might trade-off the safety quality of the job. Focusing on safety upgrades for existing infrastructure means fewer resources for “the future.” Addressing needs in every district and expanding rural broadband is almost certainly not the best way to bolster overall commerce. I could go on.
This plethora of aims is grist to the mill for a conclusion I reached back in 2017:
The sad truth is that infrastructure investment through the political process rarely prioritises long-term growth. Other considerations dominate, whether electoral advantage or regeneration of an area – even when market signals point to the need to expand booming regions.
The conflicted role of being both the promoter of a project and being responsible for examining its failures and risks leads politicians to make over-optimistic claims about a scheme’s benefits relevant to costs.
In principle, smart investments in infrastructure can sometimes improve economic welfare. But when huge amounts of federal money is seen as a communal pot for a host of social, environmental, local and “make work” objectives, the chances that such money will be spent wisely looks slim.
Media and social media have been percolating – mostly with invective – over President-elect Trump’s “deal” to keep Carrier and its 1,000 jobs from moving to Mexico. I am among the many critics of this ad hoc, interventionist approach to retaining or attracting companies to perform value-added, job-creating activities in the United States.
But there is a broader lesson in all of this, which seems to be getting overlooked: The United States (and the 50 states, individually) is competing with the rest of the world to attract and retain investment in value-added activities – factories, research centers, laboratories, etc. And, in that competition, public policies are on trial.
The revolutions in communications and transportation have made global capital mobile. The proliferation of transnational supply chains and cross-border investment means that businesses – entrepreneurs and other value-creators – have options like never before. Investment and production location decisions are determined by a variety of factors, including: the size of the market, access to transportation networks, wages and skills of the workforce, whether there is healthy respect for the rule of law, stability of the political and economic climates, perceptions of corruption, the magnitude and impact of regulations and taxes, trade policies, immigration policies, energy policies, and whether the general policy environment is conducive to running a successful business.
The United States has long been the premiere destination for foreign direct investment. FDI in U.S. manufacturing operations in 2015 reached $1.2 trillion – by far, the most FDI in any country’s manufacturing sector (and approximately double the amount in China’s manufacturing sector). But, whereas the United States accounted for 39 percent of the world’s stock of FDI in 1999, today it accounts for about 21 percent. The United States has, to some extent, lost its relative luster as a place to set up shop.
One reason for this is that the rest of the world has come on line – more countries have achieved greater stability, better education levels, work-force skills, transportation systems, etc – so there are alternatives for investment that didn’t exist 20 years ago. All of that is a good news. But a second reason reflects poorly on the United States. To some extent, foreign and U.S. investment is being chased from U.S. shores because of a relatively declining environment. In recent years, the regulatory environment has become more restrictive; corporate tax rates in the United States are higher than most other countries (certainly, highest among OECD countries); there has been a prolonged period of regime uncertainty with respect to trade, energy, immigration, and other policies. Perceptions of the existence of corruption and crony capitalism are on the rise. And companies are often berated and threatened by policymakers (including presidential candidates) for their choices – to perform some of their operations abroad or to keep their profits off-shore, rather than repatriating them at near confiscatory rates, to give a few examples.
Many companies worry about these threats. Sometimes they react by making “political considerations” a more important determinant of their investment/production location decision. Carrier may have done this, worrying about repercussions. Certainly, a strong case can be made that General Electric’s decision to bring jobs back from Mexico and China a few years ago, after President Obama made a pitch to U.S. companies to “resource” in the United States, had something to do with expectations of political dividends.
One major takeaway is that political considerations become more important as the size of government increases. Instead of investing in economic activity in the Rust Belt or the Heartland, companies are incented to invest on K Street because the political investments pay higher returns. This is among the greatest threats that worry limited government advocates.
But the main point here is that companies have choices and their decisions to locate in Indiana or Mexico, for example, are influenced by policy. Carrier is a big consumer of steel sheet and other steel products in its manufacturing operation. Perhaps the fact that there are numerous and increasing trade restrictions on imported steel has something to do with their original decision to move to Mexico.
Instead of threatening companies with repercussion for outsourcing – hell, they can pick up and leave altogether – or inducing them to stay with tax holidays and other subsidies, U.S. policy in the Trump administration and beyond should be to make sure the United States ticks the most important boxes when companies compare it to other investment location alternatives.
Since 1975 – for 41 straight years – the United States has registered annual trade deficits with the rest of the world. That means that year after year, Americans spend more on foreign-produced goods and services than foreigners spend on U.S.-produced goods and services or, put simply, the dollar value of U.S. imports exceeds the dollar value of U.S. exports.
For almost as long, some economists have been arguing that trade deficits are unsustainable – they sap economic growth, bleed jobs, and saddle our descendants with debt. Perhaps if one looks at the trade deficit (or the slightly broader current account deficit) in isolation, these concerns might seem to have merit. But looking at the U.S. trade or current account deficits without considering the capital account surplus is a meaningless, misleading exercise.
Yesterday, I published this piece at Forbes online, explaining why the trade deficit is not only not a problem, but that the associated capital surplus (the excess of inward investment over outward investment), which includes high-quality foreign direct investment, bestows huge advantages on the U.S. economy. In that piece, I ask trade deficit hawks (or scolds, as I call them) to furnish their best, fact-based, comprehensive arguments – to finally step up to the plate and explain why it is that the trade deficit is a problem to solve.
It would be of immense public policy value if we were to be able to catalogue and compare the arguments of both sides (and those who may be in the middle). After all, one of the reasons that trade is so maligned is that the public has been lead to believe that the trade account is a scoreboard, with the deficit indicating that Team America is losing – and it’s losing on account of poorly negotiated trade deals and foreign cheating. Helping the public reach that conclusion (rather than find the truth) may be the goal of some noisy contributors, but I suspect there are plenty of trade deficit hawks with purer motives, if not convincing arguments.
We intend to host a public debate on this question later this year, so it would be good to have some compelling, fact-based arguments that the trade deficit is a problem to solve. (Feel free to forward by email or social media.) Below is a short list of some of Cato’s expositions of the arguments that the trade deficit is not a problem to solve:
- Dan Ikenson, The U.S. Trade Deficit Is Not a Debt to Repay, March 22, 2016
- Dan Griswold, America’s Maligned and Misunderstood Trade Deficit, April 20, 1998
- Dan Griswold, “Bad News” on the Trade Deficit Often Means Good News on the Economy, January 11, 2005
- Dan Griswold, Does the Record Trade Deficit Threaten the U.S. Economy? March 21, 2007
- Dan Ikenson, Trade Deficit Oped in The New York Times Is Heavy on Fallacy and Wrong on Economics, November 8, 2013
- Dan Ikenson, Appreciate This: Chinese Currency Rise Will Have a Negligible Effect on the Trade Deficit, March 24, 2010
- Donald J. Boudreaux on the trade deficit and foreign investment, May 1, 2011
- Dan Ikenson and Scott Lincicome, Beyond Exports: A Better Case for Free Trade, January 31, 2011
- Dan Ikenson, Made in America: Increasing Jobs through Exports and Trade, March 16, 2011
And here's Milton Friedman talking to Kansans about the subject: Milton Friedman on Trade Balance and Tariffs
I've written often about the global competition to attract foreign investment, and have made the point that investment flows to jurisdictions with good policies in place. Globalization of production and the mobility of capital mean that national policies (regulations, tax policy, immigration, trade, energy, education, etc.) are on trial, with net investment inflows rendering the verdicts.
But some countries (and some U.S. states) use tax holidays and other forms of tax forgiveness, in lieu of adopting good policies, to attract investment, which burdens taxpayers and subverts the process of matching investment to its optimal location. These are subsidies -- like so many other programs -- that distort markets and should be discouraged.
In today's Cato Online Forum essay, which is associated with the TTIP conference taking place on October 12, Ted Alden from the Council on Foreign Relations puts forward a strong proposal to end this madness via the Transatlantic Trade and Investment Partnership negotiations.
Read it. Provide feedback. And please register to attend the conference.
Some exaggeration notwithstanding, Harold Meyerson, with whom the occasion to agree is rare, does a reasonably good job describing some of the pitfalls of the so-called Investor-State Dispute Settlement mechanism in his Washington Post column yesterday. ISDS has become a source of growing controversy, which threatens to derail the Transatlantic Trade and Investment Partnership negotiations, which are reported to be floundering during the seventh “round” of talks taking place this week in Chevy Chase, Maryland.
“Under ISDS,” Meyerson writes, “foreign investors can sue a nation with which their own country has such treaty arrangements over any rules, regulations or changes in policy that they say harm their financial interests.” That is more or less correct, but the implication that the threshold for bringing a suit is simple harm to a foreign investor’s financial interests is misleading. What is being disciplined under ISDS is not harm to financial interests of foreign investors, but harm that comes from discriminatory treatment of foreign investors. Thus, ISDS avails foreign investors (i.e., U.S. companies invested abroad, foreign companies invested in the U.S.) of access to third-party arbitration tribunals as venues for determining whether and to what extent the plaintiff suffered economic damages on account of host-government actions or policies that fail to meet certain minimum standards of treatment.
Meyerson suggests that ISDS provisions be purged from the TTIP negotiations because they subordinate U.S. courts to unaccountable tribunals, which “invites a massive end-run around national regulations.” Though I firmly believe the U.S. economy is racked with superfluous and otherwise unnecessary regulations, I do believe that a successful foreign challenge of U.S. laws, regulations, or actions in a third-party arbitration tribunal (none has occurred, yet) would subvert accountability, democracy, and the rule of law. For those and several other reasons, I’m on board with Meyerson’s suggestion to purge ISDS from TTIP, and would extend the purge to all trade agreements. In fact, I developed eight reasons for purging ISDS from the trade negotiations in this paper earlier this year.
First, ISDS is overkill. Investment is a risky proposition. Foreign investment is usually more risky. But that doesn’t necessitate the creation of institutions to protect multinational corporations – who are among the most successful and sophisticated companies in the world – from the consequences of their business decisions. They are quite capable of evaluating risk and determining whether the expected returns cover that risk. Moreover, MNCs can mitigate their own risk by purchasing private insurance policies.
Second, ISDS socializes the risk of foreign direct investment. When other governments oppose, but ultimately concede to, U.S. demands for ISDS provisions, they may be less willing to agree to other reforms, such as greater market access, that would benefit other U.S. interests. That is an externality or a cost borne by those who don’t benefit from that cost being incurred. In this regard, ISDS is a subsidy for MNCs and a tax on everyone else. Moreover, what may be too risky an investment proposition without ISDS for Company A is not necessarily too risky for Company B. By reducing the risk of investing abroad, then, ISDS is a subsidy for more risk-averse companies. It is a subsidy for Company A and a tax on Company B.
Third, ISDS encourages “discretionary” outsourcing. While ISDS may benefit U.S. companies looking to invest abroad, it neutralizes what was once a big U.S. advantage in the competition to attract investment. Respect for property rights and the rule of law have been relative U.S. strengths, but ISDS mitigates those U.S. advantages. Access to ISDS could be the decisive factor in a company’s decision to invest in a research center in Brazil, instead of the United States. Why should U.S. policy reflect greater concern for the operations of U.S. companies abroad than for the operations of U.S. and foreign companies in the United States? While we should not denigrate, punish, or tax foreign outsourcing, neither should we subsidize it. ISDS subsidizes “discretionary” outsourcing.
Fourth, ISDS exceeds “national treatment” obligations, extending special privileges to foreign corporations. An important pillar of trade agreements is the concept of “national treatment,” which says that imports and foreign companies will be afforded treatment no different from that afforded domestic products and companies. The principle is a commitment to nondiscrimination. But ISDS turns national treatment on its head, giving privileges to foreign companies that are not available to domestic companies. If a U.S. natural gas company believes that the value of its assets has suffered on account of a new subsidy for solar panel producers, judicial recourse is available in the U.S. court system only. But for foreign companies, ISDS provides an additional adjudicatory option.
Fifth, U.S. laws and regulations will be exposed to ISDS challenges with increasing frequency. The number of cases is on the rise. Most claims have been brought against developing countries—with Argentina, Venezuela, and Ecuador leading the pack—but the United States is the eighth-largest target, having been the subject of 15 claims over the years. As the percentage of global Fortune 500 companies domiciled outside the United States continues to increase, U.S. laws and regulations are likely to come under greater scrutiny.
Sixth, ISDS is ripe for exploitation by creative lawyers. There is a lot of latitude for interpretation of what constitutes “fair and equitable” treatment of foreign investment, given the vagueness of the terms and the uneven jurisprudence. Thus, ISDS lends itself to the creativity of lawyers willing to forage for evidence of discrimination in the arcana of the world’s laws and regulations. Among the complaints worldwide in 2012 were challenges related to “revocations of licenses, breaches of investment contracts, irregularities in public tenders, changes to domestic regulatory frameworks, withdrawals of previously granted subsidies, direct expropriations of investments, tax measures and others.”
Seventh, ISDS reinforces the myth that trade primarily benefits large corporations. A persistent myth that has proven hard to dispel permanently is that trade benefits primarily large corporations at the expense of small businesses, workers, taxpayers, public health, and the environment. The fact is that trade is the ultimate trustbuster, ensuring greater competition that prevents companies from taking advantage of consumers. Lower-income Americans stand to benefit the most from trade liberalization, as the preponderance of U.S. protectionism affects products and services to which lower-income Americans devote higher proportions of their budgets. But by granting special legal privileges to multinational corporations, ISDS reinforces that myth and is a lightning rod for opposition to trade liberalization.
Eighth, dropping ISDS would improve U.S. trade negotiating objectives, as well as prospects for attaining them. Dropping ISDS would assuage thoughtful critics of the trade agenda, who do not oppose trade, but who believe trade agreements should be more modest and balanced. Meanwhile, what now appears to be an angry mob protesting trade generally will be thinned out, exposing the unsubstantiated arguments of the professional protectionists who benefit by impeding Americans’ freedom to trade.
The TTIP has run into a firestorm of opposition – particularly in Europe where there seems to be growing support for dropping ISDS. Doing that, in my estimation, is a necessary but insufficient condition for rescuing TTIP. Going back to square one, as has been suggested as a possibility by EU trade commissioner-designate Cecilia Malmström, might also be a good idea. In case fresh thinking become contagious, perhaps this “Roadmap” for TTIP success will come in handy.
A Washington Post editorial today pushes back against the argument that a Trans-Pacific Partnership agreement would exacerbate income inequality. Amen, I suppose. But in making its case, the editorial burns the village to save it by conceding as fact certain destructive myths that undergird broad skepticism about trade and unify its opponents.
“All else being equal,” the editorial reads, “firms move where labor is cheapest.” Presumably, by “all else being equal,” the editorial board means: if the quality of the factors of production were the same; if skill sets were identical; if workers were endowed with the same capital; if all production locations had equal access to ports and rail; if the proximity of large markets and other nodes in the supply chain were the same; if institutions supporting the rule of law were comparably rigorous or lax; if the risks of asset expropriation were the same; if regulations and taxes were identical; and so on, the final determinant in the production location decision would be the cost of labor. Fair enough. That untestable premise may be correct.
But back in reality, none of those conditions is equal. And what do we see? We see investment flowing (sometimes in the form of “firms mov[ing],” but more often in the form of firms supplementing domestic activities) to rich countries, not poor. In this recent study, I reported statistics from the Bureau of Economic Analysis revealing that:
Nearly three quarters of the $5.2 trillion stock of U.S.-owned direct investment abroad is concentrated in Europe, Canada, Japan, Australia, and Singapore. Contrary to persistent rumors, only 1.3 percent of the value of U.S.-outward FDI [foreign direct investment] was in China at the end of 2011.
Meanwhile, the United States (not China or Mexico) is the world’s #1 destination for FDI:
With a stock valued at $3.9 trillion, the United States is the top single-country destination for the world’s FDI outflows. There are plenty of reasons for that being the case, including the facts that the United States is the world’s largest market and has a sound legal system and a relatively transparent business environment. More than $4 out of every $5 of that stock (84.2%) is owned by Europeans, Canadians, and Japanese, with the U.S. manufacturing sector accounting for a full third of its value, making it the primary destination for inward FDI.
Are BASF, Michelin, BMW, Siemens, Airbus, InBev, Honda, Kia, Ikea, Shuanghui (recent Chinese purchaser of Smithfield Hams) and thousands of other foreign-headquartered companies invested here because labor is cheapest in the United States? They are here because firms conduct value-added activities wherever it makes the most sense to do so, given all of the considerations and restrictions that affect costs. For so many reasons, the United States is still the top destination for investment in manufacturing and most services industries.
So stop. Just stop.
The editorial also indulges the most persistent myth of all, that increasing exports while minimizing imports is the purpose of trade agreements. As I’ve written on countless occasions in numerous different ways, increased imports are the real benefits of trade. Our exports are what we use to pay for our imports. If you prefer paying less for your products at the grocery store, you should prefer exporting less for the products you import. And for those concerned about income inequality—the editorial’s presumed audience—it is worth understanding that import competition increases choices and reduces prices, which means imports increase real incomes.
The editorial concedes that imports from Vietnam may increase under the TPP (“suppose [the bilateral deficit] were to double”), but that the deficit “would still be tiny relative to the overall U.S. trade balance.” Instead of apologizing and rationalizing, as though this development were a cost, why not point out how lower-income Americans, in particular, would experience a lower cost of living because trade would reduce the cost of their clothing and footwear?
We need to do better a job explaining how trade does not lend itself to sports metaphors. Exports are not our "points." Imports are not "their" points. The trade account is not a scoreboard. It is not Team America against the world. Trade is about mutually beneficial exchange between individuals in different political jurisdictions, and to the extent that those kinds of transactions are subject to the whims of politicians, more and more resources will be diverted from economic to political ends.
Though it may have had good intentions, the Washington Post should know better than to perpetuate simplistic myths spun by well-compensated K Street consultants on behalf of the business, labor, and environmental interests that benefit financially from restrictions on trade and investment.
In this new paper, I argue that an overly burdensome U.S. regulatory state is partly responsible for the downward trend in domestic and foreign investment in U.S. factories, professional services operations, distribution centers, and research and development facilities. EPA mandates, Obamacare’s costly, complicated new health care directives, and the slowly emerging financial services restrictions stemming from Dodd Frank, are just some of the new regulations that have thickened the Federal Register to more than 80,000 pages per year and added 16,500 new pages to the Code of Federal Regulations during the Obama presidency, undoubtedly deflecting and chasing investment and business creation to foreign shores.
Oddly, this massive expansion of federal rules has evolved as President Obama has simultaneously expressed concerns about the impacts of both declining investment and regulatory overkill on economic growth. In 2011, the president issued Executive Order 13563 under the heading "Improving Regulation and Regulatory Review." Section 1 states:
Our regulatory system must protect public health, welfare, safety, and our environment while promoting economic growth, innovation, competitiveness and job creation. It must be based on the best available science. It must allow for public participation and an open exchange of ideas. It must promote predictability and reduce uncertainty. It must identify and use the best, most innovative, and least burdensome tools for achieving regulatory ends. It must take into account benefits and costs, both quantitative and qualitative. It must ensure that regulations are accessible, consistent, written in plain language, and easy to understand. It must measure, and seek to improve, the actual results of regulatory requirements.
The president issued this EO in the wake of his party’s mid-term election rebuke, perhaps to indicate that he understood the concerns of business. He even required that his agencies formulate plans for undertaking systematic, retrospective reviews of their rules and regulations with an eye toward making them less imposing on society:
Sec. 6. Retrospective Analyses of Existing Rules. (a) To facilitate the periodic review of existing significant regulations, agencies shall consider how best to promote retrospective analysis for rules that may be outmoded, ineffective, insufficient, or excessively burdensome, and to modify, streamline, expand, or repeal them in accordance with what has been learned…
In the words of a former chief economist at the Council of Economic Advisers:
The single greatest problem with the current system is that most regulations are subject to a cost-benefit analysis only in advance of their implementation. That is the point when the least is known and any analysis must rest on many unverifiable and potentially controversial assumptions.
Moreover, in a study titled "Validating Regulatory Analysis," the OMB presented results comparing the projected benefits and costs of regulations with the actual benefits and costs measured after promulgation and implementation and found that projections "tend to overestimate both benefits and costs, but they have a significantly greater tendency to overestimate benefits than costs." According to the data in Table 3-2 of the study, the benefits projected by regulators in their "Regulatory Impact Analyses" were overestimated 40 percent of the time; the costs were underestimated 26 percent of the time, and; the benefits-cost ratio was overestimated 47 percent of the time.
These miscalculations are compounded by regulators’ own stated bias to err on the side of regulating. Describing its Utility MACT rule (regulation of the emissions of large power plants) in the Federal Register, the EPA admitted:
We may determine it is necessary to regulate under section 112 even if we are uncertain whether [the rule] will address the identified hazards… We believe it is reasonable to err on the side of regulation of such highly toxic pollutants in the face of uncertainty (emphasis added).
Considering that U.S. regulatory costs amount to about $1.75 trillion per year – a figure that exceeds the total value added of the entire U.S. manufacturing sector – these obvious problems with the U.S. regulatory state are no laughing matter.
Economics teaches the theory of diminishing marginal returns, which holds that even though an additional unit of input may generate more output, there is a point beyond which the addition to total output from each new increment of input begins to decline. The concept applies to regulation. Take pollution abatement. In 1970, when the EPA began to regulate activities that were presumed to have adverse impacts on environmental quality, there was great scope for air and water quality improvement. There was a lot of low-hanging fruit in those days. The marginal benefit of the first unit of abatement effort is much greater (and the marginal cost much lower) when air or water quality is lower.
But, today, after the most obvious and affordable abatement measures have already been adopted and the associated benefits have been reaped, the marginal cost of the next increment of improvement is greater and the marginal benefit from that effort is smaller. In fact, after working down the continuum of abatement efforts toward the limits of technological feasibility, the marginal cost of the next increment of abatement becomes even higher and the marginal benefit even lower. More broadly, the relationship between the amount of regulation and its societal benefits is not linear. Nor is the relationship between regulation and its costs.
The president – at least implicitly – seems to get this. Another executive order (Executive Order 12866), which is "supplemental to and reaffirm[ed]" by the more recent Executive Order 13563, mandates that regulating agencies "must, among other things…select, in choosing among alternative regulatory approaches, those approaches that maximize net benefits (emphasis added)." Net benefits are maximized at the level of regulation where the marginal benefit equals the marginal cost. In other words, the "optimal" amount of regulation is the amount that maximizes net benefits, and that happens at the level of regulation where the marginal benefit of an additional unit of regulation equals its marginal cost.
The nearby charts help convey these concepts. Net benefits are maximized at 35 units of regulation, where the vertical difference between the total benefits curve (TB) and the total cost curve (TC) is maximized. The net benefit of regulation to society increases with more regulation, up to the point of optimal regulation. (For many regulation, the optimal level may very well be close to zero.) After that, the marginal cost of an additional increment of regulation rises, the marginal benefit declines, and the net benefit to society shrinks. Rather than aim for the optimum, regulators tend not to recognize constraints until point C, where total benefit equals total cost. But at every point beyond 35 units and up to 70 units (point C), the net benefit of regulation is declining. And to make matters even worse, by overestimating the benefits and underestimating costs of regulation (which happens almost half of the time, according the study cited earlier), regulators are actually operating well to the right of point C, where the net benefit of regulation to society is negative (TB < TC).
As put succinctly in a report of the President’s Council of Economic Advisers, "A regulation that is expected to eliminate 90 percent of a certain harmful emissions at a cost of $100 million per year may well generate higher net benefits than one that eliminates 98 percent of those emissions at a cost of $1 billion per year." Until someone forces regulators to heed the results of marginal analysis, expect more rules and regulations, and less investment and growth.