The Overlooked Burden on Economic Growth

A number of economists, such as Harvard professor and former Treasury Secretary Larry Summers, are urging a major increase in infrastructure spending to get the economy out of the 1% growth ditch. But the overlooked drag on the economy is not lack of government spending, but the expansion of the regulatory state.

Since 1980 the code of federal regulations has grown from 100,000 pages to almost 180,000, according to the Mercatus Center. A number of organizations have estimated that those regulations carry a cost of about $1.9 trillion annually.

A 2013 study—Federal Regulation and Economic Growth by John Seater, North Carolina State University and John Dawson, Appalachian State University concluded that federal regulation has “statistically and economically significant effects on aggregate output and factors that produce it.” They conclude, “Federal regulations have reduced real output growth by about two percentage points on average over the period 1949-2005.” According to their calculations, that reduction in the growth rate has led to an accumulated reduction in GDP of about $38.8 trillion as of the end of 2011. That is, “GDP at the end of 2011 would have been $53.9 trillion instead of $15.1 trillion if regulation had remained at its 1949 level.” Critics can point out that 1949 is the wrong base year and in recent decades national issues, like the environment, have created new regulatory needs. Although this is obviously true, there is no doubt that the effect of regulation has been negative and larger than needs to be. The literature is rich with work on the growth of federal regulations and their negative impact on the economy.

The regulatory burden just keeps growing. Large companies have to allocate increased resources to compliance and lobbying that could otherwise be invested in improving their business. Small companies don’t have that option. Regulations are a tax that is a deterrent to their job creation and growth. An OECD study on small business stated that “regulatory burdens remain a major obstacle” because these firms are not well equipped to deal with them. An article in Entrepreneur.com by Scott Shane of Case Western Reserve University found that regulation had gone from being small business’s fourth major problem in 2008 to being its primary one in 2013. This burden is not trivial because small businesses account for over 50% of all domestic sales and since 1970 66% of all net new jobs. (SBA data).

Although Congress has passed legislation to deal with regulatory burdens—Paperwork Reduction Act, Congressional Review Act, and the Data Quality Act for example—their effectiveness has not been sufficient to reverse the trend to an over governed society. The growth of the regulatory state needs to be halted.

The next Administration and Congress have an opportunity to translate reform rhetoric into effective action. Here is a list of actions that could help to reign in excessive regulation.

  • Congress should set an annual regulatory budget with a percentage of the savings from reductions in obsolete and ineffective regulations added to the following year’s budget.
  • Require that new regulations include a sunset provision that can only be avoided by a rule making process to extend them.
  • Wayne Crews of the Competitive Enterprise Institute has recommended a Regulation Reduction Commission that would prepare a “packages of rules for an up or down vote.” This would be modeled after the Base Realignment Commission. Such a commission could use a triage process starting with rules promulgated before some agreed upon date and considered major.
  • Currently major rules, those costing more than $100 million annually. are submitted to Congress for a 60-day review under the Congressional Review Act, allowing Congress to pass a resolution of disapproval. Instead of a resolution of disapproval, Congress should be required to take affirmative action certifying that regulations meet the underlying legislative requirements and are cost-effective.
  • The OMB Office of Information and Regulatory Affairs (OIRA) has review authority over all proposed regulations from Executive Branch agencies. Its performance has been uneven because it is part of the Executive Branch and reflects the philosophy of the current Administration. There should be bi-annual performance reviews conducted by the Government Accountability Office to assess OIRA’s effectiveness in carrying out its legislative mandate.

The Paperwork Reduction Act (PPA), passed in 1980 and amended by the Data Quality Act of 2000, is the vehicle that guide the regulatory review process. The purpose of the PPA was to reduce the burden of information/data requirements imposed by Executive Branch agencies, to improve the quality of information coming from federal agencies and improve the efficiency of government programs, including regulations.

While the next Congress and Administration consider cooperation on regulatory reform, Congress could make a major contribution by tasking the Government Accountability Office or Congressional Budget Office with conducting a review of PPA to determine its effectiveness and changes needed to improve data/information management and to increase transparency and objectivity of analyses and research conducted in support of rule making. The system of checks and balances that is supposed to make government function effectively is not working in the regulatory process and it needs to reign in unelected regulators.

 

 

 

 

 

 

 

Author: billo38@icloud.com

Founder and president of Solutions Consulting which focuses on public policy issues, strategic planning, and strategic communications.

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