June 26, 2011 Reining Regulation

Volume 14 | Issue 2

Government regulation is intrusive and costly. But we can’t just eliminate it, say authors Dr. George s. Ford and Lawrence J. Spiwak, from t

As any business owner knows, government regulation is an ever-present specter. Whether government tries to tell you how to make, price and sell your product, the potential for regulation looms large.

Currently, the United States’ federal budget for regulatory efforts adds up to an annual $60 billion. In real terms, that has trended upwards during the past 40 years, both in its level and as a percentage of GPD (gross domestic product). Increases in the regulatory budget continue to outpace economic growth by a significant amount. In light of the enormous breadth and scope of government intervention into our economy, perhaps it is time for us to enter into an adult conversation about the role and extent of regulatory bureaucracy.

RETHINKING REGULATION
This discussion should begin with an important recognition: While elimination of all regulation is a tempting prospect for some, it makes no sense. Regulation can be a good thing. It can help prevent the pollution of rivers or protect the property rights of individuals.

However, regulation comes with substantial costs, and government marketplace intervention comes with consequences – not all of them positive. Even President Obama realizes this fact. Excessive federal regulations, he said, have stifled “innovation and have had a chilling effect on growth and jobs.”

That prompts an important question: What can be done to make the regulatory process more efficient and responsive to the marketplace? That’s a perfectly reasonable query. But the solution is going to require some really difficult policy and political choices.

NECESSARY ANALYSES
Common sense dictates that before any agency promulgates any new regulation, that agency should conduct a thorough cost-benefit analysis. Yet, many agencies forget this basic precept. They need to be reminded every now and then, through Congressional legislation or a Presidential executive order, to do so.

However, even when agencies comply with such edicts and conduct such analyses, given the highly political nature of the regulatory process, it is all too common that the agency fails to conduct such a review in a dispassionate and, more importantly, competent manner. Making matters worse, because reviewing courts must accord administrative agencies great deference as the presumptive experts in the fields under their respective jurisdictions, these courts are particularly loath to overturn a regulatory agency’s factual findings – particularly with regards to the fine point of cost-benefit analysis, even though conclusions are often attributable to such minutia.

Given this systemic problem, some propose that Congress vote on every major regulation that has an annual economic impact above a specified amount (e.g., $100 million). This argument has certain appeal, particularly because it is Congress who passes the vague and often inconsistent laws that regulatory agencies struggle to implement, or take great liberty with, in the first place.

THE PROBLEMS
But this approach poses significant limitations:

• First, Congress, by design, is a generalist and partisan body made up of 535 people with widely divergent backgrounds. It’s unrealistic to think that each individual has the time, resources or inclination to become a full-fledged policy wonk on multiple highly complex and technical issues. (That’s why Congress set up expert implementing regulatory agencies.)
• Second, Congress has a lot on its plate, and requiring members to vote on every major regulation from a myriad of agencies would simply grind this legislative body to a halt.
• Third, part of the problem with regulatory decision-making is its highly partisan nature. Moving the decision to Congress does nothing to resolve this issue and, in fact, probably makes matters worse.

A PROPOSED SOLUTION
There is, perhaps, a simpler and more direct way to make the regulatory process work better for America: Rein in regulatory activity by curtailing appropriations to the overall federal regulatory budget. For many, this notion may seem intuitive. And in our new paper (“Regulatory Expenditures, Economic Growth and Jobs: An Empirical Study”) we found, after analyzing 50 years of data using modern econometric techniques, that there exists a strong empirical link between regulatory activity (as measured by regulatory appropriations) to jobs and economic output (measured as GDP).

Data analysis indicate that if policymakers were to reduce appropriations for federal regulatory agencies across the board by just five percent, we may lose approximately 12,000 federal regulatory jobs but we’d pick up a staggering 1.2 million private-sector jobs and $75 billion more in GDP each year. Further, if we were to double the cut to 10 percent, the domestic economy picks up close to $150 billion in new GDP and 2.3 million new private-sector jobs annually. Either way, given current economic conditions and the current federal government budget crisis, that’s a heck of deal.

Taking our analysis one step further, we can even break it down into a “cost per regulator” to the economy. That’s to say, we found that each year, a single federal regulatory employee:

• Cuts GDP by $6.2 million;
• Eliminates 98 private sector jobs;
• Destroys the equivalent of the economic output of 134 persons.

Given that the total annual appropriations for regulatory agencies in the federal budget is only about $60 billion, the “cost per regulator” clearly shows the pervasive effect regulation has on the overall economy.

Finally, our analysis reveals one other important fact to consider. While we focused on the effect of reducing appropriations as a way of stimulating GDP and employment, unfortunately the opposite also holds true. Under our analysis, each million-dollar increase in the regulatory budget costs the economy 420 private sector jobs. Thus, for example, as the Obama Administration has given us a 2,000-plus page law designed to give health insurance to all Americans (which, among other things, also burdens small business with the costly requirement of having to file a 1099 for every vendor paid over $600 a year) and the creation of the new half-billion-dollar Consumer Finance Protection Bureau (CFPB), our analysis indicates that the prospects for a robust and aggressive economic recovery anytime soon are dim absent reform in the regulatory mindset of the federal government.

So what does this all mean?

As noted above, the preferred option to improving the overall regulatory process remains having an agency conduct a cost-benefit analysis before it promulgates any new regulation. As we’re students of regulatory policy and former senior staffers at major federal agencies, however, our experience breeds skepticism that such analysis can be done in a non-partisan manner. Absent binding review by dispassionate outsiders, cost-benefit analysis is far too squishy to drive real reform. This fact leads us to the alternative. Given our new findings of the relationship between appropriations for regulatory agencies and jobs and GDP, perhaps it is time to investigate responsible cuts to the federal regulatory budget. Indeed, if regulators are forced to do their jobs with fewer resources, perhaps they will direct their activity to essential interventions rather than pursue marginal interventions that impose high costs but few benefits. A better regulatory system is good for the economy and private-sector employment. The reduction in government spending is a bonus.

George S. Ford, PhD, is the chief economist for and Lawrence J. Spiwak the president of the Phoenix Center for Advanced Legal and Economic Public Policy Studies (www.phoenix-center.org), a nonprofit research institute based in Washington, D.C. Views expressed in this article do not represent those of the Phoenix Center, its adjunct fellows, or any of its individual editorial advisory board members.

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