The benefits of regulating regulation

Published 3:00 am Thursday, February 9, 2017

President Donald Trump’s first weeks in office have seen a flurry of executive orders. One action he has taken on regulation could potentially increase economic growth.

The executive order imposes two new rules on the regulatory process. First, for every new rule or action, two current rules must be targeted for elimination. This has been labeled, “one in, two out.” Second, each agency will now face a regulatory budget, based on the costs its regulations impose on Americans. Repealed regulations will provide credits against the cost of new regulations. For the rest of the 2017 fiscal year, each agency has a budget of zero.

The importance of these rules stems from regulation’s enormous cost. The Competitive Enterprise Institute’s Ten Thousand Commandments publication has documented the extent and costs of regulation for over twenty years. In 2015, the Federal government issued 3,410 regulatory rules, which took over 25,000 pages in the Federal Register to describe. The extent of regulation is even greater, because agencies issue thousands more notices and letters (24,000 just in 2015) interpreting and explaining regulations. Any new rule or notice could impose compliance burdens on businesses.

How much does this cost our economy? Ten Thousand Commandments estimates that the cost to Americans of complying with all these regulations was $1.9 trillion in 2015. Much of this money is spent hiring people who ensure compliance with regulations instead of making goods and services. The compliance cost of regulation in 2015 was 11 percent of GDP, or more than half of the $3.7 trillion which the Federal spent that year.

And compliance is only the visible cost of regulation. The greater cost is the wealth not created by the people now working in compliance, or by businesses prevented from doing valuable things for customers. This cost remains unseen, but reduces economic growth. A recent study by Patrick McLaughlin of the Mercatus Center and two colleagues estimates that Federal regulations reduced economic growth by 0.8 percent annually between 1980 and 2012. This may sound small, but it is not: GDP would have been 25 percent higher in 2012 if not for regulation. A 2013 paper by economists John Dawson and John Seater found an even greater impact of regulation on growth between 1949 and 2005. Regulations certainly provide benefits to our nation, like improving the environment. Costly regulations can still benefit our nation, to be sure. But we should seek to make regulations no more burdensome than necessary, and make sure that the benefits are worth the cost.

Regulations once approved remain in effect until repealed. Outdated and ineffective regulations add to the cost but generate few benefits. This is where President Trump’s reform offers great promise. “One in, two out” will incentivize agencies to identify costly rules for repeal. The Trump administration has taken some unusual (some might even say crazy or unconstitutional) actions so far. But the two provisions of this executive order are hardly unprecedented or particularly radical. Canada has a one in, one out rule for regulation, while Britain requires elimination of three regulations for each new one. Both Britain and Canada have regulatory budgets based on compliance costs as well.

The Office of Management and Budget (OMB) will have to define what counts as a regulatory action and how to measure costs for the regulatory budget. OMB will also be able to exempt regulations from the rule. As Susan Dudley and Sofie Miller of George Washington University point out, much rides on OMB here. The definitions could be made too weak, rendering the order irrelevant, or too narrow, leading to a different problem. Narrow definitions could count every clarification or letter as an action, making it hard for agencies to offer any guidance on how to comply with regulations.

Regulation often flies under the radar because of the modest budget cost. Indeed, Federal agencies spent $63 billion to issue those 3,400 regulations in 2015. But regulation imposes enormous costs on our economy. The devil will be in the details, but President Trump’s executive order could reduce the cost of regulation.

Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.

About Dan Sutter

I am the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University.

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