The U.S. economy’s anemic jobs and wage growth is substantially attributable to Washington’s near insatiable appetite to regulate. America’s economy is increasingly burdened by regulations constraining business activity, expanding legal liabilities, and imposing costly reporting, and record-keeping requirements. Together, these consequences create economic drag. Let’s examine how the failure of federal regulators to follow simple economic principles contributes to excessive regulatory burdens.
The Growth of Regulations and Their Burdens
Many of the detailed rules citizens identify as laws are not actually written by elected representatives; instead, they are written by executive agencies that are delegated authority by Congress to interpret and administer broad policies expressed in the underlying statutes. As Congress delegated increasing regulatory authority to executive agencies, federal regulations grew from 9,745 pages in 1950 to over 174,496 pages through 2014. Ten percent of this total has been added just since 2009. In the past 12 months, the Federal Register published 3,586 final rules, covering topics from airplanes to zoos and imposing economic impacts from monumental to microscopic. Many rules only provide minor technical details, but increasingly the executive branch uses regulations to add substantive mandates, circumventing the legislative process. Often it is argued that regulators exceed the authority that Congress intended to delegate. Regulatory compliance has become a major cost center for companies. Allocating scarce resources to regulatory compliance inevitably competes with labor and capital available for production, innovation, and investment, thus impairing economic performance.
Tough to Figure
Simple economic sense suggests regulations may reduce productivity and slow economic growth, but developing firm economic numbers is daunting:
- Different regulations affect the economy in different ways. No typical regulation or cost exists. Simply counting regulations, pages, or words is meaningless. Every regulation must be examined individually to gauge its unique burdens.
- Regulations also have benefits, economic and social, which likewise need specific analysis. Whether a regulation imposes net costs or net benefits cannot be known without this detailed analysis.
Rather than thinking about regulations in some quantified macroeconomic sense, it is more useful to examine regulations from a microeconomic perspective, considering the costs and benefits of each new regulation incrementally. Ideally, a new regulation should be added only if certain conditions are satisfied:
- Addresses a clearly defined problem defying solution through normal free-market channels.
- Is less costly than any other approach yielding similar benefit.
- Will yield in estimated benefits value to society exceeding its estimated cost.
- Does not create inconsistencies, conflicts, duplications, or costly interactions with other rules.
These principles were written into the federal government’s instructions for regulatory analysis over 30 years ago (Executive Order 12866). President Obama expanded these in Executive Order 13563, requiring agencies to calculate monetary value estimates of compliance costs and benefits and to plan follow-up effectiveness evaluations. The Office of Information and Regulatory Affairs (OIRA) is supposed to oversee the regulatory system and help agencies comply with these principles. For rules possibly imposing costs over $100 million per year, OIRA reviews an agency’s economic analysis.
With processes in place to ensure that regulation decisions are based on need and benefits exceed costs, how can the regulatory burden be so out of control? Because principles of economically efficient rulemaking are often not followed by the regulatory agencies, and today OIRA is an ineffective enforcement agent.
A clear pattern persists of errors and omissions in government analysis of costs and benefits of new regulations:
- Regulators too often assume complex tasks can be done with little effort. In one recent rulemaking, the agency assumed a disclosure report could be completed in just 1minute of clerical time. In reality, it takes 10 minutes per transaction. The difference? The annual cost across all affected transactions rises from $6.2 million to $62 million.
- Agencies often omit important cost elements. The Labor Department recently proposed requiring all employees of government contractors to attend an annual one-hour training session on affirmative action hiring. The regulators estimated the cost of hiring presenters, but they omitted the cost of paying workers’ wages during the hour of training: 24 million affected employees at $30 per hour equals $720 million omitted annual regulatory cost.
- Agencies seldom examine alternatives thoroughly, typically calculating costs only for the politically favored approach. When alternatives exist but none are analyzed, we do not know if the proposed one is least costly.
- Agencies seldom consider learning costs of adapting to regulatory changes. The uncertainty and associated costs of anticipating rule changes and the disruption of adapting to changes would be reduced if existing rules were revised less often.
- Agencies seldom quantify benefits adequately. Benefits are seldom described in specific terms and rarely valued in monetary terms. In a typical recent week, only 1 of 84 new final rules provided an estimate of the dollar value of benefits, and 79 rules failed to describe benefits in any meaningful way. Regulators rarely provide convincing data indicating benefits exceed costs.
- When benefits are estimated, the values are often exaggerated by unrealistically assuming the regulation will be 100% effective. If regulators routinely evaluated the effectiveness of past regulations, they could better project the effectiveness and benefits of new ones.
- The regulating agency provides the initial cost estimate to be tested against OIRA’s review threshold of $100 million yearly cost. Relying on the rule writer to identify economically significant regulations is inherently inappropriate and conflicted.
- The White House inhibits OIRA’s ability to enforce rational regulatory decision making when it injects politically motivated schedules and objectives into the rulemaking process.
- None of the foregoing provides any mechanism, process, or procedure for the regular reevaluation of the existing mountain of regulations.
The pervasive failure of agencies to follow the principles of good regulatory decisions has contributed to rapidly escalating costs with uncertain benefits.
Thorough analysis of regulatory costs and benefits and of alternative approaches would check the tendency of regulators to hamper the economy unduly. Agencies are naturally averse to the time-consuming and sometimes expensive research detailed analysis requires. The regulation writers do not bear the costs of the rules they write and therefore have little incentive to be concerned with efficiency.
More careful attention to the principles of comprehensive and objective analysis of regulatory costs and benefits is one element of the U.S. Chamber’s commitment to building support for a regulatory system that is more accountable to Congress and the public and less deleterious for future economic growth.
For details on the Chamber’s regulatory reform agenda, click here.