The Economy Needs a “Deregulatory Stimulus”

Regulation is one of the most important economic battlegrounds. Unreasonable federal mandates do as much as high taxes to strangle the economy.

Naturally, President Obama wants to deflect blame for his policies. He recently penned an article proclaiming his determination “to strike the right balance” between “placing unreasonable burdens on business — burdens that have stifled innovation and have had a chilling effect on growth and jobs” and protecting “our safety, health and environment.”

Unfortunately, in practice his policy usually means enriching Democratic interest groups, advancing liberal ideology, or both. And the costs have been high. James Gattuso of the Heritage Foundation recently testified before Congress about the many jobs at stake. He explained: “Economic studies can only capture effects on existing industries and technologies. The dogs that don’t bark are not counted: new technologies that are stunted, new products that are never brought to market, and ideas that are never acted upon.” This is foolish strategy at any time, and especially during a period of high unemployment.

Assessing the width and breadth of the regulatory state is Clyde Wayne Crews of the Competitive Enterprise Institute. The latest edition of his “Ten Thousand Commandments” is filled with arresting but depressing details.

Uncle Sam’s visible activity is bad enough, a projected budget of $3.8 trillion and deficit of $1.65 trillion. But regulation acts as “a hidden tax,” warns Crews. It’s not easy to estimate the total bill since regulatory costs “are unbudgeted and often indirect.” Still, the numbers that we have are sobering. Uncle Sam has issued nearly 64,000 new rules since 1995.

Economists Nicole V. Crain and W. Mark Crain figured that total regulatory costs ran about $1.8 trillion in 2008. Most are for compliance, about $1.752 trillion. Federal enforcement budgets are tiny in comparison, “only” $56 billion.

Unfortunately, compliance costs are even higher today, given the flood of Bush-Obama regulations. Notes Crews: “the current tabulation doesn’t include recent regulatory interventions related to the various stimulus and bailout programs and regulatory costs associated with the recent health care and financial reform legislation. Given that indirect costs — such as the effects of lost innovation or productivity — are notoriously difficult to determine, such figures can further understate the total regulatory burden.”

Of course, federal rules create benefits as well as costs. A basic legal framework is necessary for markets to operate. But issuing agencies have an incentive to inflate the claimed pluses. Moreover, many of the purported advantages, such as creating “green” jobs, remain inefficient and artificial creations of government. The new financial regulations actually reinforce existing problems such as “too big to fail.” Thus, the benefits are limited, and only ameliorate the economic harm resulting from regulation.

The losses are enormous. Regulation accounts for roughly 12% of the GDP, about half of total federal spending, more than this year’s record deficit, and twice total individual income tax collections. Add regulatory costs to spending and the federal government is absorbing 36% of our economy. Wonder why the economy isn’t growing faster? The real question should be: why is it growing at all?

Crews points out that total corporate profits in 2008 were just $1.5 trillion. The regulatory burden is more than ten times the $157 billion in corporate income taxes the same year. Nicole and W. Mark Crain report that regulation runs about $8,086 per employee, which obviously discourages hiring. This burden falls most heavily on small companies. Those with less than 20 employees bear a per employee cost of $10,585, as much as 42% higher than the per capita cost facing larger firms.

The political blame is widely shared. The Heritage Foundation’s James Gattuso, Diane Katz, and Stephen Keen observed: “During the presidency of George W. Bush, which many mistakenly consider as a period of deregulation, the regulatory burden increased by more than $70 billion.” But President Obama is even worse, setting new regulatory records.

Gattuso, Katz, and Keen cite administration figures that the total cost of just 43 major rules issued last year “were estimated by the regulators themselves at some $28 billion, the highest level since at least 1981.” That’s more than twice the already high annual cost of major regulations during the final years of the Bush administration.

Crews points out that at the end of 2010 the Federal Register, Uncle Sam’s formal compendium of rule-making, hit a record 81,405 pages. Three of every ten pages were for final rules, up 20% from 2009 to 24,914. The number of final regulations formally issued was up too, to 3,573. Moreover, the number of proposed rules rose from 2,044 in 2009 to 2,439 last year, setting the stage for another increase in final regulations this year.

In fact, as of 2010 58 federal departments and other bureaucracies had 4,225 regulations in process, up 4.5% from the year before. Of those, 224 were estimated to be “economically significant,” meaning having an economic impact of $100 million or more. While the number of “economically significant” rules might seem small, it is up 22% over the previous year.

Another factor makes higher regulatory costs likely in the future. Today the public is focused on federal outlays, deficits, and debts. Politicians routinely try to disguise spending, but it isn’t easy to make $3.8 trillion in outlays disappear. Regulatory costs are naturally fuzzy. Thus, politicians may decide to emphasize mandates, like with the health care bill.

Explains Crews:

Most regulations emanate from three score agencies. The biggest overseers and meddlers are the departments of Treasury, Health and Human Services, Commerce, and Agriculture, and the Environmental Protection Agency. These five bureaucracies account for “43% of all rules in the Unified Agenda pipeline,” reports Crews.

As noted earlier, the point is not that no regulation is valid. But the federal regulatory process is weighted towards expensive command-and-control by Washington. The more hidden the costs and less accountable the decisions, the worse the outcomes are likely to be.

What is needed is what Crews calls a “liberate to stimulate” agenda. An excessive regulatory burden should be seen as a barrier to economic growth. If the president and Congress really want to promote economic growth, they should begin dismantling the federal regulatory behemoth. Says Crews: “A rollback of regulation would constitute the deregulatory stimulus that the U.S. economy needs, rather than the spending stimulus it got.” A good place to start would be the list of 20 candidates for elimination from Diane Katz of the Heritage Foundation.

But relying on politicians to do the right thing is a prescription for futility. Last year just five regulations were loosened. Citizens must demand regulatory relief just as they demand tax relief. Only if lawmakers feel the political heat are they likely to act.

A few relatively simple legislative reforms, suggested by Crews, Gattuso, Robert Moffitt of Heritage, and others, could help stop the relentless advance of federal regulation. Agency rule-making needs to be more transparent. Estimated costs should be made available and cost-benefit analyses should be conducted by an independent executive agency, perhaps a new entity modeled after the Office of Management and Budget, which is part of the president’s staff (and which now offers limited regulatory oversight).

Just as the Congressional Budget Office “scores” legislative proposals for fiscal cost, bills should be assessed for their regulatory impact. But new laws are not the most serious regulatory problem. Last year “only” 217 bills were passed and signed into law. That’s about six percent of the number of new regulations.

First, Congress should stop promiscuously delegating its power to unelected, unreviewable, and unaccountable bureaucracies. An independent congressional agency should be established to review proposed executive branch regulations. Lawmakers should exercise genuine administrative oversight. Legislative approval should be required for any measure with significant economic impact. Victims of abusive regulation should have legal recourse.

Finally, rules should formally sunset. Most reauthorizations might be perfunctory, but the process would make it easier for new administrations to rethink old priorities. Today the regulatory bureaucracy tends to operate on the principle: what has ever been must ever be. That is not likely to change without legislative reform.

There will always be government regulation. But there need not always be arbitrary, inefficient, and wasteful government regulation. The American people should insist upon better legislators and regulators, as well as better legislative and regulatory processes.

Everyone agrees that growing the economy is a priority. Instead of wasting more money on misguided fiscal stimulus programs, policymakers should implement Crews’ “deregulatory stimulus.” By taking the lead in such a process, President Barack Obama might even help save his own job.