INSIGHT: Growing regulations chill business, retard the economy

27 February 2014 12:00 Source:ICIS News

By Joe Kamalick

US economy hammered by growing body of rulesWASHINGTON (ICIS)--The snowballing effect of ever-increasing federal regulations chills new business development, retards the economy by up to 3% each year and makes the US less competitive in the world, according to a new study issued this week.

As dire as that appraisal is and no matter how much the steadily mounting rules and regulations undermine the US economy, prospects for reversing or even slowing the federal rulemaking juggernaut are slim to none at best.

A new study by the Mercatus Center at George Mason University in Fairfax, Virginia, says that the number of restrictive federal regulations has grown by 20% between 1997 and 2010, climbing from 835,000 to more than 1m in that period for an average of 12,000 new prohibitions every year.

That total is drawn from a year-by-year scan of the US Code of Federal Regulations for rules that specify “shall”, “must” or “required”, according to study authors Patrick McLaughlin and Richard Williams.

“This stock of federal regulations in the US is enormous and growing,” they note. “In 2012, the Code of Federal Regulations comprised over 170,000 pages of dense legal text.”

“Importantly, as the quantity and scope of regulations grow, so does the degree to which they can negatively affect people and the economy,” they added.

“For each new regulation added to the existing pile, there is a greater possibility for interaction, for inefficient company resource allocation, and for reduced ability to invest in innovation,” McLaughlin and Williams wrote.

“The negative effect on US industry of regulatory accumulation actually compounds on itself for every additional regulation added to the pile,” they said.

In their survey of other regulatory impact studies, McLaughlin and Williams said that between 1949 and 2005, “the accumulation of federal regulations slowed economic growth by an average of 2% per year”.

They also cite a 2003 analysis by economist Tue Gorgens and others finding that “a heavily regulated economy likely will have economic growth lower on average by 2 to 3 percentage points versus less regulated economies”.

For example, the authors noted that deregulation in the UK’s transportation and communications sectors in the mid-1980s “led to an increase in the investment rate of about 3 percentage points”.

In addition, “when the US and the UK liberalised product markets in the late 1970s and early 1980s, both nations realised significant surges in investment as a share of capital stock - from 3.7% in 1975 to 8.15% in 1998”.

“On the other hand, during that same time, investment rates in continental European countries where large-scale deregulatory reforms were not implemented - such as Italy, France and Germany - decreased 5 percentage points,” they said.

The incessantly growing number of rules and regulations also makes it harder for entrepreneurs to start new businesses, the study says.

The authors relate that entrepreneurs start thousands of new US companies every month, but that new business generation might be considerably higher except for “the sheer difficulty of sorting through over one million federal requirements, in addition to all of the state and local (and possibly international) regulations to begin a business”.

Further, the study contends that “the growing stock of regulations in the US is one issue that has contributed to this country being increasingly disadvantaged in international competitiveness”.

The authors cite the Heritage Foundation’s 2013 index of economic freedom showing that the US has slipped from its fourth place standing in 1995 to tenth place last year.

“The Fraser Institute’s Economic Freedom of the World index shows an even more precipitous decline for the US, falling from third best in its ranking for the regulation category in 2001 to seventeenth in 2011,” the report said.

Ironically, these regressive, even crippling effects of cumulative regulatory overload have been widely recognised, lamented and challenged by successive presidents and busloads of members of Congress - but without real reform, revision or change.

As in the classic tale of mice seeking to warn of the cat’s approach, no one has been able to find a way to put a bell around the feline’s neck. No one has been able to check relentless stalking of the regulatory tiger.

Almost everyone recognises and denounces the problem and its costs, but the promises of successive White House administrations and the best of congressional initiatives have failed to tame the tiger.

“The need to eliminate or modify some regulations from the accumulated stock has been widely recognised by members of Congress and every president since Carter,” the study notes. Carter was president from 1977 to 1981.

Even President Barack Obama, broadly and vehemently criticised by US business and commercial interests for what they see as his administration’s extensive regulatory overreach, has called for review and consolidation or elimination of existing regulations that are overlapping, duplicative or no longer needed.

The study notes that in his 2011 State of the Union address Obama pledged regulatory reform, saying that “There are twelve different agencies that deal with exports. There are at least five different agencies that deal with housing policy. Then there is my favourite example: The Interior Department is in charge of salmon while they are in fresh water, but the Commerce Department handles them when they’re in saltwater.”

“Nonetheless,” say McLaughlin and Williams, efforts by successive administrations to revise or eliminate existing regulations “have primarily relied on executive orders for review of the need for regulations, rather than creating a streamlined and evidence-based analytical process that could accomplish large-scale reform”.

The problem with past efforts, the study contends, is that “Most efforts at regulatory clean-up have relied on the agencies that originally created the rules and have no incentive or inclination to remove them”.

In other words, it’s like asking the cat to tie the bell around its neck.

McLaughlin and Williams argue that there is a remedy.

They call for Congress to pass a Regulatory Review Act that would establish an independent Regulatory Review Commission, composed of three commissioners nominated separately by House and Senate leaders with a seventh commissioner and chairman named by the president.

“This independent commission would be tasked with assessing the effectiveness of existing regulations and recommending changes to or repeals of regulations to Congress” which then could either approve or reject the changes as a whole without amendments or other special-interest tinkering.

The recommendations outlined by McLaughlin and Williams are far more detailed and specific, as presented in the full text of their study.

However, as sincere and scholarly as their study is, it appears to overlook a fatal flaw.

Their plan requires that members of Congress step up to rein-in the regulatory monster that they, their predecessors, presidents and legions of interest groups willingly have assembled over decades.

It’s like asking Dr Frankenstein to kill his creature.

Good luck with that.

Paul Hodges studies key influences shaping the chemical industry in Chemicals and the Economy

By Joe Kamalick