An Agenda for Economic Reform

Notwithstanding the war in Iraq, the economy has become a new source of focus for both the media and politicians. While economic statistics suggest that the worst may have passed, the recovery is slow, and persistent unemployment numbers continue to generate worries among both employers and employees, particularly in the manufacturing sector. The stalled economy has many pointing to the president’s tax cuts as the source of the malaise. However, the tax cuts were a critical first step towards a stronger economy, providing businesses the capital to invest in new growth while allowing consumers to keep more of their hard-earned income. Rather than calling for more big government solutions, Washington needs to build on the president’s economic agenda by removing unnecessary burdens and roadblocks to growth and investment. Eliminating unnecessary and excessive regulatory burdens and reforming the nation’s costly legal system are important elements of the economic reform formula.

Looking at the economy, the news is not all bad. In the second quarter, output increased by 3.1 percent and disposable income increased by 3.4 percent. For the year, the Dow is up 15 percent and is up 41 percent. Yet third quarter growth is not expected to be as strong, and unemployment remains above 6 percent. Since July 2000 manufacturing jobs have fallen continuously, with a total decline of percent. Manufacturing is undergoing a transformation that is leading to leaner production processes, with productivity increases accounting for some of the jobs that have been eliminated. Slack demand is also a factor, and so is a regulatory burden that can stifle expansion or divert production offshore.

Americans currently face an estimated regulatory burden of more than $800 billion annually. In addition, in 2002 federal paperwork imposed a burden on consumers and businesses of 8.22 billion hours, an increase of more than 8 percent over 2001. As with taxes, excessive paperwork and burdensome regulations can thwart economic growth and hamper the global competitiveness of the U.S. economy. For consumers, this means higher prices and fewer jobs.

Streamlining the regulatory burden is an important step towards a stronger economy. Economists have found that removing unnecessary economic regulations has provided significant benefits to the economy. In one study, Robert Crandall and Jerry Ellig found that regulatory reform in telecommunications, airlines, trucking, and railroad industries generated more than $53 billion in annual benefits for consumers. In the past two decades, health and safety regulations have superseded economic regulation as the major force behind regulatory expansion. Unfortunately, there is no guarantee that the continued expansion of regulations will generate benefits commensurate with the costs. In fact, there are numerous studies that suggest regulation has become excessive, pursuing trivial risks through increasingly costly regulations.

John Graham, the administration’s regulatory czar, is seeking to address this problem by directing agencies to incorporate risk assessments into the regulatory process. Risk assessment is an important element of regulatory reform that complements the requirements for cost-benefit analysis. Accurate risk assessments would provide both regulators and the public with an opportunity to evaluate whether a particular regulation is reducing real risks that confront consumers in their daily lives. In addition, risk assessment provides a basis for comparing various risks that allows consumers to make more rational and informed decisions concerning the benefits of particular regulations relative to their costs.

Beyond regulatory reform, the economy is plagued with lawsuits that drive up the costs of doing business while restricting consumer choice in the marketplace. Estimates suggest that the legal system costs the U.S. economy more than $180 billion a year, or 1.8 percent of GDP. Compared to our trading partners, the United States has by far the most costly legal system, costing twice as much as legal systems in other nations. As more jobs and opportunities move to other countries rather than risk the U.S. tort system, the economy is weakened, U.S. productivity is reduced, and consumers face higher costs and fewer jobs. In addition, the current system is very inefficient when it comes to compensating victims. Less than twenty cents on the dollar goes toward compensation for economic damages, while generous shares allocated to attorneys promote an expansive legal industry. Sensible legal reform would replace the current “litigation lottery” with a rational system of liability that protects individuals but does not impose unnecessary burdens on the economy.

The president took an important step toward economic reform with his agenda of tax cuts, which fosters capital investment while providing consumers greater disposable income. Yet economic performance will still lag in the face of regulatory and legal constraints. The administration should move aggressively to shore-up victories on taxes while tackling the remaining obstacles to growth. This means making the president’s tax cuts permanent, which will establish a greater degree of certainty and allow more effective long-term planning. In addition, it is difficult for capital to work if it is unnecessarily restricted through excessive regulations. The regulatory process should be improved to reduce barriers to investment and growth, while implementing risk assessment to ensure that resources are targeted toward real risks to health and safety. Finally, the legal system must be improved to replace the current arbitrary and costly system with a sensible legal system that addresses real grievances of real people in a timely fashion. Tax cuts were a start, but there is much more that can be done to foster economic growth.