Regulatory Reform Will Also Kickstart the Economy

In response to a slow economy and criticisms of abandoning domestic policy, President Bush unveiled an economic growth package with more than $700 billion in tax cuts as its centerpiece. Congress eventually settled on a tax package of only $320 billion, but this was an important step toward a stronger economy with lower marginal tax rates and a fairer tax code. Unfortunately, the hidden taxes imposed by regulation have not received the same attention. Today, Americans face an annual regulatory burden of more than $800 billion http://www.sba.gov/advo/research/rs207tot.pdf —more than $8,000 per household. Unnecessary and ineffective regulations thwart investment and run counter the administration’s vision of economic growth.

Regulatory reform is an important component of any plan for economic growth, and the administration should initiate a comprehensive overhaul of the nation’s strained regulatory structure. In the last 30 years, economists have refined their thinking on regulation and identified the dangers of excessive regulation. For example, through cost-benefit analysis, economists demonstrated that economic regulation (e.g., trucking, railroad, and airline regulation) was inefficient and mainly used to protect narrow business interests at the expense of consumers. Economic deregulation in the transportation sector alone increased consumer welfare by more than $30 billion. These savings demonstrate the importance of regulatory reform. Tax cuts will have only a limited effect on economic growth if over-regulation precludes new investment opportunities.

While cost-benefit analysis is important, improving health and safety regulations requires additional tools, such as risk assessment. John Graham, the administration’s regulatory czar, is working to develop government-wide standards for incorporating these tools. Risk assessment provides an important complement to cost-benefit analysis, which has been used successfully to eliminate unnecessary regulatory burdens.

Risk assessment and other reforms would help ensure that regulations generate benefits commensurate to their costs. Sound risk assessment would require agencies to identify and clearly explain risks before they issue regulations. Federal agencies would have to describe the risk in a way that consumers can understand (for example, are you ten times more likely to be hit by lightning than harmed by a chemical the agency is seeking to ban?). Agencies would be required to rank the risks they are seeking to regulate based on the degree of harm. With risk prioritization, agencies would direct their efforts to the most pressing hazards first. Through such changes, regulations would become more sensible and it would become more difficult to justify regulations that provide no benefits for consumers.

In addition to new tools for analysis, the administration should consider new tools for regulatory management. One option is a regulatory budget, which would require agencies to keep their regulatory efforts within limits established for specific agencies and the government as a whole, much like a budget establishes limits on spending. A regulatory budget would help establish a more effective approach toward regulation through increased public accountability of both the regulatory agencies and the U.S. Congress. It also allows agencies to make more informed decisions while avoiding excessive or unnecessary burdens on consumers.

Another option is a regulatory moratorium, an action actually implemented by the former President Bush during the economic slowdown in the early 1990s. Once the moratorium is enacted, only deregulatory rulemakings and emergency rulemakings would be allowed, and agencies would be required to take stock and eliminate or reform regulations as needed. A regulatory moratorium offers an important first step towards reforming the regulatory burden on America. A successful moratorium would identify specific rulemakings within the agencies that should be revisited to ensure that the regulatory burden is not excessive. The moratorium would provide federal agencies the time necessary to carefully assess their current regulatory agenda. Without a moratorium, pressures for releasing new regulations limit the ability for agencies to development an accurate assessment of ongoing regulatory costs that may impose unnecessary costs on American consumers.

More recently, new problems have emerged that should be addressed in a comprehensive regulatory reform effort. First, there is a rising tension in regulatory activities between federal and state regulators. In important areas such as telecommunications and energy, state regulators are becoming more prominent, adding a new layer of regulation. There have been instances where the federal government made a conscious decision to abdicate its authority in deference to a greater role for state regulators. In dynamic national markets, this reversion to state-level regulation can pose significant new costs on consumers, as producers face an array of new regulations that vary state by state. Federal regulators need to acknowledge the national scope of these markets and avoid the inefficiencies generated in a marketplace balkanized by state regulators.

Another area of concern in recent years is the interplay between regulation and litigation. Increasingly, courts have been establishing policy on a wide range of issues, from tobacco use to privacy policies. In many instances, litigation arises because legislation and regulations are poorly worded, leaving the courts to determine policy. In fact, some regulations, such as those implementing the Americans with Disabilities Act, specifically rely on courts to interpret policies. A more efficient approach would require both Congress and agencies to provide more explicit guidance and language on how regulations are to be implemented.

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. Increased accountability would improve the regulatory process by providing government agencies with incentives to focus their efforts on those issues that provide the greatest net benefits to the public. President Bush has provided strong leadership on the need for tax reform. To fully capture the potential gains from those reforms, the president should not overlook the importance of easing the regulatory burden as well.