Politics & Policy

Bold Regulatory Reform Is Necessary for Economic Growth

Jeb Bush in South Carolina, September 18, 2015 (Sean Rayford/Getty)
Some procedural reforms could help clear out unneeded old regulations and avoid the making of new ones.

At last, structural regulatory reform is getting some of the attention it deserves. Jeb Bush just released a detailed action plan designed to revamp the regulatory system at the federal level. To his credit, the plan seems deliberately multi-dimensional, recognizing that no single reform will solve a problem that has been building for over 50 years. In other words, there is no silver bullet. But the plan does point to some of the structural changes that are necessary to fix current problems and avoid creating another mess in the future.

Three components of this plan would help us get out from under the mountain of regulations that currently inhibits entrepreneurship, stifles innovation, and slows GDP growth — and would keep us from creating a new mountain of regulations after we finish clearing away the first one. These components are: ending deference to independent agencies, creating a regulatory budget, and implementing an independent regulatory-review commission.

At its roots, the regulatory crisis can be broken into two elements: constantly making new regulations and failing to review old regulations. Some of the new regulations produced by the federal government are undesirable. They are solutions looking for problems where none actually exist. Other regulations may achieve their goal of solving a real problem, but not in the most cost-efficient manner. The regulatory production process needs better quality-assurance programs to avoid low-quality regulations.

While every president since Jimmy Carter has tried to ensure the quality of new regulations, the process is severely limited. One gap in the process is the deference given to so-called independent agencies, such as the Consumer Financial Protection Bureau and the Federal Communications Commission. In short, the problem is that independent agencies aren’t required to produce economic analyses of new regulations. These analyses provide a check on whether there is a real problem that needs to be solved, and they incentivize regulators to consider multiple approaches to addressing the issue. It’s a simple problem-solving process, but it’s often bypassed or ignored.

Bush’s plan addresses part of the quality-assurance process by promising to eliminate the exemption from economic analyses currently granted to independent agencies. That would be a substantial step.

Second, there is no effective process to find regulations that are ineffective, inefficient, redundant, or obsolete and target them for modification or elimination. This is a missed opportunity, because we could reduce a substantial burden on the economy by reviewing nonfunctional rules. With a stockpile of over one million individual regulatory restrictions, there’s plenty of red tape to sort through. Although it would take one person about three years (as a full-time job) to read all those federal regulations, it’s something a commission could handle.

#share#Bush’s plan promises the creation of an independent regulatory-review commission. The idea seems similar to one I proposed, which would be modeled after the military’s Base Realignment and Closure Commission. The idea is to relegate the decision on whether a regulation is nonfunctional to an independent arbiter, instead of leaving the decision in the hands of the agency that made the regulation in the first place. After all, letting the agencies decide whether their own rules are working well is like letting students grade their own tests. Would you expect an honest assessment?

The third structural reform is the idea of a regulatory budget. Currently, the economic costs of regulations are not formally considered in the federal budget process, in contrast to government taxing and spending.  Yet the economic costs of regulation amount to a hidden tax, so it would make sense to estimate their distortionary effects and limit them where possible and desirable. A regulatory budget is an accounting tool that would put the economic costs of regulations onto a ledger. In some versions of the regulatory budget, the costs of regulations would be tracked for informational purposes only, while other versions would limit the amount of new regulatory costs that can be imposed on the economy – in much the same way as many household budgets limit spending of different types. In theory, the limit could be set by Congress via the budget process, or by the president for executive branch agencies. The idea of a regulatory budget is not a new one, but it’s certainly one whose time has come in the United States. Elsewhere, regulatory budgets have been helping modern economies improve for a while now. The United Kingdom has been operating under a regulatory budget since 2011, and Canada began implementing its own version earlier this year.

In fact, Marco Rubio also mentioned the idea of creating a regulatory budget in the first Republican primary debate, and as a member of the Senate, he introduced legislation that would implement his own version of a regulatory budget. Recent testimony given before the Senate Homeland Security and Governmental Affairs Committee also dwelled on a regulatory budget’s merits. Regulatory experts have written about the idea for several decades.

Here are three reasons why a regulatory budget is suddenly a popular idea:

Agencies would no longer be able to regulate while ignoring the costs their regulations create.

First, we’re at a critical point. Regulatory accumulation has been slowing our economy for decades, but it hasn’t put us in crisis mode quite yet. It’s important to address the structural problems within the regulatory process now, while we still have some flexibility to devote resources to fixing the problems.

Second, a regulatory budget forces agencies to prioritize new regulations and consider how much each would cost society. Agencies would no longer be able to regulate while ignoring the costs their regulations create.

Third, a regulatory budget can ensure that we don’t start back down a path of regulatory accumulation. A “one-in, one-out” regulatory budget, for example, would keep our regulatory costs constant instead of letting them increase over time. Coupled with a regulatory-review commission, we could have a one-time decrease in regulatory costs from the commission and then maintain that new level of costs with the regulatory budget.

#related#Any presidential candidate who wants to campaign on a platform of economic growth needs to address the failures of the regulatory system. Politicians worried only about the next election may focus on the latest actions by regulatory agencies, but such a myopic focus fails to see the forest for the trees. The reason every administration has to worry about the regulations created by previous administrations is that the process is structurally deficient. One-time fixes are not the solutions we need. Regulatory reform needs to change how the process works, rather than focus on some of the regulations that the process has produced so far.

Bold regulatory reforms can get our economy back on track towards sustained and faster economic growth.

Patrick A. McLaughlin is a senior research fellow with the Mercatus Center at George Mason University and a co-creator of RegData.

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