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The Regulatory Thicket

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from the magazine

The Regulatory Thicket

It’s time to cut it back. Autumn 2011
Economy, finance, and budgets

How to Do It

Iain Murray

Peter Anderson/Getty Images

In the seemingly endless debate about how to put Americans back to work, one solution dare not speak its name: deregulation. Yet if implemented correctly, it would provide an almost cost-free stimulus of a trillion dollars or more. According to the Small Business Administration (SBA), the regulatory burden on our economy is a staggering $1.75 trillion annually. The Obama administration is apparently in denial over that figure: Cass Sunstein, who heads up the Office of Information and Regulatory Affairs, calls it an “urban myth,” though the methodology by which it is derived is widely accepted.

My colleague Wayne Crews has surveyed the growth of the regulatory state every year since 1996 in his annual report, Ten Thousand Commandments. In that time, he has seen the number of pages in the Federal Register grow from 67,000 to 81,405. Each page (apart from the bizarre blank ones) contains a rule that imposes costs on businesses while creating more jobs for bureaucrats. Small businesses suffer disproportionately from these rules because their owners have to deal with compliance themselves (they usually give up and hire someone else to handle it when they reach about 30 employees). The costs of complying with regulations average $10,585 per employee, the SBA says—enough to throw a small firm of 20 employees with $200,000 in profits into just-breaking-even territory.

No wonder small businesses, the engine of the U.S. economy, have stalled in hiring. Chamber of Commerce surveys show that over 60 percent of small businesses have no plans to hire in the next year, and the firms cite greater regulation or the threat of it as a major reason for their reluctance. In short, bureaucracy helps explain why businesses are making profits but not jobs. Substantially reducing the regulatory burden would go some way toward getting them to hire again.

There are many ways to do this. For starters, Congress should appoint an annual bipartisan commission to comb through existing rules and identify those that need repeal. The commission would conduct its own analyses of the costs and benefits of regulations, as federal agencies’ figures are notoriously suspect and far from independent. Congress would then vote on the entire repeal package, which would prevent legislators from trading their votes for the preservation of their preferred rules.

Further, Congress should add a five-year sunset provision to all new regulations. If it later decides that rules are worth keeping, it can vote to extend them for another five years. Congress should also revitalize the concept of “enterprise zones,” areas where businesses are exempted from some regulations to allow them to establish themselves at reduced cost. Enterprise zones proved an effective way of getting local economies moving in the 1980s and 1990s. Another useful tool would be a new small-business license for all start-ups and microbusinesses—firms with five or fewer employees—exempting them from new regulations for a five-year period. The federal government might consider, too, devolving many regulatory duties to the states, letting the nation’s basic constitutional units discover the effectiveness of rules through trial, error, and interstate competition.

Two British policies invite imitation in the United States. Congress could experiment with “regulatory budgeting,” a system currently being introduced in the United Kingdom, by approving a proposal of Democratic senator Mark Warner’s: for every new rule introduced, an old one of equivalent cost would have to be repealed. Congress could also implement an American version of Britain’s new Red Tape Challenge, which enables citizens to air grievances about particular regulations. This could be done either in conjunction with the bipartisan commission or, as in the U.K., by a team of business leaders that reports back to the legislature.

All these ideas would provide significant regulatory relief. First, however, Congress should take responsibility for regulations, instead of surrendering rule-making to unaccountable government agencies, as David Schoenbrod explains in the following article.

Reining in the Rules

David Schoenbrod

The economic consequences of regulating business are huge. Regulatory costs raise prices, depress incomes, and encourage companies to locate in friendlier climes, harming our economy and hampering recovery. Unfortunately, the perennial cry to reduce “regulatory drag” has yielded few results at the federal level. Congress rarely responds to such pleas because voters usually regard regulation one-sidedly, believing that it simply reduces risks without imposing burdens. Only when voters think as consumers and clearly see the advantages of easing regulations does Congress act. Recall the late 1970s and early 1980s, when airlines, interstate bus companies, and other businesses previously treated as public utilities were successfully deregulated. In those instances, the public rightly understood that heavily price-controlled air travel and an unchallenged Ma Bell hurt their economic interests while enriching monopolistic companies. More often, however, a divided Congress digs in against efforts to lighten regulations, with the pro-regulation faction arguing, usually successfully, for “protections that the American people want.”

Regulatory drag can be reduced only as part of a reform that credibly promises to ease burdens and protect the public. Such reform is possible, but it needs to start by changing how Congress approaches regulation: lawmakers must assume responsibility for rule-making.

Though Congress is to blame for the excessive regulation of business, that isn’t because it makes too many rules itself. Rather, as government has grown more complex over the last century, Congress has deferred to unaccountable federal agencies the tricky work of writing the rules that put its regulatory schemes into effect, and those agencies have tended to go much further than Congress would have. The result is regulatory overreach, bureaucratic intransigence, and waste—which legislators can then blame on the agencies. This pass-the-buck-and-point-the-finger arrangement enables lawmakers to take credit for the promised benefits of new regulatory schemes but to evade responsibility for the actual costs and problems that result. Legislators thus feel free to enact more and more regulatory statutes. The Office of Management and Budget has estimated that since 1980, federal regulators have written more than 130,000 rules, an ever-thickening tangle that Americans and American firms must reckon with.

Not so long ago, Supreme Court Justice Stephen Breyer explained in an influential law review article how a return to congressional accountability might work: Congress would pass a statute that prevented any new regulations from going into effect until the legislature confirmed them in a vote. Breyer’s idea has found congressional champions in Representative Geoff Davis and Senator Rand Paul, both Kentucky Republicans, who have sponsored a bill that would compel Congress to approve or disapprove agency regulations. The bill would apply only to “major” regulations, defined as those that the Office of Management and Budget determines to have an annual impact of $100 million or more. Over the summer, House Speaker John Boehner and House Majority Leader Eric Cantor announced that the lower chamber would take up the bill; a vote could come as early as November.

The Davis-Paul bill has some Democratic sponsors, but many Democrats oppose it. Republicans have given Democrats an excuse to dislike the bill by naming it the Regulations from the Executive in Need of Scrutiny (REINS) Act; the title and some of the accompanying rhetoric make the bill sound like just another plan to ease burdens on business while increasing risks for the public. That may be why the Senate has shown little interest in REINS so far. But the bill may have an easier time after the 2012 election, if Republicans make gains then. The Senate Committee on Homeland Security and Governmental Affairs, meanwhile, is putting together a regulatory-reform bill of its own.

To try to explain why elected lawmakers should not be accountable for agency-made laws, the bill’s opponents point out that legislators aren’t as knowledgeable as agency experts. But as the New Deal’s sage of administrative law, James Landis—already confronting the problem of congressional abdication of responsibility—put it seven decades ago, “It is possible by a simple device to have the administrative [agency] as the technical agent in the initiation of rules of conduct, yet at the same time to have the legislative share in the responsibility for their adoption” (emphasis added). Others object that Congress would be swayed by campaign contributions from the industries that it regulates. In fact, big money counts for more in the administrative process than in Congress. Still others worry that filibusters would be common—but the Davis-Paul bill, which limits debate to two hours in each house, wouldn’t allow that.

Opponents of congressional accountability for regulations make a final argument: Congress, they say, simply lacks the time to vote on major regulations. But it’s worth noting that during the 111th Congress, even as federal agencies promulgated 130 major regulations, Congress enacted more than 80 laws naming post offices and the like. REINS would shift representatives’ time from striking poses to taking responsibility for the most important laws that bind and protect their constituents. If Congress really believes that the time required for review is too great, it could raise the criterion for a regulation to count as “major” over the $100 million threshold, rather than abdicate responsibility entirely. The more honorable course would be to spend more days voting in Washington and less time campaigning for reelection. Actually doing the job ought to be a prerequisite for fighting to keep the job.

Establishing democratic accountability would encourage Congress to reject regulations that impose burdens disproportionate to their benefits. Reducing regulatory drag would therefore bring significant benefits to our economy over time. It would also be the right thing to do. In a representative democracy, the way to find out which regulations citizens want is for elected representatives to vote on them—not for unelected officials to write them as the representatives hide.

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