September 23, 2016

Managing Business Red Tape

James Broughel

Senior Research Fellow

Patrick McLaughlin

Senior Research Fellow
Summary

Kentucky’s Red Tape Reduction Initiative promises much for the state’s economy. But perhaps the greatest service of this effort will be to demonstrate the project’s feasibility. Kentucky, in its pioneering tradition, could lead the way for other states and perhaps even the federal government.

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Earlier this summer, Gov. Matt Bevin announced a plan to address the outdated, overly complex and unnecessary red tape that has accumulated in Kentucky’s regulatory code. As part of his administration’s plan, government employees - with input from the business community and the general public - will be tasked with reviewing over 4,500 regulations on Kentucky’s books in order to identify the problematic rules in need of revision or elimination. Although some details of the initiative are still forthcoming, the intent is clear: Get red tape out of the way so the state’s economy can flourish.

With his announcement, Gov. Bevin placed Kentucky on the short list of governments that realize unlimited regulatory growth isn’t a desirable feature of public policy. It’s no coincidence that Kentucky should be concerned about regulatory build-up. As of 2015, Kentucky’s regulatory code contained over 129,000 regulatory restrictions. These restrictions are indicated by words in the code like “shall,” “must,” and “prohibited,” which typically signify binding, legal prohibitions or obligations related to some action. In fact, at more than 6.6 million words, the 2015 Kentucky code is so large that you would need more than nine weeks to read it, even if you read regulations as your full-time job.

While some regulations achieve desirable effects, at some point the accumulation of regulations forces compliance with rules that are duplicative, obsolete, or even contradictory. The citizens of Kentucky must carefully navigate this complex system—a task that is not without consequence. Economic research is increasingly clear that regulatory accumulation - the build-up of administrative rules over time - hinders innovation and slows economic growth. Much of this burden falls on businesses and employees who work in walk-in health care services, animal production and aquaculture, and chemical manufacturing—the three Bluegrass State industries that are most frequently targeted by its regulators, according to an analysis by the Mercatus Center.

Kentucky’s plan has been informed by the success of the Canadian province of British Columbia, which instituted its own red tape reduction effort over a decade ago. British Columbia’s model succeeded largely by changing the incentives at government agencies. The typical regulator feels that her job is to make new regulations. Being part of teams that make new rules leads to awards and other plaudits in government. Meanwhile, no one ever seems to get a pat on the back for deciding not to make a new rule.

British Columbia’s plan directly addressed these incentives. When a regulatory agency wants to make a new regulation, it must first identify red tape to cut. Agency employees still have an incentive to find ways that new rules might improve goals like health and safety, but now they also have an incentive to use their unsurpassed knowledge of old rules to pick out the ones that needlessly impede progress.

Regulators in British Columbia were transformed by this change. They became “regulation managers” who oversee a portfolio of new and old regulations, rather than “regulation makers” whose primary goal was to create more rules. And they’ve done this to great effect: In 2001, when its program began, British Columbia counted a total of 382,139 regulatory requirements—a figure that included all regulatory requirements found in formal regulatory text as well as in guidance documents, interpretations, legislation, and other associated policies and forms. By 2004, the province reduced the number of regulatory requirements by 37 percent and has successfully kept a cap on their growth in the years since.

Changing the incentives for employees seems to be the key difference between effective models of regulatory reform, like British Columbia’s, and ineffective models. For example, while every U.S. president from Jimmy Carter to Barack Obama has announced some sort of plan for red tape reduction, none of those presidents’ plans averted further growth of the federal regulatory code during his time in the White House.

Kentucky’s Red Tape Reduction Initiative promises much for the state’s economy. But perhaps the greatest service of this effort will be to demonstrate the project’s feasibility. Kentucky, in its pioneering tradition, could lead the way for other states and perhaps even the federal government.