November 1, 2016

States Can Cut Their Own Red Tape, but Are Stuck with Feds'

Patrick McLaughlin

Senior Research Fellow
Summary

Perhaps the success of states at reducing red tape will demonstrate the feasibility of regulatory reform to policymakers in Washington.

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State policymakers constantly search for ways to foster economic growth. Governors, legislators and even some regulatory agencies have focused on state regulatory policy lately.

For example, this summer, Kentucky Gov. Matt Bevin (R) announced a plan to prune the red tape that has accumulated in the state's regulatory code — which, as of 2015, contained over 129,000 regulatory restrictions. Illinois Gov. Bruce Rauner (R) just announced a similar plan and Maryland Gov. Larry Hogan (R) prioritized the identification of unnecessary bureaucracy and red tape for over a year.

Preceding all of these, Rhode Island quietly initiated a red-tape reduction initiative back in 2012, while Lincoln Chafee (I/D) was governor. When the effort wrapped up in 2014, Rhode Island's final report on the regulatory review identified 48 regulations that could be repealed altogether because they were "outdated, unnecessary or obsolete," while hundreds of other regulations were scheduled for modification.

North of the border, the Canadian province of British Columbia has followed a policy designed to reduce red tape since 2001, leading to the astounding elimination of over one-third of the total number of regulatory restrictions on the books. In spite of some individuals' worries that regulatory reform would reduce safety or harm the environment, the sky didn't fall in British Columbia.

But the economy did soon recover from the prolonged period of slow growth that came to be called the "dismal decade."

The problem that each these governors recognized is that the accumulation of red tape is not at all benign. Those obsolete rules in Rhode Island, for example, were doing nothing other than hindering entrepreneurs and businesses from serving their customers in the best ways possible and creating jobs and revenues while doing it. It was apparently not a question of weighing benefits against costs; it was a question of recognizing that, for those regulations at least, there were only costs and no benefits.

Indeed, a substantial amount of economic research indicates that regulatory accumulation poses a significant drag on economic growth. At the national level, the relentless build-up of regulations has been estimated to slow economic growth by nearly 1 percentage point. To put that in perspective, the Bureau of Economic Analysis estimates that the annual economic growth rate in the second quarter of 2016 was 1.4 percent, and just 0.8 percent for the quarter before that.

Increasing those rates by 1 percentage point would effectively double the economy's growth rate.

Unfortunately, even when these states — and the others that follow suit — complete their regulatory clean-up efforts, their residents will continue to experience the frustration of red tape. That's because a state can only go so far in reducing red tape before it runs into an "invisible fence" — the barriers to innovation and economic growth posed by the accumulation of over 1 million regulatory restrictions in federal regulatory code.

Consider this conundrum.

If you worked on one of these states' red tape reduction efforts, your work flow might go something like this: First, you would have to catalog the stock of regulations on the books, which often comes from dozens of different agencies and have simply accumulated for decades with little attention to their effectiveness or the possibility of obsolescence.

Then you would need to systematically identify, modify or eliminate the red tape: The underachievers of the regulatory code that are ineffective, obsolete, duplicative or unnecessarily complex.

None of this is as straightforward as I make it sound. To determine whether a regulation is actually effective can involve a significant amount of data gathering, modeling and analysis — if you can even determine what the regulation's intent was in the first place.

But then, on top of it all, imagine that you've gone through all of this work, only to discover that some of the red tape is required by federal regulations.

I doubt anyone currently knows the number of federal regulations that require states to enact state-level regulations on specific topics and according to specific design, but I have little doubt that the number has consistently grown over the last 60 years, commensurate to the overall growth of federal regulations and the proliferation of federal regulatory agencies.

And even in the unlikely scenario where a state were to be granted exemptions from those requirements from federal rules, state economies are still going to be held back by the simple fact that federal regulatory code seems to be more than 10 times as large in volume as state regulatory codes, at least for the sample that my colleagues and I have been able to analyze with RegData.

Still, the fact that there is a limit to what state-level red tape reduction initiatives can achieve — the invisible fence posed by federal regulatory accumulation — shouldn't deter those governments from doing what they can.

Business owners and investors are keenly aware of the differences in business climates from one state to another. Similarly, every governor recognizes that his or her state is competing with other states to attract those business investments. Clearing out the red tape will certainly help in that regard, and the economies of those states that can achieve that goal will reflect those investments.

Perhaps the success of states at reducing red tape will demonstrate the feasibility of regulatory reform to policymakers in Washington.

And if we're lucky, the message of the need for red tape reduction at the federal level could be delivered by all the governors and former governors who have led these efforts across the country.

Ideally, they'd travel to Washington to deliver the first ever gubernatorial rendition of the old classic, "Don't Fence Me In."