Jan 10, 2019

Explainer: How States Can Set up Regulatory Reform for Success

Andrea O'Sullivan Feature Writer , Christian McGuire Communications Associate

Lawmakers will soon settle in to tackle their states’ most pressing problems. This often includes excessive, outdated, or otherwise ineffective regulation. While regulations can provide important societal benefits, they can also slow economic growth, impede new business formation, and limit upward social mobility. Spurred by positive examples in other jurisdictions and a general hunger for real solutions, legislators across the country have developed an appetite for regulatory reform.

Policymakers eager to revamp their regulatory system may wonder exactly how to go about it. The Mercatus Center has produced a body of research that provides a straightforward path to robust regulatory reform. We’ll discuss some of our most relevant findings, with links to more information.

Set up the Right Plan the Right Way

There are two basic kinds of regulatory reforms. There are those that are prospective or forward-looking, aiming to improve the quality and design of new regulations. Then there are retrospective or lookback reforms, which target existing regulations. These reform areas can overlap to some extent—for example, learning from past experience can help in the design of new rules—but legislators should always understand what kind of changes they are looking for before settling on any particular solution.

Economic Analysis

A primary way to improve the design of new regulations is to make them more evidence-based. This means incorporating more expert analysis, including using tools like cost-benefit analysis in rulemaking.

States should consider forming an “economic analysis unit” to provide evidence-based reports on the costs and benefits of regulations. Senior research fellows James Broughel and Patrick McLaughlin explain how to achieve this in “Principles for Constructing a State Economic Analysis Unit.” Broughel has also answered some frequently asked questions about the role economic analysis can play in state regulatory policy.

Such economics-grounded analyses will be invaluable to states looking to understand the on-the-ground effects of their policies. Importantly, economic analysis complements other reform efforts, like sunset reviews or red tape reduction. To be effective, however, analyses should be timely, objective, and produced independently from the regulatory agencies that set policy. A special legislative office is a logical place to house regulatory analysis responsibilities. For example, many states have legislative offices that produce fiscal notes.

Red Tape Reduction

States may also have a problem with overregulation. In “A Step-By-Step Guide to Using Mercatus Tools to Reduce State Regulation Levels,” Broughel lays out how policymakers can enact potent and long-lasting reforms to reduce the overall burden of state regulation:

1. Define the regulatory burden. First, identify what it is you want to reduce. Is it the number of pages in your state code? The compliance burden? Maybe the social cost? Broughel recommends that states target a simple and achievable metric, like regulatory requirements or regulatory restrictions.

2. Establish a baseline. Next, calculate what the overall regulatory level is. States have a handy tool in Mercatus’s RegData project, which uses computer algorithms to scan regulations’ text to calculate the total number of restrictive words, the agencies that issue the most restrictions, and the industries that are most targeted.

Mercatus has tabulated datasets for 27 states already (get in touch if you’d like to see yours). Our scholars have assembled reports on the regulatory environment in certain states, —here is one for Maryland, for example. You can watch this RegData tutorial from senior research fellow Patrick McLaughlin, or contact us if you have any questions.

3. Set a target reduction goal and a deadline. After you know what you want to target and how bad the problem is, set a measurable reduction goal and date when it should be achieved. Broughel suggests aiming to emulate nearby or successful jurisdictions.

One such jurisdiction is British Columbia, which instituted a successful red tape cutting program in 2001. Mercatus visiting research fellow Laura Jones wrote about the experience of Canada’s western province in “Cutting Red Tape in Canada: A Regulatory Reform Model for the United States?” The benchmark set by British Columbia—reducing total regulation levels by over one-third in three years—could be an ambitious goal for state and local governments in the US. Virginia, a state that recently set a 25 percent reduction target at two state agencies that engage in occupational licensing, is another possible model.

4. Create an oversight mechanism. Even the most meticulously-crafted reform plan will fail without accountability. Policymakers should tie themselves to the mast of robust reform by having an independent body oversee and check the process, like a red tape commission. Broughel lays out the objective: “to establish a process for reviewing the administrative code in a state, to ensure the successful and timely achievement of target goals, and to report back to the governor and the legislature regarding the progress of reform efforts.”

5. Establish a process to review the code and get buy-in from regulators. With all of that planning in place, it is time to actually review and reduce the regulatory burden. There are many ways to do this: The red tape reduction commission discussed above can tackle the task, or it can be a legislative endeavor. Broughel suggests a more decentralized approach spearheaded by each agency. This leverages their local knowledge and imbues a sense of “ownership” in the process. A policy whereby for every new regulation, two or more regulations are eliminated can provide incentives to agencies to reduce red tape. Economic analysis can also assist in the effort to identify the most inefficient state regulations.

6. Institutionalize a regulatory budget. Reducing regulations is only the start. For regulatory reform to be successful, a state should seek to maintain the reduction, or else regulators might return to business as usual. One way to lock-in success is through a “regulatory budget”: governments can set caps on annual regulatory growth. British Columbia instituted a regulatory budget to great success, as Jones pointed out. The simplest form of budget might require that if a new regulation must be issued, an agency will need to repeal an old one. This not only puts a check on regulatory growth, and it encourages regular regulation review. A more sophisticated budget could set regulatory allowances across agencies.  

Why It Matters

Regulation is often a burden on economic growth. When governments drown firms in oceans of confusing mandates and unnecessary paperwork, production declines. Economic research has identified staggering losses from over-regulation. In “The Cumulative Cost of Regulations,” McLaughlin, Bentley Coffey, and Pietro Peretto report that the economy would have been $4 trillion larger in 2012 if regulation had stayed at 1980 levels, a loss of around $13,000 per capita.

But we should not lose sight of the human toll of over-regulation, particularly on low-income households. As a recent Mercatus policy brief explains, the most vulnerable in society are often disproportionately affected by regulation for several reasons.

First, government rules often raise prices, including on basic necessities. Since people with low-incomes usually devote a larger portion of their earnings to such purchases, the net effect of over-regulation can be regressive. Furthermore, regulation requires employers to spend more on compliance. This leaves businesses with fewer dollars to pass on to workers in the form of higher wages. Finally, certain kinds of regulation (like occupational licensing) set up barriers that block low-income individuals from entering a profession. That reduces economic opportunity and further compounds the negative effects of regulation.

Many Paths to Reform

A state’s approach to regulatory reform will be as unique as it own special character. A state can opt to eliminate almost a third of its rule pages, like Rhode Island did. It can set up a budgeting system for regulations, like Virginia recently did. It can implement mandatory regulatory review, like Arizona. It can mandate or improve cost-benefit analyses for regulations, following New Mexico’s lead. Or it can do something else entirely. Our roadmap gives policymakers the tools to craft the right goals and plans that set their states up for success. Regulatory reform is well within every state’s reach.

Photo credit: MarylandGovPics/Flickr, Maryland Regulatory Reform Commission Press Conference 2015

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