January 23, 2015

Regulation

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The last time a major reform of the United States regulatory process took place was in 1946, when the Administrative Procedure Act (APA) was passed. Since then, there has been a steady increase in the stock of regulations accumulating from the federal government. As of 2012, the Code of Federal Regulations was over 174,000 pages in length. Despite some reforms in the 1970s and the implementation of regulatory review by the Office of Management and Budget (including requirements to do economic analysis for major rules) in the 1980s, there have been few significant changes to the APA in the last 65 years, while the stock of regulations continues to increase over time.

The Regulatory Studies Program at the Mercatus Center is dedicated to studying the effects of regulation on society. Key lessons from recent Mercatus research are presented in the pages that follow, including ways to reform the process of designing regulations such that rules become less burdensome and more likely to achieve desired results. We explore the effects that regulation has on real people through diminished employment opportunities and how communities are affected by the disproportionate burden that regulation can place on low-income individuals. Finally, we explore how regulations become entrenched in the system, difficult to revise, eliminate, or improve, even in those cases where there is consensus that reform is necessary.

CONTENTS
Regulation and Rulemaking
The Burden Regulations Place on Individuals and Communities 
Regulation and Employment 
Regulatory Entrenchment 
Regulatory Reform 

REGULATION AND RULEMAKING
Good governance, the aim of every policymaker, is achieved by informed decision-making on when and how to employ regulation.

The question policymakers must ask is, does regulation actually solve problems, or does it unintentionally create new ones?

Agencies must use regulatory analysis to answer this question and build a foundation for quality regulation. Yet, many analyses suffer from a failure to

  1. define the problem
  2. identify and evaluate alternatives to the proposed regulation
  3. establish a means to track the regulation’s results, and
  4. inform decisions about the regulation’s content.

These weaknesses mean that too many regulations are imposed using a “ready, fire, aim” approach, without any credible examination of alternatives—market forces, state or local actions, or differently crafted rules—that might be more effective or efficient at solving the problem. The result has been an ill-informed, inefficient, and unnecessarily costly regulatory framework.

  • For example, the Food and Drug Administration (FDA) proposed a rule to prevent animal feed contamination based on a scant assessment of the nature, cause, and significance of the problem it’s trying to solve. The FDA fails to show that the regulation would produce significant benefits in excess of costs. Based on Mercatus estimates, the FDA’s animal feed standardswould impose compliance costs from $87 million to $129 million annually, which far exceed the regulation’s estimated benefits of $30 million annually.
  • The Occupational Safety and Health Administration (OSHA) failed to make a compelling case that it knows best how to protect workers from silica exposure. In proposing a new silica-exposure rule, OSHA failed to define the problem accurately, ignored compliance issues, did not sufficiently consider effective and lower-cost alternatives, and greatly overestimated the proposed rule’s benefits while underestimating its costs.

Informed Decisions

Policymakers can avoid these pitfalls by using the following 10 principles to make sure regulations protect the public welfare while promoting economic growth, innovation, and job creation.

  1. A sensible regulation should solve a real, widespread problem. It should not just respond to anecdotes of bad behavior.
  2. A regulation should be accompanied by proof that it is likely to make life better for citizens in a significant and tangible way.
  3. Regulators should define how they will know that the problem is “solved” and that no additional regulation is necessary.
  4. Regulators should consider alternatives to regulation and alternative forms of regulation.
  5. The regulatory alternative chosen should provide the biggest bang for the buck.
  6. Regulation should respect consumers’ freedom of choice.
  7. Regulation should be technologically neutral, meaning it should not favor one type of technology over another.
  8. Regulation should be competitively neutral, not singling out particular businesses to be winners or losers.
  9. Regulation should be based on the best available evidence, not merely on assumptions, good intentions, or wishes.
  10. Regulation should acknowledge the uncertainties about its potential results.

Results Matter

Expanding regulation does not guarantee improved health and safety. Results, not assumptions, should determine regulatory policy.

  • Agencies often do a poor job of identifying the problem they are trying to solve and demonstrating how a regulation is likely to achieve a specific desired result. For example, a 2011 Department of Labor (DOL) proposal mandates overtime pay for workers providing companionship and live-in help for the elderly and disabled. The DOL claimed that the change will improve wages, conditions, and negligence standards in the home-care industry, but the agency did not produce evidence to show that a systemic problem exists in any of these areas. The DOL did not clearly show that its rule change would increase wages for workers, though it foresaw likely job losses as employers respond to the regulation by cutting staff.
  • While agencies add tens of thousands of new restrictions each year, their economic analysis of each regulation is usually incomplete and inadequate. For example, in 2005, the FDA banned the use of chlorofluorocarbons as propellants in medical inhalers used to treat asthma and other health conditions. The FDA’s regulatory ban was followed by a tripling in the price of asthma inhalers, but the agency did not estimate what benefits made the ban worthwhile despite these foreseeable costs.

THE BURDEN REGULATIONS PLACE ON INDIVIDUALS AND COMMUNITIES
Regulation too often imposes burdens that harm rather than help.

The stock of federal regulation is more than 170,000 pages long and contains more than 1 million restrictions, and it’s growing. As a practical matter, no person can be expected to comprehend so many rules and their consequences.

  • This regulatory accumulation has real and costly consequences. For example, a combination of too many rules and one-size-fits-all policies caused a green-energy micro-hydropower project in Logan City, Utah, to go from a desirable, affordable $1.4 million solution to a delayed headache costing nearly $3 million.
  • In a larger context, a World Bank study found that a 10-percentage point increase in a country’s regulatory burden slows the annual growth rate of each citizen’s personal income by half a percentage point. Based on this finding, an increase in regulatory burden can translate to thousands of dollars in lost income growth for the average citizen in less than a decade. US federal regulations have grown at an average annual rate of 2 percent from 1949 through 2005. This increase in regulation translates into a loss of income of $129,300 for every person in the United States.

Proponents of federal regulations often cite the need to protect society as a whole, particularly lower-income individuals, to justify regulation despite potential economic costs. However, numerous regulations disproportionately burden poor Americans, who are least able to afford the costs.

  • Mercatus Center research finds that federal regulations often address small risks impacting a targeted group, but spread costs uniformly across society. Consequently, the cost of regulation as a share of income is estimated to be as much as six to eight times higher for low-income households than for high-income households.

REGULATION AND EMPLOYMENT
Agency estimates about the employment impact of a new regulation are rarely accurate because agencies often ignore evidence of job displacement.

Agencies implicitly assume that workers displaced by regulation simply find identical work in other industries. As a result, federal agencies ignore the economic cost of job loss in regulated industries, despite strong evidence that job displacement of any type is very costly for individuals, families, and communities.

  • Even after reemployment, it can take as long as 20 years for workers to catch up on lost earnings, largely due to skill mismatches between the jobs lost and the new jobs created in the economy.
  • These losses occur in all major industries and among workers of all ages and levels of seniority.
  • Recent estimates of lost earnings range from 1.4 years of earnings in times of low unemployment to 2.8 years during times of high unemployment.

Second, agencies ignore the economic cost of indirect job loss in other industries resulting from higher prices and other costs generated by new regulation.

  • For example, the EPA found that its proposed Toxics Rule would raise the price of electricity by nearly 4 percent and, as a result, higher energy prices would raise prices and reduce sales in 19 associated industries. A more complete analysis by the EPA would have found that for every job lost in the electrical industry, 11 jobs would have been lost in other industries.

Third, agencies typically do not account for certain long-term effects of regulations on the labor market, such as

Business productivity is important to individual consumers and to society. When government regulation decreases business productivity, consumers suffer from paying higher prices than they otherwise would have had to pay, and society suffers from expending more scarce resources than would otherwise have been required to produce what we need.

  • Research suggests that industries that are more regulated are also less productive. The one-third of industries that are least regulated show growth rates in output per hour and output per worker that are 1.8 and 1.9 times, respectively, the growth rates for the one-third of industries that are most regulated.
  • Increases in regulation are associated with significant contractions in productivity growth one year later after accounting for economic growth, the cost of investment, and industry-specific factors that influence productivity.

The minimum wage acts as a regulation that prohibits the exchange of a service below a certain price. This restriction also harms the workers with the fewest skills and the least experience. A recent Mercatus Center study found that a proposed 13.8 percent increase in New Jersey’s minimum wage (from $7.25 to $8.25 per hour), which voters passed into law, would not directly affect college-educated and presumably wealthier workers. However, the wage hike could increase unemployment by as much as 2 percentage points for workers without high school diplomas.

REGULATORY ENTRENCHMENT
Regulatory burdens aren’t going away. Despite decades of presidential promises to reduce the regulatory burden, agencies have rarely followed through. There are many obstacles to reducing duplicative, outdated, and harmful regulations.

  • Agencies have few incentives to determine which regulations are obsolete or to eliminate their own rules.
  • Agency employees are rewarded for creating new regulations, and thus have little incentive to provide information that would lead to a rule’s elimination.
  • The authors of certain statutes may reject the notion that regulations from those statutes are no longer necessary.
  • Interest groups pressure agencies and Congress to keep rules in place that provide benefits to them but spread the costs to everyone.

Research indicates that the most effective strategy to overcome these obstacles would be for Congress to create an independent commission tasked with reducing unnecessary regulatory burdens. To maximize the commission’s ability to curb regulatory accumulation and improve economic growth, the following would be necessary:

  • The commission would need to use a transparent method of assessment that focuses on whether and how rules lead to the outcomes desired.
  • While the commission would receive input from the public and agencies, it would need to be explicitly directed to consider how regulations affect underrepresented groups, such as consumers and small businesses. The commission would need to produce a report of regulations and programs to be modified, consolidated, or eliminated. Similar to the process used with the Base Realignment and Closure Commission, Congress would need to pass a joint resolution of disapproval to prevent the commission’s recommendations from going into effect.

REGULATORY REFORM
Regulatory reform is necessary to ensure that regulatory policy actually solves problems rather than perpetuates them.

Agencies can greatly improve regulatory policy if they consistently apply basic decision-making principles:

  • Define the problem and its root causes.
  • Identify the desired outcome.
  • Consider all the options that could achieve the outcome.
  • Assess the tradeoffs of each option.
  • Define how to measure progress—and actually measure it.

Research indicates that a sound foundation for regulatory reform begins with

  • applying the same regulatory analysis standards to the executive branch and independent agencies, who are exempt from executive orders governing regulatory review;
  • requiring agency regulatory analysis by statute as a means to streamline the rulemaking process; and
  • requiring congressional approval of major regulations to bring accountability for regulatory actions back to Congress.

Successful regulatory reform must also include an outcomes analysis of rules after they take effect; this would be best done by creating an independent commission tasked with reducing unnecessary regulatory burden.

release date: January 2015