September 22, 2020

Administrative Rule Reform in Oklahoma

Oklahoma Senate Rules Committee; Oklahoma House Committee on Administrative Rules
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Chair Jech, Chair Gann, and members of the committees:

Good morning. Thank you for the opportunity to speak today regarding the joint study being produced on Oklahoma administrative rules reform. My name is James Broughel, and I am a senior research fellow at the Mercatus Center at George Mason University in Arlington, Virginia, and an adjunct professor at the Antonin Scalia Law School at George Mason University. My research focuses on state regulatory institutions, the sources of economic growth, and the economic analysis of regulations.

I will be touching on three topics today:

  1. Regulation is necessary in some cases. It can be justified to protect health, safety, and the environment. The accumulation of regulation, however, has a real cost, which should be kept in mind.
  2. The Mercatus Center is leading a project to quantify regulation across the 50 states using modern technology, in an effort to provide answers to long-held questions. I will discuss how much regulation exists across the states and how Oklahoma compares to some of its neighbors.
  3. There are innovative efforts to reform regulatory procedures in several states right now, and I will emphasize three reforms that stand out: red tape reduction efforts, periodic review requirements, and economic analysis requirements.

The Costs of Regulatory Accumulation

The accumulated body of regulations in a state has an effect on the economy that is greater than the sum of the effects of each individual regulation. The effect of regulation on the economy can be thought of as akin to dropping pebbles in a stream. The first pebble is insignificant, a thousand pebbles may slow the flow, but a hundred thousand pebbles could dam the stream even when that last pebble, by itself, also has an insignificant effect.

The empirical connection between regulation and economic growth is well documented in the peer-reviewed academic literature:

  • A 2013 study in the Journal of Economic Growth estimates that federal regulation slowed the growth of the US economy by 2 percentage points per year on average from 1949 to 2005. This estimate suggests that, had regulation remained at its 1949 level, 2011 GDP would have been about $39 trillion larger, or 3.5 times larger, than it actually was.
  • A study published in the Review of Economic Dynamics estimates that economic growth has been slowed by 0.8 percentage points per year on average by federal regulations implemented since 1980. That number suggests that had the federal government imposed a cap on regulation levels in 1980, then by 2012 the economy would have been $4 trillion larger, which amounts to $13,000 per person in the United States.
  • Researchers at the World Bank estimate that the economies of countries with the least burdensome business regulations grow 2.3 percentage points faster annually than countries with the most burdensome regulations.
  • A review of the peer-reviewed studies that rely on measures of regulation constructed by the World Bank and Organisation for Economic Co-operation and Development finds an apparent consensus that entry regulation and anticompetitive product and labor market regulations are generally harmful to productivity and growth.

A lost percentage point or two in annual growth may not sound like a lot, but consider this: Oklahoma’s real GDP grew at a rate of 0.3 percent from the first quarter of 2019 through the first quarter of 2020. This was better than many states, many of which saw their economies shrink during this period as a result of the coronavirus pandemic. However, other states, such as Texas, were growing as fast as 2.2 percent, highlighting that faster growth is indeed possible. Over the past decade, Oklahoma real GDP grew at an average annual rate of 2.4 percent, while the national average was 2.3 percent.

If the past decade is a good indicator, it will take about 30 years for the state’s economy to double in size. Growing at about the average rate for the nation isn’t bad. But consider this: if Oklahoma’s economy were to grow 4 percent per year consistently, it would take just 18 years for its real GDP to double. To put this in context, after a century, an economy growing at 4 percent a year will be five times the size of an economy growing at 2.3 percent a year. This is roughly the difference between the US economy today and the economy in 1963.

 

Before the pandemic, some states were achieving rates of growth around 4 percent annually. Faster growth would bring increased employment opportunities and higher wages for Oklahomans and improve living conditions for state residents now and in the future. Most importantly, higher rates of growth mean that overall wellbeing for society eventually increases, because at some point an economy growing faster than another will be so much wealthier that it can be considered objectively better off.

Introducing State RegData

Generally speaking, state regulatory codes are too large for any single individual to read from start to finish. The online version of the Oklahoma Administrative Code (OAC) contained 9.2 million words in mid-2020. It would take an ordinary person about 512 hours—or almost 13 weeks—to read the entire OAC, assuming the person reads regulations 40 hours per week as a full-time job.

At the Mercatus Center, my colleagues and I have launched State RegData, a first-of-its-kind effort to quantify regulation across the 50 states. State RegData uses text analysis technology to scan through bodies of legal text—in this case, state administrative codes. Modern technology is allowing us to overcome barriers traditionally associated with parsing millions of words of regulatory text.

As part of our project, we pull key information from state codes, including word counts and counts of regulatory restrictions, which are instances of the terms shall, must, may not, prohibited, and required. These restrictions can signify legal constraints and obligations of various kinds. Using machine learning algorithms, we are also able to estimate which industries are most targeted by state regulation and assess which types of regulation are most prevalent.

Oklahoma had 142,604 regulatory restrictions in its administrative code as of mid-2020. To put that in context, the average state has roughly 135,000 restrictions, putting Oklahoma a little above average. Oklahoma has about 100,000 more restrictions in its regulatory code than Idaho, the least regulated state by our measure. It also has considerably more regulations than some of its neighbors, such as Kansas, Missouri, and New Mexico, although not as much regulation as Texas or Colorado (see figure 1). A policy brief attached to this testimony provides more in-depth analysis comparing Oklahoma to other states in the southwest region of the United States.

FIGURE 1. STATE-LEVEL REGULATORY RESTRICTIONSThe RegData technology (from which State RegData derives) is now well established in the peer-reviewed economics literature. Recent research utilizing RegData has studied the connection between regulation and employment growth, startup rates, firm size, wages and income inequality, prices, and even corruption.

In addition to being useful in academic research into the causes and consequences of regulation, we believe that State RegData has a practical policy use as well. In recent years a number of states have instituted red tape cutting reforms and measured their progress using Mercatus data tools (or metrics inspired by Mercatus data tools). Four of the six states that saw the largest percentage reduction in regulatory restrictions between the releases of version 1.0 and version 2.0 of State RegData are states that have cited Mercatus research or used State RegData metrics to guide their red-tape-cutting efforts. These states are Idaho, Kentucky, Missouri, and Nebraska.

These reforms have been primarily led by governors trying to review the stock of rules in their states to identify outdated or unnecessary regulatory clutter. For example, Idaho Governor Brad Little issued an executive order kicking off a red-tape-cutting effort in early 2019. Governor Kevin Stitt of Oklahoma also issued an executive order in early 2020, which references Mercatus data. Ohio passed regulatory reform legislation in 2019 that refers to metrics similar to the RegData restriction count.

Three Reforms Worth Considering

A number of states have engaged in innovative regulatory reform efforts in the past several years. These states can serve as a model for further Oklahoma reforms. However, even the states leading the charge in this area could go further. In that sense, Oklahoma is well positioned to become a leader in regulatory reform and a model for other states. To that end, Oklahoma policymakers should consider the following three reforms.

Red Tape Reduction

In recent years, a number of states, including Oklahoma, have been experimenting with the creation of a regulatory budget, which places caps on the overall amount of regulation agencies can issue. Most observers acknowledge that it would not be sensible to allow regulatory agencies unlimited license to spend taxpayer dollars without constraint—that’s why fiscal budgets exist. But the same lessons are only beginning to carry over to regulations, as agencies are in a sense given free rein to “spend” seemingly unlimited amounts of public money through regulation.

A regulatory budget helps address this issue, and two states in particular are making significant headway in this area. In 2018, Virginia passed a law called the Regulatory Reduction Pilot Program. The law first requires two state agencies, the Department of Criminal Justice Services and the Department of Professional and Occupational Regulation, to produce a count of all regulatory requirements under their purview. The agencies published their initial counts in 2018 and had roughly 6,000 requirements between them. After that, the agencies were given three years to reduce their requirements by 25 percent, or roughly 1,200 requirements. In October of 2019, the two agencies announced that they have each cut 10 percent of existing requirements, meaning that they were ahead of schedule. Sometime in 2020, all state agencies subject to the state Administrative Process Act are expected to report a count of their own requirements. Eventually, the pilot program may be extended to require reductions in regulatory burdens at these other agencies.

Ohio passed similar legislation in July of 2019. That legislation requires that departments across the state produce a count of their regulatory restrictions (called a “base inventory”). This initial count will then form the basis for tracking the progress of a deregulatory effort, which mandates the removal of two regulatory restrictions for each new one added until mid-2023. Oklahoma also has an ongoing red tape reduction effort in place called the Break the Tape Initiative. This initiative followed an executive order issued by Governor Stitt that required a review of regulatory restrictions, imposed a “one-in, two-out” requirement for regulations, and set a 25 percent across-the-board reduction goal for regulatory restrictions. The Oklahoma order can be considered a best practice. However, the legislature should consider whether locking these reforms in place through legislation would prove more effective and enduring than the current approach.

Periodic Review

Most states have an administrative procedure act in place, which establishes a formal process for creating new regulations. However, historically far less attention has been devoted to designing a process for periodically reviewing regulations once they are in place. A red tape reduction effort, as discussed earlier, is one way to undergo a review of regulations. However, two other methods are also worth considering: sunset provisions and mandated rule repeals.

One way to encourage periodic review is to force regulations to go through the rulemaking process anew, which can be done by incorporating sunset provisions into the regulations. Sunset provisions are automatic expiration dates attached to laws. So, for example, if a seven-year sunset were attached to a regulation, the regulation would automatically expire seven years after enacted. If the regulating agency felt it was worth it to keep the regulation, the agency would then have to repromulgate the rule as if it were a new regulation, and the rule would then be subject to the scrutiny new regulations receive, which often includes comments from the public, economic analysis, and sometimes third-party review by the legislature or an executive office.

New Jersey and Indiana are two states that attach seven-year sunsets to administrative rules. North Carolina requires that rules be reviewed every 10 years. (Some other states, such as Colorado, Idaho, Tennessee, and Utah, have one-year sunset provisions where the legislature votes on whether rules are extended or not. In practice, these sunsets tend to operate more like a legislative review process for new regulations than a periodic review requirement for rules that have existed on the books for some time.)

Periodically repealing regulations is another potential model, similar to sunset provisions. Idaho governor Brad Little signed an executive order in January 2020 requiring that state agencies review their rules on a five-year staggered basis. The order directs agencies to issue rules formally repealing existing rule chapters; and if an agency wants to keep a chapter, it must refile it as a new rule, thereby subjecting it to the public commenting process as well as to new economic analysis requirements. Governor Little issued a similar order during the coronavirus pandemic, requiring agencies to repeal any regulations waived or suspended during the pandemic. That order set up a process by which agencies could appeal to the state budget department if they felt there was a compelling reason a rule should be kept. Notably, Idaho’s review requirements have been instituted through executive actions, but they could be made more permanent through legislation.

The benefit of forcing rules to be sunset or periodically repealed is that it switches the burden of proof and forces the regulating agency to justify why regulations should be maintained. Without such a process, regulations are kept by default unless regulators repeal them voluntarily. In general, this is unlikely to happen, which explains why 68 percent of federal regulations have never been updated. With a sunset or periodic repeal requirement, regulations are discarded by default unless regulators offer sound reasons to keep them. Clutter is thereby removed quickly and easily, and regulations that are kept are subjected to the same scrutiny new regulations receive.

Economic Analysis

The effectiveness of any red-tape-cutting effort or periodic review requirements will be limited if the effort is not supplemented by high-quality information about the effectiveness of various regulations and programs. Without such evidence, policymakers will often opt to maintain the status quo, as this is the path of least resistance. The federal government has experimented with requirements for cost-benefit analysis for regulations going back to the 1970s, and such analysis generally enjoys considerable bipartisan support. However, the federal process leaves a lot to be desired. One reason is that agencies analyze their own rules, which represents an obvious conflict of interest, since regulators have strong incentives to produce analysis flattering of their own programs while downplaying any negative aspects.

As a result, Oklahoma may want to look at states that have more independent analytical institutions. West Virginia is in the process of creating a new Office of Regulatory and Fiscal Affairs within a committee in the legislature. Although the office is still being created, it is likely to look a lot like how the office was envisioned in bipartisan legislation that passed both chambers in 2020 (but was not signed into law). The benefit of this kind of office is that regulatory analysis will be produced separately from the agencies that regulate and will be subject to oversight by both parties in the legislature.

Similarly, New Hampshire requires a fiscal impact statement for proposed regulations. In addition to looking at the budgetary impacts of rules on state government finances, the analysis also includes some assessment of costs and benefits to the public. The Joint Legislative Committee on Administrative Rules in the state reviews regulations and the accompanying analysis, meaning that both the production and the review of analysis take place outside of the executive branch, in the legislative branch.

It is also important to invest in the personnel capable of producing analysis competently. In other words, sometimes it takes money to save money. If analysis saves the economy even a fraction of a percentage point of growth, these savings could pay for the analyst salaries many times over. Agencies in Oklahoma currently have some minimal requirements for producing Rule Impact Statements. These requirements may be insufficient, however, given that that the analysis is currently produced by regulatory agencies, and it is unclear whether the analysis is being produced by trained analysts. Oklahoma legislators might wish to examine the examples of West Virginia and New Hampshire more closely as a potential model for more independent production of analysis.

Conclusion

If Oklahoma can consistently increase its economic growth rate each year, the opportunities available to state residents will increase, to their benefit. This testimony has presented three reforms that would represent smart steps toward achieving this goal. These are red tape reduction reforms, periodic review requirements, and economic analysis requirements.

Oklahoma is well-positioned to adopt any or all of these reforms, especially given the priority Governor Stitt’s administration is giving to regulatory reform. Actions from the legislature would likely prove more powerful and enduring than executive actions, however.

Thank you again for your time and for the opportunity to submit this testimony. I am happy to answer any questions you may have.

Attachments (2)

James Broughel and Kofi Ampaabeng, “A Snapshot of Regulation in Southwest US States” (Mercatus Policy Brief)

James Broughel, “Oklahoma Can Be a Top 10 State for Regulation” Oklahoman, April 9, 2019