October 25, 2019

Cutting Red Tape in Nebraska

Testimony before the Nebraska Government, Military and Veterans Affairs Committee
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Chairman Brewer and members of the committee:

Good morning. Thank you for granting me the opportunity to speak today. 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, 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 needs to be kept in mind.
  2. How much regulation is there? The Mercatus Center is involved in an effort to quantify regulation across the 50 states using modern technology to provide long sought-for answers.
  3. Finally, among the most innovative efforts to reform regulatory procedures in the states right now are three reforms specifically that I will emphasize: red tape reduction efforts, a regulatory reset (which involves repealing the entire regulatory code and replacing it with a simpler and more streamlined version), 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 was, by itself, also insignificant.

The empirical connection between regulation and economic growth has been documented many times 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 by the Mercatus Center 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.
  • The authors of one study, published in the Quarterly Journal of Economics, a top-ranked economics journal, say the following about gains (or lack thereof) from more stringent regulation: “We do not find that stricter regulation of entry is associated with higher quality products, better pollution records or health outcomes, or keener competition. But stricter regulation of entry is associated with sharply higher levels of corruption, and a greater relative size of the unofficial economy.”

A few lost percentage points in annual growth may not sound like a lot, but consider this: Nebraska’s real GDP grew at an annual rate of 3.4 percent in the first quarter of 2019. This was an impressive rate, but some states, such as West Virginia, were growing as fast as 5.2 percent, highlighting how much faster growth is indeed possible. Indeed, in 2018, Nebraska real GDP grew at a much slower rate, of just 1.5 percent, while the national growth rate over 2017–2018 was 2.9 percent. If the past decade is a good indicator, it will take about 40 years for the state’s economy to double in size, growing at an annual rate of 1.8 percent.

By contrast, if Nebraska’s economy were to grow 3 percent per year consistently, it would take just 24 years for its real GDP to double. Growth rates of 3 percentage points or more per year are plausible and are being achieved in some states right now, as the most recent data for Nebraska make clear. States with slower growth will see incomes and wages for state residents that are much lower than they could otherwise be. Reversing this trend would bring increased employment opportunities for Nebraskans and improve living conditions for state residents now and in the future.

Introducing State RegData

Generally speaking, state regulatory codes are too large for any single individual to read from start to finish. For example, the online version of the Nebraska Administrative Code (NAC) contained 7.5 million words in 2017. It would take an ordinary person about 418 hours—or 10 weeks—to read the entire NAC, 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.

Nebraska had 100,627 regulatory restrictions in its administrative code as of mid-2017. To put that in context, the average state has roughly 131,000 restrictions, putting Nebraska somewhat in the middle of the pack. Nebraska has roughly 56,000 more restrictions in its regulatory code than South Dakota, the least regulated state by our measure. California, the most regulated state by our measure, has nearly four times as many regulatory restrictions as Nebraska (see figure 1).

In addition to being useful in academic research into the causes and consequences of regulation, we believe State RegData has a practical policy use as well. For example, in recent years a number of states have instituted “red tape” cutting reforms and used measures based on Mercatus data tools to track their progress. These have been primarily governor-led efforts 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. His administration already claims to have cut more than 19,000 regulatory restrictions, with more to come. Ohio is an example of a state that passed regulatory reform legislation in 2019; the legislation references metrics similar to the RegData restriction count metric.

Three Reforms Worth Considering

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

Red Tape Reduction

In recent years, several states 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 have not carried over to regulations, and most agencies are 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 progress 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. This month, the two agencies announced that they have each cut 10 percent of existing requirements, meaning they are ahead of schedule. In 2020, all state agencies subject to the state Administrative Process Act will have to produce a count of their requirements. Eventually, the pilot program may be extended to require reductions in regulatory burdens at these other agencies.

Ohio passed similar legislation this past July. That legislation requires that departments across the state produce a count of their regulatory restrictions. 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.

A Regulatory Reset

A regulatory reset involves repealing the entire state regulatory code and starting from scratch. The idea is that the code becomes so burdensome and overwhelmingly complicated that policymakers simply throw the whole administrative code away and start over from square one. It sounds dramatic, but two states undertook the process in the last year. For example, Idaho has a sunset provision that sunsets all state regulations on July 1 of each year, unless extended by an act of the legislature. This year, the legislature opted not to extend the existing code. As a consequence, 19 percent of rule chapters, 10 percent of pages, and 19,000 regulatory restrictions were allowed to expire. Remaining rules were extended through the issuance of emergency regulations promulgated by the executive branch.

This has all gone incredibly smoothly. The only area where perhaps Idaho’s reform could have gone better is with respect to time. The Little administration had only a little more than two months to determine which rules to keep and which to scrap before the reset. That’s why states might want to consider a reform closer to Rhode Island’s. Rhode Island initiated a reset, but agencies were given far more advance time to review their rules and were able to cut more red tape as a result.

In 2016, Rhode Island put an expiration date on its entire code, set to occur on December 31, 2018. This was done as part of an effort to create an online code, but it was also meant to be a red tape cutting exercise. After the reset, the state had eliminated 31 percent of its total rule volume.

The benefit of forcing a one-time reset is that sunset provisions like Idaho’s are usually not triggered; rules are simply reauthorized. Even when a sunset expiration provision is triggered, giving agencies ample time to identify rules to cut or modify is important. In general, the benefit of a reset approach is that it switches the burden of proof. Without a reset, regulations are kept by default unless regulators repeal them through the regulatory process; with a reset, regulations are discarded by default unless regulators go through the regulatory process to keep them. Clutter is thereby removed quickly and easily.

Economic Analysis

The effectiveness of any red-tape-cutting effort or regulatory reset will be limited without being 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 widespread bipartisan support. However, the federal process leaves a lot to be desired, primarily since agencies analyze their own rules, which represents an obvious conflict of interest. Agencies have strong incentives to produce analysis flattering of their own programs while downplaying any negative aspects.

As a result, Nebraska may want to look at states that have more promising analytical institutions. For example, New Hampshire has a requirement for a “fiscal impact statement” for proposed regulations. In addition to looking at the budgetary impacts of rules on state government finances, the analysis must also include some assessment of costs and benefits to the public. Importantly, analysis is produced independently by a legislative budget assistant in the legislature. The Joint Legislative Committee on Administrative Rules also reviews regulations and the accompanying analysis. Both the production and the review of analysis take place outside of the executive branch, in the legislative branch, which is a stark departure from how analysis is produced in Washington, DC. It is critical that whatever body is tasked with producing analysis enjoys widespread trust by members of the legislature.

Agencies in Nebraska currently have some minimal requirements to consider fiscal impacts of their regulations, but these requirements are fairly weak and not transparent. If Nebraska opts to supplement or replace its current analytical requirements, New Hampshire could serve as a potential model. Critically, it is important that the state invest in the personnel capable of producing analysis competently. If analysis saves the economy even a fraction of a percentage point of growth annually, this could pay for the analyst’s salary many times over. In other words, sometimes it takes money to save money.

Conclusion

If Nebraska can consistently increase its economic growth rate each year, this would have profound implications for the opportunities available to state residents, both in the near term as well as into the future. This testimony has presented three reforms that would represent smart steps toward achieving this goal. These are red tape cutting reforms, a regulatory reset, and economic analysis requirements. Nebraska is well-positioned to adopt any or all of these reforms. Should it do so, the state would certainly be a leader in regulatory reform and a model for other states to follow.

Furthermore, Mercatus Center data are available and are actively informing efforts in states across the country as they seek to reduce regulatory burdens. Thank you again for your time and for the opportunity to submit this testimony. I am happy to answer any questions you may have.