October 3, 2017

The Regulatory Landscape in North Carolina

Testimony before the North Carolina Joint Legislative Administrative Procedure Oversight Committee

Chairman Wells, Chairman Jordan, and members of the committee: 

Thank you for inviting me here today to discuss the regulatory landscape in North Carolina. My name is James Broughel, and I am a research fellow at the Mercatus Center at George Mason University, where I study state regulatory issues as part of Mercatus’s State and Local Policy Project.

My message here today can be summarized in three points:

  1. North Carolina has a significant amount of regulation on its books, both in absolute terms and relative to some other US states.
  2. The accumulation of regulations can be a drag on economic growth and prosperity in a state and can even weaken the effectiveness of the most important regulations in place.
  3. Capping the level of regulation is a way to help the North Carolina economy grow, make the state a more attractive place to do business, and encourage a more systematic look back at the rules affecting state residents.

Quantifying Regulation at the State Level 

At the Mercatus Center, my colleagues and I have launched State RegData, a first-of-its-kind project to quantify the level of regulation across the 50 states. State RegData involves using text analysis software to scan through bodies of state administrative code. Generally, state codes are too large for any single individual to read through from start to finish. For example, the online version of the North Carolina Administrative Code contains 8.7 million words. It would take a person about 483 hours—or more than 12 weeks—to read the entire code, assuming a person reads regulations 40 hours per week as a full-time job.

At Mercatus we use computer text analysis software to pull key information from state codes, such as word counts and counts of regulatory restrictions, which are instances of shall, must, may not, prohibited, and required. These words and phrases can signify legal constraints and obligations of various kinds. We also estimate the industries that are most targeted by state regulation and assess which state agencies produce the most regulation.

North Carolina has 109,350 regulatory restrictions in its administrative code. Some of these restrictions are vital for protecting the health and safety of citizens, but others just make the code unnecessarily complicated or, worse, impose costly burdens on the public with no corresponding benefits. Title 21 of the North Carolina Administrative Code, related to Occupational and Licensing Boards and Commissions, contains more than 14,000 restrictions. Surely some of these restrictions are not necessary for safeguarding public health, safety, or the environment. Many occupational licensing requirements exist to protect established interest groups rather than to serve the public interest. Such protections often raise the wages of protected occupations but also raise prices for consumers and make it harder for residents to enter these professions and obtain well-paying jobs. These negative outcomes disproportionately burdern low-income individuals, as well as other vulnerable populations like military spouses and immigrants, who are trying to better provide for their families.

To date we have examined 14 state codes, and we plan to look at all 50 states in the near future. North Carolina’s code is near the middle of the pack of states examined thus far. While North Carolina’s regulatory code is 71 percent larger than Arizona’s code in terms of regulatory restrictions, North Carolina has succeeded in avoiding the regulatory excesses seen in some other states. For example, New York’s code is almost three times the size of North Carolina’s. Nearby neighbors Virginia and Kentucky also have more restrictions on the books than North Carolina (see figure 1).

Why Regulatory Accumulation Matters

The body of regulations in a state, taken together, has an effect on the economy that is greater than the sum of the effects of each individual regulation. Michael Mandel of the Progressive Policy Institute in Washington, DC, likens the effect of regulation on the economy to dropping pebbles in a water stream. The first pebble is insignificant, a thousand pebbles may slow the flow, but a million pebbles could dam the stream even when that last pebble was, by itself, also insignificant.

As more and more rules are added to the books, complexity increases. Scholarship from the fields of psychology, economics, and organizational science suggests that people are more likely to make mistakes and are less motivated and able to comply when they are required to follow too many rules simultaneously. Thus, reducing the complexity of the regulatory system is also likely to be a powerful way to improve compliance, generating better outcomes from rules.

There seems to be a connection between regulation and economic growth as well. A 2013 study in the Journal of Economic Growth estimates that federal regulation has slowed the growth rate of the US economy by 2 percent per year on average since 1949. A recent paper published by the Mercatus Center estimates that growth has been slowed by 0.8 percent per year on average by federal regulations implemented since 1980. Finally, researchers at the World Bank estimate that countries with the least burdensome business regulations grow 2.3 percentage points faster annually than countries with the most burdensome regulations.

Differences of one or two percentage points in growth may not sound like much, but consider this: From 2006 to 2016, North Carolina’s real GDP growth averaged just 0.8 percent per year. If this trend continues, it will take 87 years for the economy to double its size. By contrast, if North Carolina’s economy were to grow 3 percent per year, it would take just 24 years for its real GDP to double. This small difference in growth rates is roughly the difference between the economy doubling once in a lifetime and doubling three times in the same time period. Years of slow growth means incomes for North Carolinians are lower than they would otherwise be. Reversing this trend would allow North Carolinians to improve living conditions and opportunity for themselves, as well as for their children and grandchildren.

A Cap on Regulation Levels

North Carolina has had a strong track record of pursuing regulatory reform in recent years. However, another potential reform that has not yet been implemented, but that is worth considering, is a cap on regulation levels. A regulatory cap can prevent excessive regulatory accumulation while also preserving the flexibility regulators need to maintain a modern and up-to-date regulatory system. There are some benefits to this approach:

  • Limiting regulatory accumulation. A cap is a check on the inertial growth of regulations. In Mandel’s metaphor, a cap prevents too many pebbles from clogging the stream.
  • Demonstrated success. The cap approach has been tried, and proven effective, in other places, most notably in Canada.
  • Locking in the competitive edge. Based on restriction counts, North Carolina looks attractive to businesses because they face a less complex regulatory environment than in some neighboring states. A cap on regulation levels would help lock in this competitive edge and may even lead to reductions in complexity, helping North Carolina achieve regulation levels closer to those seen in states like Arizona or Connecticut.
  • A culture change at state agencies. After the Canadian province of British Columbia instituted a cap on rulemaking in the early 2000s, one public official noted that it changed her role from a regulation “maker,” who simply adds new rules, to a regulation “manager,” who oversees and cares for a portfolio of rules.

British Columbia sought to reduce regulation levels by one-third within three years, which was a more ambitious goal than a simple cap on regulation levels. However, since implementing a policy that one regulatory requirement be eliminated for every new one introduced, regulation levels have fallen even further in the province. Accompanying the overall reduction in regulation was an economic turnaround. While regulatory reform was one factor among many, it likely contributed to British Columbia’s recent boom. The success of this province’s regulatory effort inspired a similar federal law in Canada, which passed the Canadian parliament overwhelmingly by a margin of 245 yes votes to just one no vote. Importantly, the reforms did not come at the expense of public health or the environment, and a cap system is now made easier because previously unattainable data, such as those captured as part of the Mercatus State RegData project, are now available to track the level of regulation in a state across time.

Finally, a cap on regulation levels forces more careful consideration of both new and existing regulations. When a new regulation is determined to be important enough to put in place, this triggers the reconsideration of old regulations in order to identify rules for modification or repeal. A cap system leaves decisions about the fine details of policymaking to the regulatory agencies that tend to possess the relevant expertise, while the legislature could play a supervisory role in determining whether the cap should rise, fall, or stay the same over time. Such an approach may prove more effective than sunset provisions, which also encourage review of old regulations on the books, but which tend to lack an absolute requirement to eliminate burdens. Indeed, in 2013 North Carolina instituted a sunset review process for regulation. A cap may bolster the effectiveness of the new sunset review process.

Conclusion

The state of North Carolina has more than one hundred thousand regulatory restrictions on its books. It has considerably more regulation than some other states such as Minnesota, Connecticut, and Arizona. A cap on regulation levels could help prevent unwanted regulatory accumulation while also granting regulators the flexibility to address new and evolving problems. The successful experience of British Columbia since 2001 offers a roadmap for how to implement such a reform, and it suggests reform could potentially spur economic growth. Data from the Mercatus Center State RegData project are also available to help in this endeavor. If North Carolina can consistently increase its growth rate by even tenths of a percentage point annually, this would have great implications for the opportunities available to state residents, both in the near term as well as far into the future.

Thank you again for your time and this opportunity to testify today. I look forward to your questions.