May 18, 2017

Comprehensive Regulatory Reform

A Mercatus Policy Primer

Americans expect federal regulation to accomplish many important things, such as protecting the country from financial fraudsters, preventing workplace injuries, preserving clean air, and deterring terrorist attacks. Regulation also requires tradeoffs—there is no such thing as a free lunch. Depending on the regulation, consumers may pay more, workers may receive less, retirement savings may grow more slowly, and Americans may have less privacy or personal freedom. In a democratic society, these tradeoffs require government regulators to carefully and completely disclose the likely effects of individual rules and of the regulatory system as a whole. In this and other ways, our regulatory system has fallen short. Congress needs to address the shortcomings of this system with comprehensive regulatory reform.

During the past four decades, a bipartisan consensus has emerged reflecting the commonsense notion that regulations should solve real problems at an acceptable cost. Unfortunately, this does not always occur, because the current regulatory process is broken. Regulatory legislation is often enacted, and regulations are adopted, with little or no evidence that they will effectively solve the problems they are intended to address. Policymakers at best view each regulation in isolation, paying little attention to the long-term buildup of rules—many of which are likely outdated or ineffective—or to how that regulatory accumulation affects Americans. Formal processes for retrospective analysis of rules, which would assess the actual results of individual rules or regulatory programs after they are implemented, have not been institutionalized in the United States. 

This buildup of unexamined regulations has serious consequences for Americans’ standard of living. Over time, regulatory agencies have incentives to create more rules, and there is no formal culling process to modify or eliminate obsolete, duplicative, ineffective, or overly burdensome regulations. In 1950, for example, the Code of Federal Regulations (CFR)—the set of books that contains the entirety of regulations that are in effect at the time of publication—contained 9,745 pages spread over 47 volumes. By 2016, the CFR totaled nearly 180,000 pages in more than 200 volumes. 

This accumulation of regulation represents a growing but hidden tax that hinders innovation and entrepreneurship, negatively affects wage growth in some occupations, and disproportionately harms low- and middle-income households. The perpetual accumulation of regulation slows annual GDP growth rates by nearly one percentage point. Reasonable people can have different opinions about how much GDP they are willing to sacrifice to obtain various regulatory protections, but a regulatory system that allows decision makers to proceed in ignorance of the tradeoffs can hardly be said to promote the public interest. 

The American people deserve a regulatory system that solves real problems at a reasonable cost. The current system has ingrained institutional flaws that often prevent this from happening. This primer will provide an overview of the problems with the federal regulatory system and identify an integrated set of solutions to accomplish comprehensive regulatory reform. First, this primer explains why some regulations are ineffective and documents the economic costs of regulatory accumulation. Next, the primer explains current problems with the regulatory process, from the very first step—overly broad or vague authorizing legislation—to the lack of retrospective analysis and proper oversight by Congress. Finally, the primer provides a roadmap for comprehensive regulatory reform at every step in the process, beginning and ending with congressional action.

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