February 26, 2019

Achieving a Modern Regulatory System in Ohio

Testimony before the Ohio Senate Government Oversight and Reform Committee
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Chairman Coley, Vice Chair Huffman, Ranking Member Craig, and members of the committee:

Thank you for allowing me to submit this written testimony in regards to the regulatory environment in Ohio. My name is James Broughel, and I am a senior research fellow at the Mercatus Center at George Mason University, where my research focuses on state regulatory matters.

My message here today can be summarized in three points:

  1. Ohio has a significant amount of regulation on its books, both in absolute terms and relative to other US states.

  2. The accumulation of unnecessary regulations can be a drag on economic growth and prosperity in a state and can even weaken the effectiveness of regulations that are justified to protect health, safety, and the environment.

  3. Creating a budget, or inventory, system for regulations, as is being proposed under the SB1 legislation before this committee, is a way to help the Ohio economy grow, make the state a more attractive place to do business, and encourage recurring systematic looks back at the thousands of existing regulations affecting Ohio residents.

Quantifying Regulation at the State Level

Generally speaking, state regulatory codes are too large for any single individual to read through from start to finish. For example, the online version of the Ohio Administrative Code (OAC) contained more than 15 million words as of early 2018. It would take an ordinary person about 847 hours—or more than 21 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 allows the State RegData project to overcome some of the traditional barriers associated with parsing millions of words of regulatory text.

State RegData pulls 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. We are also able to estimate which industries are most targeted by state regulation and assess which types of regulation are most prevalent.

Ohio had 246,852 regulatory restrictions in its administrative code as of early 2018. To put Ohio’s regulatory situation in context, Ohio’s administrative code contains the third-highest count of regulatory restrictions of any state reviewed thus far under the State RegData project. Ohio’s regulatory code is roughly four times the size of Idaho’s code in terms of regulatory restrictions, and it contains more than 100,000 more restrictions than the average state, which has roughly 138,000 restrictions. Neighbors Indiana, Kentucky, Michigan, Pennsylvania, and West Virginia all have significantly fewer restrictions in their regulatory codes than Ohio. Of those states, Pennsylvania comes closest to Ohio, with 153,661 restrictions, or approximately 93,000 fewer than Ohio (see figure 1).

Figure 1

Some of Ohio’s more than 246,000 restrictions are vital for protecting the health and safety of citizens, but others make the code unnecessarily complicated or impose costly burdens on the public with no corresponding benefits. For example, many occupational licensing requirements exist to protect established interests rather than to serve the public interest. Such protections often raise the wages of workers in protected occupations, but they also raise prices for consumers and make it harder for people to enter regulated professions and obtain well-paying jobs. These negative outcomes disproportionately burden low-income individuals, as well as other vulnerable populations such as minorities, military spouses, and immigrants, all of whom are trying to better provide for their families. Too often, no corresponding quality improvements can be detected from occupational licensing regulations.

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 from each individual regulation. Michael Mandel and Diana Carew of the Progressive Policy Institute in Washington, DC, liken the effect of regulation on the economy 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.

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. Reducing the complexity of the regulatory system is a powerful way to improve compliance and generate better outcomes from regulations that serve a justified purpose.

There is 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 percentage points per year on average since 1949. A study published by the Mercatus Center estimates that growth has been slowed by 0.8 percentage points per year on average by all federal regulations implemented since 1980. 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. Numerous other academic studies have confirmed the negative effects that product market regulations can have on investment rates, productivity growth, innovation and research and development spending efficacy, and employment.

A few lost percentage points in growth may not sound like a lot, but consider this: From 2007 to 2017, the compound annual growth rate of Ohio real GDP was just 0.9 percent (the rate for the nation was 1.5 percent). If this trend continues, it will take about 78 years for the state’s economy to double its size. This was approximately the life expectancy at birth for an American born in 2007. By contrast, if Ohio’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. Growth rates of 3 percentage points or more per year are not unrealistic, and are they being achieved in some states right now. By contrast, years of slow growth mean incomes for state residents will be much lower than they otherwise would be. Reversing this trend would boost innovation, bring increased employment opportunities for Ohioans, and improve living conditions for state residents, now and in the future.

Establishing a Budget for Regulations

Ohio has a track record of pursuing regulatory reforms in recent years. However, there is much more work to be done. One potential reform that is worth considering is creating a budgeting system for regulations, as is being proposed under SB1. A regulatory budget 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 budget provides a check on the inertial growth of regulations. In Mandel and Carew’s metaphor, it helps prevent too many pebbles from clogging the stream.

  • Demonstrated success. The budgeting approach has been tried, and proven effective, in other places, most notably in Canada. A similar effort is underway in Virginia.

  • Improving state competitiveness. Based on restriction counts, Ohio looks less attractive to businesses than neighboring states. A regulatory budget could be used to reduce regulatory complexity, thereby lowering barriers to entrepreneurship and helping Ohio achieve regulation levels closer to other states like Pennsylvania or Kentucky.

  • A culture change at state agencies. After the Canadian province of British Columbia instituted a simple regulatory budget 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.

In 2001, British Columbia sought to reduce regulation levels by one-third within three years, which is a similar target to the 30 percent reduction in regulatory restrictions envisioned under Ohio SB1. After hitting its initial target, British Columbia implemented a policy whereby one regulatory requirement would be eliminated for every new one introduced, thus ensuring that regulatory creep would not return after the initial reduction target was met. Regular reporting played an important role in providing the necessary transparency about how many requirements were added or removed over time and where requirements were coming from. In fact, regulation levels have fallen further in the province since the “one-in, one-out” policy was established. Accompanying the overall reduction in regulation has been an economic turnaround. While regulatory reform was one factor among many, it likely contributed to British Columbia’s strong economy in recent years.

The success of the province’s regulatory effort inspired a similar national law in Canada, which passed the Canadian parliament overwhelmingly by a margin of 245 “yes” votes to just one “no” vote. US states, such as Kentucky, have also been inspired by the reforms in British Columbia and are currently implementing red tape reduction programs. British Columbia was able to achieve its goals in part because government employees counted the number of regulatory requirements in place and committed to tracking this statistic across time. A similar tracking system is now being set up in Virginia, as part of its 2018 Regulatory Reduction Pilot Program. By July 1, 2020, all executive branch agencies in Virginia that are subject to the state Administrative Process Act must develop a baseline regulatory catalog and report their catalog data. Two states agencies, the Department of Professional and Occupation Regulation and the Department of Criminal Justice Services, must, by July of 2021, initiate reforms that produce a 25 percent reduction of the rules and requirements under their purview. Like with the national law in Canada, Virginia’s law is notable for its bipartisan nature. CNBC recently named Virginia one of America’s best states for business, citing the new regulatory reduction law as a major reason for Virginia’s strong placement in the rankings.

Importantly, a budgeting system leaves important decisions about the fine details of policymaking to the regulatory agencies that tend to possess the relevant expertise. This helps explain why British Columbia’s reforms did not come at the expense of public health or the environment. Meanwhile, under a regulatory budget or inventory system, the legislature plays an important supervisory role in determining whether regulatory allocations should rise, fall, or stay the same over time. The legislature can also play an oversight role to ensure agencies are meeting their targets. For example, Ohio SB1 grants an oversight role to the Joint Committee on Agency Rule Review.

Conclusion

The state of Ohio had more than 246,000 regulatory restrictions on its books as of early 2018. It has more regulation than all of its immediate neighbors, based on findings from the Mercatus Center’s State RegData project. A budgeting system for regulations could help prevent unwanted regulatory accumulation in Ohio, 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. Other US states such as Kentucky and Virginia are following British Columbia’s successful example.

If Ohio 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 far into the future. Establishing a regulatory budget is a smart step toward achieving this goal.