Thank you for the opportunity to submit this testimony. My name is James Broughel, and I am a senior research fellow at the Mercatus Center at George Mason University and an adjunct professor at the Antonin Scalia Law School. My research focuses on regulatory institutions, economic analysis of regulations, and the impacts of regulations on economic growth.
My testimony today centers around House Bill 158 (HB 158), which is currently being considered by this committee. Specifically, I have three main points to convey:
Around the country, governors and regulatory agencies have suspended regulations standing in the way of an effective public health response to the COVID-19 pandemic; these regulations need to be reviewed to ensure that they are working for Americans, including the residents of Montana.
Though Montana is one of the more lightly regulated states on balance, some states are significantly less regulated than Montana by some measures, and all states need effective mechanisms for reviewing rules to ensure that the rules are meeting public needs.
If passed, HB 158 would constitute one of the most deliberate efforts in the country to enhance policymakers’ understanding of why the current regulatory system has fallen so far short during the ongoing pandemic. Montana legislators should be commended for their efforts, but there remain ways in which HB 158 could nevertheless be improved.
Suspending Regulations to Promote Public Health
During the past year, regulations in a wide variety of areas have been relaxed or suspended in order to facilitate the public health response to the COVID-19 pandemic. Examples of such waived or relaxed regulations include the following:
Certificate-of-need (CON) laws. CON laws require healthcare providers to seek permission from the government before they offer new services or expand or build new facilities. As of January 2020, 35 states plus the District of Columbia required healthcare providers to obtain a CON before offering at least one service, and this number rises to as many as 39 states when other similar healthcare supply constraints are taken into account. Yet according to one report, 24 states with CON laws have suspended portions of them during the pandemic or authorized emergency certificates to be issued, such as certificates allowing for increases in the number of available hospital beds.
Occupational licensing and scope-of-practice regulations. These regulations restrict who can work in certain professions and what services professionals in various occupations can provide. During the pandemic, states have made it easier for out-of-state or retired healthcare professionals to provide services, and they have expanded the classes of healthcare professionals that can provide certain services, such as testing or vaccination. For example, the US Department of Health and Human Services has issued nationwide guidance allowing pharmacists, qualified pharmacy technicians, and state-authorized pharmacy interns to administer COVID-19 vaccines and COVID-19 tests.
Regulations governing clinical laboratories. The federal government botched its early response to the crisis, as the first COVID-19 tests distributed around the country by the Centers for Disease Control and Prevention (CDC) produced unreliable results. At the same time, commercial labs and public health officials in the states couldn’t get initial approval to perform their own tests (though in some cases, they tested anyway). These failures, largely a result of inflexible regulations, led the FDA and CDC to relax regulations on clinical laboratories and transfer some regulatory authority over labs to the states.
Whether these suspended or relaxed regulations ever made sense at all is a critical public health issue. Thus, it is not surprising that governments are engaging in reviews of regulations waived or suspended during the pandemic. In Arizona, Governor Doug Ducey signed an executive order in early 2021 directing state agencies to conduct a comprehensive review of regulations suspended during the COVID-19 emergency to determine whether suspensions should be made permanent. In Idaho, Governor Brad Little signed Executive Order 2020-13, titled “Regulatory Relief to Support Economic Recovery.” That order requires regulators to initiate rulemakings to remove regulations waived during COVID-19. Exceptions can be made for rules required by law or necessary to protect public health or safety, but the default position is that such regulations should be eliminated. The US Department of Health and Human Services also ordered a review of the vast majority of its existing regulations in early 2021, though that effort is being delayed by legal challenges.
Background on the Regulatory Environment in Montana
A recent Mercatus Center report highlights the reach of the regulatory state throughout the Rocky Mountain region of the United States. Montana has 4.7 million words of regulation in its administrative code and about 60,000 regulatory restrictions (instances of the words and phrases “shall,” “must,” “may not,” “prohibited,” and “required”). Figure 1 shows a map of US states along with their corresponding regulatory restrictions.
As is evident from figure 1, Montana has one of the lower levels of regulation in the country, as measured by counts of restrictions. It nonetheless has more regulations than a number of other states, including some of its neighbors. For example, Idaho has just 39,000 restrictions as of last count, and North Dakota and South Dakota both have fewer restrictions than Montana.
In addition, there are reasons to believe that the cost of the regulatory system sometimes declines on a per capita basis as the population increases. Thus, a restriction in California might impose a lower cost on an individual than the same restriction in Montana. On a per capita basis, Montana is among the 10 most regulated states (including the District of Columbia, which is the most regulated state-level jurisdiction in the United States on a per capita basis). Montana industries are also about 30 percent more regulated by federal regulation than are industries across the nation as a whole, meaning businesses in Montana are disproportionately targeted by regulators in Washington, DC, relative to businesses nationally.
Even if on balance Montana is less regulated than most other states (which seems likely), this should not detract from the need for systematic review of existing regulations. Whether rules are advancing public health or diminishing it is a critical question, and without rigorous review, this question will remain unanswered.
Regulations Can Slow Growth, Increase Risk and Have Regressive Effects
The overall volume of regulation in a jurisdiction can be problematic because of the process of regulatory accumulation, which slows growth and has other unintended consequences. The empirical connection between regulation and 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.
Well-designed regulations can protect the public, but regulations also have costs that can increase health and safety risks inadvertently. The mechanism driving this result is that compliance costs from regulations reduce business profitability, and these losses get passed on to workers in the form of lower wages and to customers in the form of higher prices. By extension, families have less income to spend on doctor’s visits, safer vehicles, or living in more secure or less polluted neighborhoods. Across society, some risks inevitably rise as incomes fall owing to the burdens regulations impose.
When regulatory costs rise enough, one can expect deaths to occur because the assortment of rules increases risks for some hardworking Americans who are on the margins. Recent research suggests that for each $110 million or so in regulatory costs, there will be one expected death owing to this impoverishment effect. As a result, statistical analysis shows that higher levels of federal regulation go together with higher mortality, even after controlling for factors commonly thought to explain higher mortality.
In addition to these unintended consequences related to risk, a recent report from the Mercatus Center finds that federal regulations from 1997 to 2015 are associated with an additional 17,755 Montanans living in poverty, 3.1 percent higher income inequality in the state, 51 fewer businesses annually, 508 lost jobs annually, and 7.4 percent higher prices. Thus, regulations have many unintended consequences, and these side effects are often most pronounced for working families and households.
Recommendations for Improving HB 158
HB 158 creates a COVID-19 response study commission whose responsibility is to review statutes and regulations suspended or revised during the pandemic and to prepare a report with recommendations. Such study could help to address problematic regulations like those described earlier in this testimony. Moreover, this legislation would go a step further than other states have gone, such as Arizona or Idaho, which have ordered reviews of suspended regulations via executive order, which is a less durable solution than legislation.
That said, there are ways to ensure that HB 158 is effective in achieving its stated goals.
Populate the commission in a bipartisan manner. The benefit of a bipartisan approach is that it lends credibility to a review effort by making recommendations reflect a consensus. A potential model is the bipartisan government efficiency and regulatory review commission that is set to be created by Assembly Bill 4810 in New Jersey, a bill that, as of this writing, has passed both chambers in New Jersey’s legislature and awaits the governor’s signature. Modeled after a similar commission that existed during the Chris Christie administration, Assembly Bill 4810 would allow both the majority and the minority party in the state legislature to appoint members to the review commission. (Note that a recent amendment to HB 158 would allow the minority leader in each chamber to appoint a member to the commission.)
Make the commission permanent. Assembly Bill 4810 in New Jersey is again a model in this respect, because it creates a commission that will be a permanent standing body to review regulations and makes recommendations for improvements. Although reviewing regulations suspended during the pandemic is and must be a top priority, regulatory review more generally is needed on an ongoing basis, not just temporarily.
Invest in economists to produce independent, objective analysis. Under HB 158, the Legislative Services Division (LSD) will provide support staff to assist the COVID-19 response study commission. Additionally, regulatory agencies will be required to furnish an economic impact statement upon request by the commission. However, to ensure objectivity and independence of analysis, legislators should consider staffing the LSD with an economist whose job is to analyze regulations upon request. Doing so would keep analytical responsibilities separate from program management.
Give the commission authority to order agencies to regulate or deregulate in specific areas. In Mississippi, the Occupational Licensing Review Commission was set up in recent years to review occupational licensing regulations. The commission has the authority to direct agencies to remove regulations in particular areas. Montana may want to empower the commission created under HB 158 with similar authority.
The COVID-19 pandemic has revealed deep shortcomings in the regulatory system at multiple levels of American government. As such, it is not surprising that states and federal agencies are considering ways to review regulations that were hampering the pandemic public health response. Montana is taking important steps by looking at ways to make temporary regulatory suspensions permanent. The process now being considered has the potential to make Montana a leader in public-health-centered regulatory reform and a model that other states will likely wish to emulate.
Thank you for the opportunity to submit this testimony. I am happy to answer any questions you may have.