The Regulatory Landscape in Pennsylvania

Mr. Chairman and members of the Committee: thank you for inviting me here today to discuss the regulatory landscape in Pennsylvania. 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 Program.

My message here today can be summarized in three points:

1. Pennsylvania has a significant amount of regulation on its books, both in absolute terms and relative to a number of other 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 Pennsylvania economy grow, make the state a more attractive place to do business, and also improve the performance of the most vital rules protecting the health and safety of citizens. 

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 computer programs to scan through bodies of state administrative codes. Generally, state codes are too large for any single individual to read through from start to finish. For example, the online version of the Pennsylvania Code contains roughly 12.8 million words. It would take a person about 713 hours—or just under 18 weeks—to read the entire code, assuming a person reads regulations 40 hours per week as a full-time job.

Of course, this is not practical, so at Mercatus we use computers to pull key information from state codes, such as words counts and counts of regulatory restrictions (which are words and phrases like “shall,” “must,” “may not,” and “required” that can signify legal constraints and obligations of various kinds). We can also estimate which industries are the most targeted by state regulation and assess which state agencies produce the most regulation.

As of earlier this year, Pennsylvania has 153,661 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. There are 208 restrictions governing the design and use of ladders in the state, and there are 190 restrictions setting standards for consumer packages and containers. Surely some of these restrictions are not necessary for safeguarding public health, safety, or the environment.

Pennsylvania’s code is 140 percent larger than Arizona’s code in terms of regulatory restrictions. It is 40 percent larger than Missouri’s and 15 percent larger than Virginia’s. On the other hand, Pennsylvania deserves credit for avoiding the regulatory excesses seen in some other states. For example, New York’s code is double the size of Pennsylvania’s, and the Illinois code is 69 percent larger than Pennsylvania’s.

WHY REGULATORY ACCUMULATION MATTERS

When thinking about regulation, it is common to focus on each particular rule on a case by case basis, but in fact, the cumulative effect of all rules together will be different from the sum of the effects of all rules when each rule is viewed in isolation. Michael Mandel of the Progressive Policy Institute in Washington, DC, likens the effect of regulation on the economy to dropping pebbles in a stream. The first pebble may not slow the flow of water in a noticeable way, but the thousandth pebble might, and the millionth pebble might stop the flow altogether. This is true despite the fact that the millionth pebble might be of little consequence if it were the first pebble dropped in the stream.

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 likely to be a powerful way to improve the outcomes of rules.

Scholars are also finding a relationship between regulation and economic growth. A 2013 study in the Journal of Economic Growth estimates that federal regulation has slowed the US economy by 2 percent per year on average since 1949. A recent paper published by the Mercatus Center estimates growth has been slowed by 0.8 percent per year on average by federal regulations implemented since 1980. Finally, researchers at the World Bank have estimated 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: If Pennsylvania’s economy were to grow at 4 percent per year, it would take just 18 years for its real GDP to double. This means that if a child were born in Pennsylvania today and the state grew at 4 percent per year, that child would enter college in an economy twice the size of the economy in which he or she was born. By contrast, growing at 1 percent per year takes 70 years to double real GDP, just 9 years shy of the life expectancy at birth of someone born in the year 2014. Since the year 2000, Pennsylvania real GDP growth has averaged just 1.5 percent per year. This period of slow growth represents an opportunity to increase the incomes of Pennsylvanians, now as well as in the future.

A CAP ON REGULATION LEVELS

Several regulatory reform proposals under consideration in the Pennsylvania General Assembly would create a requirement that regulations receive legislative consent before being finalized. Such proposals aim to incorporate more democratic accountability into rulemaking—a worthy goal. However, it is important that Pennsylvania maintain the flexibility to modify or eliminate old rules as needed. Requiring legislative consent for all rules will likely make it more difficult for state agencies to update or repeal old rules.

A cap on regulation levels can prevent excessive regulatory accumulation from occurring while also preserving the flexibility needed to maintain a modern and up-to-date regulatory system. There are some benefits to this approach:

• Limiting regulatory accumulation: A cap prevents too many pebbles from blocking up the stream, so to speak, as it serves to check the natural tendency for regulations to accumulate over time.
• Demonstrated success: The cap approach has been tried, and proven effective, in other places, most notably in Canada.
• Locking in competitive edge: In terms of regulation, Pennsylvania looks relatively attractive as a place to do business when compared to states like New York or Illinois. A cap on regulation levels would help lock in this competitive edge, and may even lead to reductions in regulation levels, helping Pennsylvania achieve levels closer to those seen in states like Virginia or Missouri.
• 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 the existing pile each year, to a regulation “manager,” who oversees and balances 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. British Columbia went from relatively dismal growth in the 1980s and 1990s to becoming one of the top-performing economies in Canada. No doubt, other factors aside from regulatory reform also contributed to British Columbia’s turnaround. Nonetheless, this reform effort was deemed so successful that it inspired a federal law in Canada. And perhaps most importantly, the reforms did not come at the expense of public health or the environment.

CONCLUSION

The Commonwealth of Pennsylvania has tens of thousands of regulatory restrictions on its books. It has considerably more regulation than many other states, including Virginia, Missouri, and Arizona. A cap on regulation levels could help prevent unwanted regulatory accumulation while also allowing regulators the flexibility to address new and evolving problems. The successful experience of British Columbia in the early 2000s offers a roadmap for how to implement such a reform, and it suggests reform could potentially spur economic growth. If Pennsylvania can increase its growth rate by one percentage point or more over the long term, this would have huge implications for the opportunities available to Pennsylvanians, both now and in the future.