It’s Time to Consider the Cost of Regulation

It’s Time to Consider the Cost of Regulation. By Clyde Wayne Crews
CEI, February 26, 2009

As President Obama took the podium Tuesday night, all minds were fixed on the economy. As expected, the President addressed the economy first, front and center. “Now is the time to act boldly and wisely,” he said, “to not only revive this economy, but to build a new foundation for lasting prosperity.”

However, if by “boldly and wisely” he means increasing government spending to unprecedented levels, the near future will bring not a foundation for lasting growth, but a still-limping economy.

The President praised the passage of the $787-billion stimulus bill "the largest spending bill in history. While a lot of that money will go back into the economy, it will do so according to decisions made by politicians and regulators. In other words, it’s all top down.

A better approach is to empower citizens and businesses "who pay the taxes, anyhow "to stimulate from the bottom up. Unfortunately, removing burdensome regulations on businesses, both large and small, hasn’t figured much into the economic recovery program thus far. But alternatives to “porkulus” and “bailout to nowhere” do exist.Let’s call it “liberate to stimulate.” Such a campaign would include fiscal reforms (both taxing and spending), deregulatory stimulus, infrastructure investment liberalization, financial reforms that shift risk back on the institutions rather than on taxpayers, a regulatory reduction commission, and much more.

Starting from the basics of the free market, we can go a long way toward laying the right foundation for unimpeded economic recovery.

Consider regulation of business in America today. We’ve all heard of the trillions of dollars in new government spending. But the compliance costs generated by thousands of regulations pouring forth from over 50 departments, agencies and commissions impose another trillion-plus more, as CEI’s Ten Thousand Commandments survey shows.

Agency bureaucrats don’t answer to voters. Congress, although responsible for the underlying statutes that propel those agencies, can blame the agencies for regulatory excesses. That’s how we get “regulation without representation.”

Administrative reforms like cost-benefit analysis cannot tame the regulatory state as long as agencies themselves get to evaluate the benefits of their own rules, and as long as legislative constraints on the scope of the regulatory state remain weak.Thus, reducing the scope of government control in the economy is the true end game. But until then, measures like a regulatory budget could promote accountability by limiting the amount of regulatory costs that agencies can impose on the private sector, and holding Congress responsible for those costs.

Of course, regulatory costs can never be precisely measured, so a budget could not achieve absolute precision. And enforcement will never be easy, since agencies will have incentives to overstate benefits and understate compliance costs. Still, regulatory budgeting could help restore congressional primacy in the legislative and rulemaking processes from which regulations spring.

As information "sorely lacking now "accumulates, Congress can begin to divide a “total” budget among agencies roughly in proportion to potential benefits, such as lives saved. Agencies’ incentives would be to rank hazards from most to least severe, and address them within their budget constraint. Unwise regulating could mean transfer of the squandered budgetary allocation to a “rival” agency, while Congress would weigh an agency’s claimed benefits against alternative means of protecting public health and safety.

A well designed regulatory budget should explicitly recognize that agencies’ basic impulse is to overstate the benefits of its activities, and therefore relieve agencies of benefit calculation responsibilities altogether.

Other ways to promote the success of a budget are to: start small, compile a periodic “report card” on the numbers and costs of regulations in each agency, establish a regulatory cost freeze, set up a Regulatory Reduction Commission to assemble a package of regulations to cut, and employ separate budgets for economic regulation and environmental/social regulation.

A regulatory budget will not magically reduce the current $1.3- trillion annual regulatory burden. But better information about the size and scope of the regulatory state will aid future economic stimulus efforts. And as Washington sets out on a massive growth spurt, any enhancement of congressional accountability and limitations on the delegation of regulatory power can only help.

Wayne Crews is Vice President for Policy at the Competitive Enterprise Institute.