By Guest Columnist Patrick A. McLaughlin:
Senior Research Fellow, Mercatus Center and one of the developers forREGDATA
Federal regulators surely have good intentions when proposing new rules, such as increasing worker safety or protecting the environment. However, policymakers typically view each regulation on its own, paying little attention to the buildup of rules—many of them outdated and ineffective—and how that regulatory accumulation is hurting economic growth.
The continuous accumulation of rules over the last several decades has likely slowed economic growth by hindering the primary drivers of the economy—innovation and entrepreneurship. Unless Congress and agencies address this growing backlog, it will continue to stifle innovation and entrepreneurship.
Regulatory Accumulation Harms the Economy
According to the Mercatus Center’s RegData—a new database that uses text analysis to quantify the federal regulations targeting each industry in the United States—total regulatory restrictions have increased nearly 20 percent since 1997 to more than 1 million. Multiple studies have quantified how the growth of rules slows economic growth. For example, one study published in 2013 in the Journal of Economic Growth found that between 1949 and 2005 the accumulation of federal regulations slowed US economic growth by an average of 2 percent per year. Had the amount of regulation remained at its 1949 level, 2011 Gross Domestic Product (GDP) would have been about $39 trillion—or three and a half times—higher, which translates into a loss of about $129,300 for every person in the United States.
What could explain this macroeconomic effect? In addition to direct compliance costs, regulation creates another type of cost: Opportunity costs, or the productive activity forgone because scarce resources get devoted to compliance with regulations. As I wrote in a recent study, “If the owner of a restaurant has to spend an evening showing the food inspector around the restaurant, the owner can’t spend that same time greeting customers and ensuring that they have a quality dining experience.” Or, perhaps more worryingly, resources—in terms of budgeted spending but also in terms of individuals’ time and effort—that companies might have invested in the development of new technology, improved production and management methods, or workplace risk reduction must instead be diverted to regulatory compliance.
If regulatory accumulation causes significant company resources to be diverted away from developing new products or better production techniques, we would expect to see heavily regulated industries’ productivity grow more slowly than lightly regulated industries. Indeed, a 2014 study using data from the RegData database found precisely that: from 1997 to 2010, labor productivity grew almost twice as fast for the least regulated industries compared to the most regulated industries.
The Regressive Effects of Regulations
Proponents of federal regulations often use the need to protect society as a whole, particularly lower-income individuals, to justify their actions despite potential economic costs. However, numerous regulations disproportionately burden poor Americans. Mercatus Center research finds that federal regulations often address small risks impacting a targeted group, but spread costs uniformly. As a result, these rules cost up to six to eight times more as a share of income for low-income households than for high-income households. For example, in 2005 the Food and Drug Administration banned the use of chlorofluorocarbons as propellants in medical inhalers, such as asthma inhalers, for environmental reasons. Shortly thereafter, the price of asthma inhalers tripled. As I explained in Senate testimony, this higher price disproportionately harms lower income persons, and may lead to the choice not to buy an inhaler or leave an asthma attack untreated.
Solutions to Reduce the Regulatory Burden
There are many obstacles to reducing duplicative, outdated, and harmful regulations.
Special interests will pressure agencies and Congress to keep rules in place that result in concentrated benefits for their constituency but spread costs to the rest of the population.
Agency employees are rewarded for creating new regulations, and thus have little incentive to provide information that would lead to a rule’s elimination.
I recently proposed a strategy to address regulatory accumulation. Central to the strategy is independent review (which others have also proposed). While every administration since Jimmy Carter’s has acknowledged the problem of regulatory accumulation, none has attempted to establish a truly independent arbiter to assess whether old rules are duplicative, obsolete, or harmful. Conversely, leaving such assessments to the agencies that produced the rules originally—which is, in fact, what the current administration has been doing with its own retrospective review efforts—guarantees mediocre results. It’s akin to allowing students to grade their own tests. Everyone will get good grades, and no one will get honest feedback.
By John Dunham:
Managing Partner, John Dunham & Associates
Talk, talk, talk, talk about the government, and not a word about political favor. Everything touched is my political choice. The life you take is your political voice. The sacred cows come crashing to their knees, golden harvest reaped without intelligence. There’s no chance between the heavens and the seas. In a blood bath don’t laugh, grab your piece of golden calf. So sings Chrissie Hynde and the Pretenders in this song from the 1981 album Pretenders II.
In 1981, the country was facing a new disease now known as AIDS, which became an epidemic and raised alarm throughout the nation. In fact, on July 3, 1981, the Centers for Disease Control and Prevention (CDC) published some of its first observations on the disease. To date, according to the World Health Organization, about 36 million people have died from the AIDS. The first cases of a different virus, Ebola, were discovered at about the same time – in fact five years earlier, but up until just a few weeks ago, the disease was concentrated in Central Africa. The current outbreak began in March of this year, and to date, about 5,000 people have died from the disease (although nobody knows for sure as many cases have gone unreported).
Ebola is now active in the United States, and may become more so as aid workers and other people from the effected countries in western Africa come to America. The nation has been in a panic as the CDC and other government agencies tasked with dealing with epidemic disease, seem to have no reliable protocols in place to deal with the crisis. This in spite of the fact that the CDCs key mission is to work 24/7 to protect America from health, safety and security threats, both foreign and in the U.S. Whether diseases start at home or abroad, are chronic or acute, curable or preventable, human error or deliberate attack, CDC fights disease and supports communities and citizens to do the same.
To accomplish this important mission – one that is surely the responsibility of government – the CDC has received nearly $114 billion in tax dollars since 1981, the year AIDS was first discovered. With so much money, why has the agency been caught flat footed about a disease that it has been aware of for 38 years?
One reason may be that so little of the CDCs funds are actually spent to protect America from health, safety and security threats but rather on politically-correct causes like anti-smoking, anti-drinking and obesity. The agency is still spending millions of taxpayer dollars each year to conduct research to show that smoking is dangerous.
Looking at last year’s agency budget, about 38 percent of all funds were spent on so-called lifestyle diseases, rather than on preparing the nation for real threats like Ebola. If this same percentage had been spent on state-sponsored nannyism every year since 1981, it would mean that the CDC had spent a total of $43.4 billion telling people not to smoke or eat too much salt and fat. One wonders how much better the procedures for Ebola would be today had that money been spent on researching and preventing actual diseases.
While the CDC’s siphoning of funds from real diseases to political causes has been going on for a long time, through both democratic and republican administrations, the bottom line is that today the agency is showing itself to be dysfunctional and ineffective. Americans do not trust the government. They do not believe that government can protect them from potential threats like epidemics or terrorism, and politicians are quibbling between themselves about how to deal with Ebola.
Would $43 billion make a difference? Maybe or maybe not, but for sure the travails at the CDC show that the sacred cows have come crashing to their knees, and a golden harvest was reaped without generating much intelligence.
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