November 30, 2011
Manhattan Moment: Here's The Right Way To Do Regulatory Relief
In the seemingly endless debate about how to put Americans back to work, one solution dare not speak its name: deregulation. Yet if implemented correctly, it would provide an almost cost-free stimulus of a trillion dollars or more.
According to the Small Business Administration, the regulatory burden on our economy is a staggering $1.75 trillion annually. The Obama administration is apparently in denial over that figure: Cass Sunstein, who heads up the Office of Information and Regulatory Affairs, calls it an "urban myth," though the methodology by which it is derived is widely accepted.
My colleague Wayne Crews has surveyed the growth of the regulatory state every year since 1996 in his annual report, "Ten Thousand Commandments." In that time, he has seen the number of pages in the Federal Register grow from 67,000 to 81,405.
Each page (apart from the bizarre blank ones) contains a rule that imposes costs on businesses while creating more jobs for bureaucrats. Small businesses suffer disproportionately from these rules because their owners have to deal with compliance themselves (they usually give up and hire someone else to handle it when they reach about 30 employees).
The costs of complying with regulations average $10,585 per employee, the SBA says — enough to throw a small firm of 20 employees with $200,000 in profits into just-breaking-even territory.
No wonder small businesses, the engine of the U.S. economy, have stalled in hiring. U.S. Chamber of Commerce surveys show that over 60 percent of small businesses have no plans to hire in the next year, and the firms cite greater regulation or the threat of it as a major reason for their reluctance.
In short, bureaucracy helps explain why businesses are making profits but not jobs. Substantially reducing the regulatory burden would go some way toward getting them to hire again.
There are many ways to do this. For starters, Congress should appoint an annual bipartisan commission to comb through existing rules and identify those that need repeal. The commission would conduct its own analyses of the costs and benefits of regulations, as federal agencies' figures are notoriously suspect and far from independent.
Congress would then vote on the entire repeal package, which would prevent legislators from trading their votes for the preservation of their preferred rules.
Further, Congress should add a five-year sunset provision to all new regulations. If it later decides that rules are worth keeping, it can vote to extend them for another five years. Congress should also revitalize the concept of "enterprise zones," areas where businesses are exempted from some regulations to allow them to establish themselves at reduced cost.
Enterprise zones proved an effective way of getting local economies moving in the 1980s and 1990s. Another useful tool would be a new small-business license for all startups and microbusinesses — firms with five or fewer employees — exempting them from new regulations for a five-year period.
The federal government might consider, too, devolving many regulatory duties to the states, letting the nation's basic constitutional units discover the effectiveness of rules through trial, error and interstate competition.
Two British policies invite imitation in the United States. Congress could experiment with "regulatory budgeting," a system currently being introduced in the United Kingdom, by approving a proposal of Sen. Mark Warner, D-Va.: For every new rule introduced, an old one of equivalent cost would have to be repealed.
Congress could also implement an American version of Britain's new Red Tape Challenge, which enables citizens to air grievances about particular regulations. This could be done either in conjunction with the bipartisan commission or, as in the U.K., by a team of business leaders that reports back to the legislature.
All these ideas would provide significant regulatory relief. First, however, Congress should take responsibility for regulations, instead of surrendering rule making to unaccountable government agencies.
Iain Murray is a vice president at the Competitive Enterprise Institute. Adapted from the special autumn issue of City Journal.
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