THE REGULATORY BEHEMOTH

 

Confronting the Bureaucracy that Hobbles American Productivity  

 

The American regulatory system is an unaccountable and inefficient process run by an organization of government bureaucrats hostile to workers, entrepreneurs, consumers, investors, and landowners. This abuse will come to a stop under a Carson Presidency.

 

Excessive regulation is a drag on the American economy, generating costs of roughly $2 trillion per year – more than $14,000 per household.[1] The burden of complying with business regulations is especially heavy for small to medium enterprises, which are disproportionately disadvantaged.[2] Regulatory reform often proves difficult for establishment politicians, who are beholden to the special interests that dominate the regulatory process. But as someone outside of the political establishment, I will be free to dismantle the regulatory structures holding America behind. I am the only candidate with a plan to get the regulatory bureaucrats out of our lives.

 

Here’s the problem: America has far too many federal and state regulations. The Federal regulatory system produces some 75,000 pages of new regulations every year. This blizzard of new requirements means that poor people bear a disproportionate burden of what amounts to a hidden tax. Even if we assume there are some benefits from regulation – at an estimated upper boundary of $700 billion – the net loss is still a staggering $4,000 per capita. For a family of four in poverty, the first $16,000 of income goes to pay the regulatory tax---with nothing to show for it in return! However, because that burden is implicit and thus hidden from accountability, it gets overlooked.

 

Regulation is often created with good intentions. But the bureaucrats responsible for creating legislation and interpreting how it is imposed have little regard for how it impacts the lives of citizens. The costs of regulation are permanent, diffused across the population, and especially burdensome to low-income households. The benefits of regulation are short-lived and concentrated among elite stakes-holders.

 

Nowhere is American business more adversely impacted than in smaller manufacturing companies. The annual costs of federal regulations – the direct levied business portion is 56 percent of the total $2 trillion of costs – for all firms are $233,182 per firm or 21 percent of average payroll. For manufacturing firms the average compliance costs is $864,125 per year. When we look at the manufacturing firms with fewer than 50 employees (that is 224,858 firms with over 2 million employees) or over 90 percent of manufacturing companies in America, the regulatory costs are $34,671 per employee. The average wage in these small manufacturing firms, according to the Census Bureau, stands at only $41,035. The regulatory cost is thus 84.5 percent of the wage. This acts a massive tax on hiring and employing labor.

 

Another disturbing problem also emerges from these studies: Larger firms, while also burdened by federal regulations, actually pay lower costs per employee because of economies of scale on compliance. For medium size firms between 50 and 99 employees, the costs are $18,243 (average wages $45,241). For the largest manufacturing firms with more than 100 employees, the annual compliance costs are $13,750 per employee (average wages $55,998).

 

In short, the federal government is regulating small businesses out of business to the relative benefit of giant businesses, which are hurt disproportionately less.  Furthermore, while small manufacturing firms will likely shut down, larger firms that find themselves overly burdened can simply relocate and take jobs overseas.  Either way, American workers lose— both jobs and wages. The only discernable winners here are the larger firms that can monopolize the domestic market and the foreign countries that benefit when American capital is reallocated out of the United States to their economy.

 

When we look at manufacturing jobs and falling median income we should not be looking at China, India or Mexico for what is happening. The problem for American workers is not what is done in foreign capitals – but rather is caused by the reckless disregard for them in Washington, DC. It is Congress and the bureaucracies that have reduced the standard of living for so many Americans.

(Source: Mark Crain and Nicole Crain, “The Cost of Federal Regulation to the U.S. Economy, Manufacturing and Small Business,” Report for the National Association of Manufacturers 2014). 

 

It is always more difficult to get rid of an old regulation than to not create it in the first place. Once a regulation has been implemented, beneficiaries quickly become fully capitalized into the new regulatory structure. For example, a farmer might have the value of his land augmented by a new regulation. When a new farmer buys that farm he will have to pay the full augmented value of the land. The new farmer will treat the effect of the regulation like a property that was fully paid for, and will lobby more vigorously against reform of the regulation.

 

The benefits of regulation are concentrated and the costs are diffuse, which leads to domination of regulation by special interest groups. Regulation generates large benefits for a small group of individuals. Then regulation spreads out the costs over a large number of individuals. Policies and regulations that cost the typical household very little cannot generate sufficient political opposition to pressure for reform. Each beneficiary will be willing to expend on lobbying an amount almost equal to the expected benefit of a regulation to see that regulation instituted or preserved.

 

The concentrated nature of the benefits of regulation also leads to regulatory capture. Typically the agency responsible for regulating an industry is staffed by individuals familiar with, and sympathetic to that regulated industry. That sympathy, and the incentive of bureaucrats to preserve their jobs, leads regulators to manage regulations to the benefit of friends within the regulated industry – at the expense of firms, workers and consumers with few political connections. Regulatory “creep” then turns into a regulatory “stampede” that crushes economic growth underneath. 

 

According to economist Russel Sobel, the United States’ drop in rank of economic freedom means that on average approximately 740,000 fewer new businesses were started each year. This has grave implications. Instead of a dynamic growing economy for all Americans, we are left with stagnant economic growth, anemic employment, persistent poverty, and slow growing tax revenues.

 

 

Taking on the Special Interests

 

Any proposal of regulatory reform is likely to face opposition from well-organized and well-informed concentrated special interest groups and the bureaucrats responsible for administering the regulations. The households that incur the costs of regulation have little incentive to be specifically informed about the costs of any individual regulation. Any attempt to reform regulations one at a time through the legislative process is thus likely to fail.

 

The only hope for meaningful regulatory reform is for a candidate who does not owe any political favors to special interest groups or the political establishment to bring forward broad-based cross-industry regulatory reform and repeal. The benefits have to be presented as a package of savings big enough to capture the attention of households. Cross-industry repeal may result in losses to individuals in regulated industries, but those same individuals will reap the benefits of regulatory repeal in other industries. Repealing regulations across all industries simultaneously can minimize transitory harm to individuals who are capitalized into special interests. My common sense approach offers the most promising way to restore the costs of regulation back to households – where they can be logically assessed. .

 

Regulation seldom harms households directly. Rather, the primary consequence of regulation is that it slows the growth rate of output: productivity. Regulation is a hidden and indirect tax on workers, businesses, consumers, and investors. The regulatory tax results in fewer jobs and lower wages; at the same time, it imposes higher costs of employment, fewer sales, higher prices, and lower returns on investment. Reform and repeal will free the economy from the crushing drag of regulation, and allow the economy to grow unhindered at a rate 2 percent greater than the current trend.[3]

 

Suppose a little creek is polluted. The Environmental Protection Agency wants it cleaned 90 percent of a particular toxin in the water. Removing the first 90 percent is the least costly, given available technological standards. However, if they then require another 90 percent reduction of the remaining 10 percent of toxin, this becomes much more costly (with fewer incremental benefits). If they want to reduce the remaining 1 percent another 90 percent, the costs rise exponentially while the new benefits race toward zero. In effect, regulatory burdens skyrocket as regulators chase an absurd “receding zero” without the realistic constraints of cost/benefit analysis.

 

Most regulations are ripe for reform or repeal. However, some regulations may be justifiable. Wise discernment is required for identifying useful regulations. In particular, a non-political cost/benefit analysis that relies on real-world prices will sort the good regulations from the bad. Any such analysis must be performed or replicated by an outside agency to avoid conflicts of interest such as the National Bureau of Economic Research or the National Economic Research Associates.

 

The recent Supreme Court case of Michigan vs. EPA ordered costs and benefits to be revealed when taking proposed regulations into account. Too many regulations claim intangible benefits – benefits that have never been quantified and costs that have never been estimated. Regulatory agencies often do little more than create a persuasive narrative to project the value of hoped-for benefits. But no one can perform a cost/benefit analysis of a regulation with “hope” or “change” as an argument. Accurate and honest analysis requires realistic pricing; if a potential regulation depends on a benefit that does not have a justifiable value, then that regulation needs to be reformed or repealed in accordance with authenticated valuation. This requirement will be extended to every regulation, regardless of scope or supposed necessity. Environmental quality and fuel economy regulations will be analyzed in the same manner as consumer product safety regulations and licensure requirements.

 

Well-intentioned regulations require critical analysis so they can allocate Federal funding where it is most needed. For example, rear-view cameras are presumed to save lives; the Department of Transportation estimates that requiring rearview cameras would reduce the number of fatalities from 228 per year to between 133 and 116 per year, meaning that 112 lives could perhaps be saved. For the installation of rearview cameras, $132 extra was spent on each of the 16.5 million new cars sold in 2014. That amounts to roughly $19.4 million per life saved.[4] No one can put a price on a life, but that same money might have saved more lives through some other venue. A cost/benefit analysis based on real-world prices would identify the real-world tradeoff. Potential regulations and government programs should be prioritized for implementation based on the demonstrated real-world net benefits.

 

 

A Common Sense Approach to Assessing Regulation

 

Any new regulation will be required to pass a cost/benefit test that demonstrates quantifiable benefits based on real-world prices before it will be approved by my administration. Additionally, a new regulation will have to prove that it generates more benefit than the existing regulation that it replaces before I will approve it. A budget on regulatory cost needs to be established and maintained. The costs and benefits of regulation must be made transparent to citizens in the same way that the tax code needs to be simplified and made transparent for taxpayers.

 

I therefore propose the following docket of federal regulation reforms and repeals, consistent with my platform of simplicity, transparency, fairness, and efficiency. Economic, environmental, and tax compliance regulations constitute 58 percent of the regulatory burden. My flat tax eliminates the need for tax compliance regulations all together – lifting 16.7 percent of the total regulatory burden. Another 35 percent of the regulatory burden is conducted through the Federal Communications Commission, Department Of Transportation, Department Of Labor, and Department of Human Services. Healthcare is another major area ripe for regulatory reform.

 

My program is to address the most costly regulations first, helping to jumpstart the economy. We will end the rampant regulatory corruption of political favoritism by providing a benchmark for regulatory reform across all federal agencies. Every existing rule in the Code of Federal Regulations and every new rule will be tested according to the real-world standard of cost/benefit analysis.

 

Every federal regulation will be required to have a sunset horizon of 5 years, after which it will automatically expire from the code. To be continued, the existing regulation must be resubmitted again for an updated cost-benefit test. Regulations that made sense 10 or 20 years ago could be positively harmful as they are being enforced today; the only way to fully know is continuous reexamination based on current conditions. Furthermore, the costs associated with conducting these cost/benefit tests by outside non-political evaluators shall come from the overall budget allocated to the regulatory agency. This will restore a healthy balance within the governance structure. Currently, regulatory agencies can propose a never-ending list of wasteful and arbitrary rules at no cost to the agencies. However, under my plan, if agencies attempt to impose irresponsible rules that cannot pass a basic efficiency test, they will have their discretionary budgets reduced. Bureaucrats will begin to only propose reasonable rules that have a rational and measurable basis in improving human welfare. Agencies will preemptively weigh imagined benefits against realistic costs before sending rule proposals to be scored officially. With these changes, reasonable and needed federal regulations can emerge and adapt to changing circumstances, and an effective brake will stop the entanglements of bureaucratic regulatory red tape that are accomplishing so little good for the American people and doing far too much harm to American productivity.     

 



[1] Clyde Wayne Crews Jr. “10,000 Commandments: An Annual Snapshot of the Federal Regulatory State” Competitive Enterprise Institute, 2015 Edition, p. 7. Mark Crain and Nicole Crain, “The Cost of Federal Regulation to the U.S. Economy, Manufacturing and Small Business”, Report for the National Association of Manufacturers 2014.

[2] Crews, p.9.

[3] John W. Dawson and John J. Seeter, “Federal Regulation and Aggregate Economic Growth,” Journal of Economic Growth 2013.

[4] Diana Thomas, “Regressive Effects of Regulation” Mercatus Working Paper. No 12-35. November 2012, p.9



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