The next president, whether a Democrat or a Republican, should place a high priority on federal regulatory reform, in order to promote good jobs, vibrant firms, and a stronger American economy.
Regulation is, of course, appropriate to address such problems as public health and safety and environmental pollution. But a growing body of scholarship finds that overregulation has slowed economic growth and reduced American prosperity. Fortunately, revamped federal regulatory review, centered in the White House, can play a key role in helping tame the regulatory behemoth.
Recent Research Spotlights the Costs of Overregulation
Over the last two decades, quantitative research has focused on the economic effects of regulation. A great body of evidence finds that increases in U.S. regulatory burdens have reduced economic growth. This slowdown has seriously harmed the American economy.
For example, a 2018 study by economists Patrick A. McLaughlin, Nita Ghei, and Michael Wilt found that the accumulation of rules in the United States since the 1980s slowed American economic growth. The slowdown imposed an estimated $4 trillion loss in U.S. gross national product in 2012 (had regulations stayed at 1980 levels).
May 2023 testimony to Congress by Doug Holtz-Eakin, former director of the nonpartisan Congressional Budget Office, provided further evidence on the slowdown. He noted that U.S. GDP per capita (“a rough measure of the standard of living”), after rising 2.3% annually in the second half of the 20th century, has risen at an “anemic” rate of only 1.2% thus far in the 21st century. According to Holtz-Eakin, excessive regulatory growth is the key culprit:
[F]rom 2005 to today, agencies have recorded cumulative totals of $1.5 trillion in regulatory costs and approximately 1.3 billion annual hours of paperwork. For perspective, the cumulative new regulatory costs imposed over the past 18 and a half years would represent roughly 6% of current U.S. GDP.
University of Chicago economics professor Casey Mulligan highlighted other aspects of excessive regulatory costs in June 2023 congressional testimony. He explained that mere clerical “red tape” is merely the tip of the regulatory-cost iceberg. Complying with a regulation often involves high opportunity costs (foregone opportunities for businesses to trade, innovate, and realize their full potential). Moreover, ‘‘many rules protect a type of business from competition, sometimes by erecting barriers to new market participants and other times by outright prohibiting competing goods and services.’’ This skews market outcomes, reducing market-generated economic benefits.
In his testimony, Mulligan also found that, through 2022, the Biden administration had added regulatory costs of $617 billion per year, based on rulemakings alone ($5,000 per-household per-year for rules finalized in 2021 and 2022). He added that continuation of the 2021-2022 pace for eight years would yield an aggregate per-household regulatory burden of more than $40,000. In contrast, he estimated that application of President Donald Trump’s deregulatory approach, as opposed to President Joe Biden’s regulatory approach, over eight years would have yielded aggregate savings of up to $80,000 per-household.
In a November 2023 study of regulatory costs absorbed by U.S. businesses, economists Mark W. Crain and Nicole D. Crain found that smaller firms were disproportionately harmed:
Considering all federal regulations, all sectors of the U.S. economy and all firm sizes, federal regulations cost an estimated $12,800 per employee per year in 2022 (in 2023 dollars). Small firms with fewer than 50 employees incur regulatory costs of $14,700 per employee per year – 20% greater than the cost per employee in large firms ($12,200).
Even worse, the United States is not a low-regulatory-burden country. This undermines American international competitiveness. According to Mulligan (in a January 2024 article citing research by Crains):
Ranking 16th, the U.S. is not among the low-regulatory-cost [major market-oriented] countries. The Crains’ analysis of GDP data from 2000 to 2022 suggests that if regulatory costs in the U.S. were reduced to match the average of the five least-burdened countries, U.S. GDP would increase by approximately 8 percent. Eight percent of GDP is about $2 trillion per year or $15,000 per household per year.
Three Presidential Actions Can Curb Regulatory Excess
Fortunately, the next president can immediately issue executive orders aimed at reducing economically destructive overregulation by federal agencies.
Three complementary reform programs that the new president may wish to pursue through executive orders are:
- adopting a regulatory budget;
- recalibrating regulatory cost-benefit analysis to make it more effective in estimating regulatory burdens; and
- establishing a process for identifying anticompetitive market distortions in the regulatory-review process, so that they can be avoided and, ideally, eventually phased out.
Implementing Regulatory Budgeting
“Regulatory budgets” place a limit on the total cost of regulations that each federal agency is allowed to impose.
Research presented in a major scholarly symposium, published by the Harvard Journal of Law and Public Policy in 2022, analyzes alternative regulatory budgeting proposals.
A symposium article by economists Patrick McLaughlin and Laura Jones explains that text-based metrics (text-based counts of regulatory requirements or restrictions) “are affordable to implement, easy to understand, and can cover most of the regulatory burden. They also have been successful in achieving regulatory reductions” in a number of jurisdictions. Such metrics “offer a number of advantages over alternatives, including a cost-effective way to get a handle on both the stock and the flow of government rules stemming from legislation, regulation and guidance, policies and forms.”
Variations on text-based metrics have been adopted with some success by various jurisdictions, as documented by Harvard symposium authors. One example is a January 2017 executive order by President Trump, which required federal agencies to repeal two significant rules for each new one adopted, and to ensure that the total cost of all new regulations be no greater than zero.
The Trump administration reported that its deregulatory actions “achieved regulatory cost savings of more than a hundred billion dollars” in fiscal year 2020. Nonetheless, President Biden rescinded the Trump order in January 2021. Given the recent rise in regulatory burdens documented by Mulligan and others, the next president would be well-advised to consider issuing new orders reinstituting some version of regulatory budgeting.
Recalibrating Cost-Benefit Analysis
Since the Reagan administration, presidents have issued executive orders directing the Office of Management and Budget to undertake cost-benefit analysis of proposed federal regulations. OMB and the agencies that drafted proposed rules were instructed to employ objective economic calculations in their analysis. This was not a partisan issue.
In November 2023, however, the Biden White House issued a major revision of Circular A-4, the guidance document for agencies developing proposed regulations. The revision introduced subjective value judgments into the estimation of costs and benefits.
These changes, which have been controversial, allow a larger proportion of regulatory proposals to pass cost-benefit muster. This means net regulatory burdens rise, slowing economic growth. Small businesses, in particular, are likely to be harmed, as explained by the Small Business Administration.
A simple fix would be to rescind the Biden administration’s withdrawal of Trump-era executive orders on regulatory reform, and at the same time to reissue the Trump orders (or variations thereof). In addition, Circular A-4 should be revised to eliminate the new subjective approach to cost-benefit analysis introduced in 2023.
The president should also consider a new executive order requiring cost-benefit analysis by independent federal regulatory agencies, which impose large regulatory costs. Such an order would be within the president’s legal authority.
Targeting Anticompetitive Market Distortions
Research indicates that anticompetitive market distortions (ACMDs) imposed by governments significantly reduce economic output. OMB regulatory review at present does not focus on measuring the competition-distortive effects of regulations. The next administration could change this through executive orders requiring that agencies estimate, and that OMB review, the economic welfare effects of proposed regulations that distort competition.
The order could assign OMB (in consultation with economists from inside and outside of government) to establish protocols for evaluating the distortive effects of proposed regulations.
Those protocols could take into account metrics that have recently been developed for analyzing the negative welfare effects of ACMDs. Even without precise estimates, it might be possible to roughly assess whether the distortive harm of particular regulatory proposals would likely outweigh their benefits.
Swift Presidential Action on Regulatory Reform Is Needed
The over-regulatory status quo acts like a harmful hidden tax on American workers, families, and businesses. It stifles U.S. economic growth and innovation at a time of increasing international competition. Accordingly, the next president would be well-advised to quickly deploy the various regulatory-reform tools at the administration’s disposal, including regulatory budgeting, to rein in these regulatory excesses. While additional future initiatives, including legislative reform, may well be needed, presidential action is an important and necessary start.