There can be no doubt that excess regulation weighs heavily on the American economy, slowing both economic growth and job creation, two things this nation desperately needs. Gross domestic product (GDP) growth averaged only 1.4 percent over the past decade, the U.S. now has nearly $20 trillion in debt, and real wages are stagnant.
And while the reported unemployment rate may only be 4.6 percent, much of the rate's decline has come from the sharply falling labor participation rate that now sits at just under 63 percent. Today, nearly 95 million Americans are out of the workforce, about 7 million more than in 2008.
Recognizing the role of excessive regulation on growth, President Trump has launched an aggressive campaign to curb the regulatory state, promising to cut regulations by a whopping 75 percent.
The president appears to mean business.
For example, as one of his first actions as president, Trump signed an executive order implementing a regulatory freeze across executive agencies.
And just last week, the president signed a third executive order which directs executive agencies to designate a "regulatory reform officer" who will head a new "regulatory reform task force" to identify existing regulations which, inter alia, either harm job creation and employment, are outdated or impose costs that exceed their benefits.
While the administration's efforts should be lauded, the president is likely to find — just like his predecessors before him — that aggressive regulatory reform is easier imagined than accomplished. The regulatory state has created powerful constituencies that are reluctant to disrupt the status quo.
Moreover, given the inherent nature of the regulatory process (i.e., the need for an administrative agency to draft a Notice of Proposed Rulemaking [NPRM] before it seeks to strike existing regulations off the books, the due process requirement that such NPRM be put out for public notice and comment, and other statutory constraints on deregulatory efforts), significant and rapid change will face multiple hurdles.
However, empirical evidence suggests that significant regulatory reform and corresponding economic growth may also be achieved by using a fundamental tool in Congress's arsenal: the power of the purse.
In 2011, we at the Phoenix Center released an econometric analysis in which we suggested that one way to reduce the overall size of the regulatory burden would be by curbing federal spending on regulatory efforts, an approach that also has a direct and favorable effect on the overall federal budget. Our results were significant.
Using modern time-series econometric methods, our research quantified the relationship between government spending on regulatory activity and the important goals of economic growth and job creation. We evaluated 50 years of data on the regulatory budget, GDP and private-sector employment.
We found that the size of the regulatory budget is inversely related to economic growth and the number of private-sector jobs. As such, our study provided empirical evidence to support what most Americans already intuitively know: Reducing the size of the regulatory state is a promising means for cutting spending and growing the economy.
Last week, we released an update to that paper, applying the statistical model to an expanded set of data. Again, our results reveal that a judicious use of the power of the purse on the federal regulatory budget can produce positive economic effects.
Among other findings, our updated empirical analysis reveals:
- A 10 percent reduction in the regulatory budget — or about $5.6 billion — will produce an additional $1.2 trillion in GDP annually over the next five years, or $244 billion annually.
- On average, a 10 percent reduction in the regulatory budget implies a $45 gain for every $1 decline in the regulatory budget.
- A 10 percent reduction in the regulatory budget — which implies a return to pre-Obama administration levels — leads to an increase of 3 million new private-sector jobs annually.
- On a cost-per-regulator basis, one regulator costs the U.S. economy the equivalent of 138 private sector jobs per year under current conditions. Each regulator costs the U.S. economy $11 million annually.
Recent press reports indicate that the Trump administration intends to propose a budget with significant reductions to the funding of most federal administrative agencies.
While we won't know the details of the president's plan until mid-March, our empirical analysis demonstrates that any discussion of responsible cuts to the regulatory budget is at least a welcome first step toward shrinking federal spending and getting the economy moving again.
Lawrence J. Spiwak is the president of the Phoenix Center for Advanced Legal & Economic Public Policy Studies, a research organization that studies broad public-policy issues related to governance, social and economic conditions, with a particular emphasis on the law and economics of the digital age. A full copy of the study referenced in above — "Phoenix Center Policy Perspective No. 17-01: What is the 'Cost per Regulator' on GDP and Private Sector Job Creation? An Update on Prior Research" — may be downloaded here.
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