Economic activity in the United States was down nearly 33 percent in the second quarter of 2020. With the magnitude of a third quarter recovery still uncertain, languishing revenues are driving businesses to cut costs wherever they can, leaving millions of Americans unemployed. Congressional negotiators struggle with new stimulus deals. Without intervention, as many as 2.1 million U.S. businesses may have to shut their doors for good, adding further economic uncertainty to the stress of living in a pandemic.
One silver lining is that even modest regulatory reform, the likes of which bipartisan leaders in Canada and some U.S. states have successfully implemented, could lift a significant weight off the shoulders of businesses and help protect the livelihoods of their employees and owners.
In a new Mercatus Center study, we find that regulatory growth over the last 20 years has increased businesses’ operating costs per unit of output by about 3.3 percent each year. As is the case with compound interest, this seemingly modest annual change grew into a hefty burden over time.
Reducing the total volume of regulations, even just to that of 20 years ago, would reduce daily costs by double-digit percentages, giving a vital helping hand to distressed businesses. Though many experts in recent months have suggested removing regulations such as certain restrictions on personal protective equipment production, our proposal differs in a crucial way: We prescribe comprehensive reform — that is, reducing the regulatory burden across the board.
We need comprehensive reform because the costs of regulations fall on more than just big businesses. An ever-growing regulatory code disproportionately hurts those least able to absorb new costs, like small businesses, sole proprietors, and the tens of millions employed by the gig economy. Regulatory growth also reduces the number of new startups.
Because regulations drive up prices for goods and services, they create a disproportionately larger drain on the income of the poorest households. Recent evidence indicates that regulations increase poverty rates and income inequality.
Reducing the regulatory burden can pare down these inequities and improve overall economic performance. For evidence of the economic benefits, consider the Canadian province of British Columbia. In 2001, it had the slowest growing economy in the nation — so slow that many referred to the 1990s as the “dismal decade.” Over the next few years, policymakers cut its regulatory code by a third, and it has since grown faster than any other province — without any decline in health, safety, or environmental outcomes.
These benefits also come at a low monetary cost. Congress has already spent trillions to minimize economic damage during the pandemic, with more stimulus on the horizon. While regulatory reform cannot replace these actions, it adds something significant at a tiny fraction of the cost. The intragovernmental administrative costs of identifying and removing regulations are miniscule by comparison.
The scaling back of regulations also eludes many of the difficulties commonly associated with more dramatic reform efforts. For average citizens, the only requirement is that they go about their normal business, albeit with fewer obstacles in their way. It requires no wholesale transformation of the economy, no overhaul of government processes, and no broad cultural change (other than within agencies).
So why, if regulatory reform promises so many benefits at such little cost, has the public not uniformly demanded it? The answer may hinge on two common beliefs that recent evidence forces us to question.
Many believe that the growing body of regulations helps the little guy at the expense of CEOs and shareholders. While this may be true of a focused and well-managed regulatory code, a system that piles on rule after rule, year after year, creates a different kind of environment — one so complex and with so many hurdles that it advantages those with vast compliance resources at the expense of everyone else.
The other common belief is that regulatory costs are not that large. This is where our research comes in: A continuously growing regulatory code creates costs that compound each year, leading to massive burdens on all businesses over time.
As businesses scramble to cut costs in the midst of the pandemic, hoping to keep their staffs employed and their doors open, regulatory reform could move us in the right direction. But the longer we wait, the more damage will be done.
Richard Fullenbaum is an adjunct professor of economics at the U.S. Naval Academy. Tyler Richards is a research coordinator with the Mercatus Center at George Mason University. They are coauthors of the new Mercatus Center study, "The Impact of Regulatory Growth on Operating Costs." The views expressed in this article are those of the authors and do not reflect the policies or opinions of the affiliated institutions.