Study: The Consequences of Regulatory Accumulation and a Proposed Solution

From: Mercatus Center/George Mason University

Patrick McLaughlin, Richard Williams

While every American president for the past 30 years has embraced the notion of performing economic analysis on new regulations before their implementation, no president has successfully reexamined the enormous stock of previously existing regulations that he inherited nor materially altered the growth of the stock of regulations. Yet this stock of federal regulations in the United States is enormous and growing. In 2012, the Code of Federal Regulations—the series of books that contain all the currently applicable federal regulations—comprised over 170,000 pages of dense legal text. Importantly, as the quantity and scope of regulations grow, so does the degree to which they can negatively affect people and the economy.

The buildup of regulations is a consequence of a reactive regulatory system. As economists Michael Mandel and Diana Carew recently wrote, “The political system, understandably, reacts to major events—new technologies, corporate accounting scandals, environmental discoveries, or reports of tainted food or faulty products.” When regulations are created in reaction to major events, “new rules are [placed] on top of existing reporting, accounting, and underwriting requirements. . . . For each new regulation added to the existing pile, there is a greater possibility for interaction, for inefficient company resource allocation, and for reduced ability to invest in innovation. The negative effect on U.S. industry of regulatory accumulation actually compounds on itself for every additional regulation added to the pile.”

The existing regulatory system requires that executive branch agencies “adopt a regulation only upon a reasoned determination that the benefits of the intended regulation justify its costs.” Unfortunately, this requirement only involves prospective analysis, and not retrospective analysis. As a former chief economist of the Council of Economic Advisers put it, “The single greatest problem with the current system is that most regulations are subject to cost-benefit analysis only in advance of their implementation.” While prospective analysis can certainly help avoid some regulatory pitfalls, only in hindsight can an analysis determine whether the benefits that a rule was intended to achieve are actually being realized and whether those benefits do indeed justify the costs of the rule.

The need to eliminate or modify some regulations from the accumulated stock has been widely recognized by members of Congress and every president since Carter. In his 2011 State of the Union address, for example, President Obama noted, “There are twelve different agencies that deal with exports. There are at least five different agencies that deal with housing policy. Then there is my favorite example: The Interior Department is in charge of salmon while they are in fresh water, but the Commerce Department handles them when they’re in saltwater. I hear it gets even more complicated when they are smoked.” Nonetheless, executive branch attempts to examine and revise or eliminate existing regulations have primarily relied on executive orders for review of the need for regulations, rather than creating a streamlined and evidence-based, analytical process that could accomplish large-scale reform.

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