by Raymond J. Keating-
With it being National Small Business Week and a national election looming just a few weeks away, it’s the right time to look at a key burden for entrepreneurs, small firms, investors, and businesses across industries: regulation.
A few years ago, SBE Council laid out the costs of regulations in a report titled “Regulation: Costs, Incentives and the Need for Reform.” In that report, we summed up:
“Assorted studies make clear the significant costs imposed by the U.S. regulatory system in terms of lost GDP, costs imposed on small businesses, declining entrepreneurship, reduced job creation, and reduced or restrained investment and productivity. Studies over the past 25 years have consistently found that the cost of regulatory compliance disproportionately affects small firms. Indeed, overly burdensome and complex regulations, along with high costs and uncertainties, impact business decisions.”
No matter which candidate wins the White House or which party controls Congress, both sides of the political aisle need to understand the real and significant costs of regulation. In addition, to the above SBE Council analysis, the Mercatus Center has published two recent studies that warrant attention.
The Impact of Regulation on Costs
First, in a study titled “The Impact of Regulatory Growth on Operating Costs” by Richard Fullenbaum and Tyler Richards, the authors report “that regulations in the current year and four to five years prior have statistically significant upward effects on operating costs per unit of output. This suggests that the most pronounced effects of regulations occur when a regulation is passed and when compliance dates arrive. Our results imply that the average level of annual regulatory growth (3.55 percent) increases operating costs per unit of output by 3.3 percentage points per year relative to a baseline of no regulatory growth.”
The authors also summarize the implications of their findings this way:
“Even with these limitations, the policy implications of our findings cannot be overstated. The ability of businesses to absorb new regulations—despite their benefits—may be limited without incurring substantial overall negative effects. The findings here could provide the foundation for a ‘regulatory budget framework’ within which constraints are placed on the number of additional regulations imposed by the federal government on the private sector. The parameters estimated above provide insight regarding not just the costs of new regulations but the potential savings from regulatory cutbacks. Returning again to our hypothetical economy in which only regulations affect operating costs, a regulatory reform initiative that reduced the total volume of regulations to 1998 levels would nearly cut operating costs per unit of output in half (a reduction of approximately 48 percent). In other words, our findings indicate that deregulation resembles technological innovation that increases economic growth, even when we assume technology to be constant.”
The Impact of Regulation on Growth and Productivity
Another recent analysis from Mercatus, titled “The Impact of Economic Regulation on Growth: Survey and Synthesis,” was authored by James Broughel and Robert Hahn. The authors review cross-country studies, and find an “apparent consensus” in that “economic regulations appear to reduce growth and productivity.”
The authors sum up: “Those studies seem to reflect a consensus that entry regulation and anticompetitive product and labor market regulations are generally harmful to growth. The results from this cross-country research, taken in conjunction with economic theory as well as other country-specific studies of economic regulation, support the hypothesis that economic regulation tends to reduce welfare in competitive markets.”
Later, they conclude, “We find that economic regulation likely operates by restricting competition, limiting incentives to invest in productivity-enhancing technologies, and, in the aggregate, reducing growth. Such regulation also constrains the ability of firms and workers to match human capital with the physical capital that makes it most productive, although it may also be the case that a base amount of protection encourages worker effort and investment in human capital.”
The Need for Regulatory Restraint and Continuous Reform
As for policy implications, Broughel and Hahn point out, “A message for policymakers on the basis of this review is to be very cautious about introducing or adding economic regulation into the economy… We believe the burden of proof should be on policymakers to show that such regulation is likely to do more good than harm, thus passing a broadly defined benefit-cost test. By broadly defined, we mean benefit-cost analysis that accounts for the dynamic, as well as the static, aspects of efficiency. In general, benefit-cost analysts should strive to better incorporate impacts on investment and productivity (and corresponding influences on growth and macroeconomic dynamism) into their analysis.”
These and seemingly countless other studies that verify the serious costs inflicted by increased regulation on entrepreneurship, business investment, productivity and economic growth, once again, highlight the need for institutional reforms, and checks and balances on the regulatory state.
Again, SBE Council spelled out some of those reforms in “Regulation: Costs, Incentives and the Need for Reform.” Those measures include improved analysis of the impacts of regulation (such as noted by Broughel and Hahn); establishing independent congressional analysis of regulations; congressional approval of rules and regulations; sunsetting of rules and regulations; establishing a meaningful regulatory budget; and requiring a supermajority vote (such as 60 percent in each chamber of Congress) to pass bills imposing major regulations on businesses, entrepreneurs and investors.
The incentives to regulate among elected officials are strong, and therefore, institutional checks are needed. Indeed, such reforms would be good news for small businesses, and for small business creation and growth.
Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.