Some Simple Ways To Improve Regulation And Boost Economic Growth

Nearly halfway through his first term, President Biden has imposed considerably more regulatory costs and paperwork hours than Obama or Trump at similar points in their presidencies. Despite Biden’s barrage of red tape, the economy has managed to slowly chug along. But now the labor market is weakening and the chance of a recession is increasing, making this the perfect time for policymakers to take a different approach to regulation, one that emphasizes performance rather than control.

The Biden administration has imposed more than $317 billion in final rule costs and over 216 million hours of new paperwork since January of 2021, far exceeding Obama’s or Trump’s regulatory activity, as shown below via data collected by the American Action Forum.

Studies show that too much regulation slows economic growth, reduces the number of new businesses, and lowers household incomes. These adverse effects are amplified when regulation is poorly implemented, as is often the case.

In a recent study from the Regulatory Studies Center at George Washington University, authors Susan E. Dudley, Joseph J. Cordes, and Layvon Q. Washington examine the cost of badly designed regulations. One study they discuss from the Netherlands Central Bureau of Economic Analysis found that a 25% reduction in administrative costs would increase GDP by 1.4%. Another study found that simplifying legal structures can increase total factor productivity by 0.6%.

Some of the negative impact regulation has on growth is avoidable. Good regulatory practices that make compliance less uncertain, more flexible, and less time-consuming can boost economic growth while still achieving the goals of the regulators. To that end, the authors offer several suggestions.

First, regulators should rely on performance or market-based regulations rather than design standards when possible. The former set targets for performance but do not require a particular means to reach the target. For example, the Clean Air Act set a target for sulfur dioxide emissions but did not tell firms how to achieve it, giving them room to innovate and experiment with different solutions. A study estimated that this performance standard reduced the costs of complying with the Clean Air Act by 50%.

At the state and local level, building codes present a great opportunity to use performance standards. Instead of specifying design standards or the type of insulation or other materials developers must use, state and local officials could set targets for energy efficiency, fire safety, earthquake resistance, and other factors. Builders could then experiment with different solutions to meet those goals.

Second, regulators should set clear targets and provide easy-to-understand definitions of important terms to avoid confusion and unintended consequences. Regulators should also work with businesses to help identify the most burdensome and confusing regulations and target them for reform first. Carefully explaining the purpose of the regulation and offering numerous ways to comply while also reforming or eliminating unnecessary regulations can help regulators generate goodwill among business leaders.

One specific way to generate goodwill is to provide a one-stop shop where entrepreneurs can get all the information and permits they need in one place. As the authors note, research shows that well-functioning one-stop shops that decrease the steps and time required to start a business are associated with a 5% to 6% increase in the number of new firms.

Finally, policymakers should consider changing the incentives of the regulators. Regulators who view their job as managing regulation rather than making regulation are more likely to work with businesses to reform regulations and regulatory processes as needed. Regulators should be incentivized to improve the efficiency of the regulations they oversee and to regularly evaluate what works and what does not. Quantitative targets or regulatory budgets are two ways to force regulators to emphasize the quality of regulation rather than the quantity since such rules preclude them from simply accumulating regulation until they find something that works to their liking.

Some regulations can improve the functioning of the economy by mitigating externalities or help us achieve other widely shared goals concerning, say, safety or pollution. But just because a regulation provides net benefits in theory does not mean it will in practice. Carefully implemented regulations allow regulators to achieve their objectives without excessively curtailing economic activity, and this should be their goal.