Government Red Tape: The Hidden Tax on Growth
Economists are divided over the impact of regulations on economic growth. Some claim there is weak evidence that deregulation stimulates growth. Some economists and business leaders, however, credit President Donald Trump’s regulatory rollback as reasons for an economic uptick and stock market boom.
Within 10 days of taking office, Trump ordered his team to slash regulatory hurdles. He signed in January last year an executive order that required two past rules to be removed for every new regulation proposed.
The administration far exceeded Trump’s promise: Instead of eliminating two old regulations, federal agencies eliminated 22 for every new regulation.
“I am challenging my Cabinet to find and remove every single outdated, unlawful, and excessive regulation currently on the books,” Trump said during his speech on deregulation at the White House on Dec. 14.
He said the results are reflected in the stock market rally and financial performance of U.S. companies.
The U.S. Code of Federal Regulations (CFR) has grown over many decades. It contains over 185,000 pages, compared to 20,000 in 1960. Today, it would take three years and 111 days to read all the rules in the CFR.
The regulatory process of the past was broken, according to experts. The federal agencies had incentives to maintain and grow their regulations to maximize their budgets. Hence, instead of eliminating obsolete, ineffective, or costly regulations, they created more rules.
“This accumulation of regulation represents a growing but hidden tax that hinders innovation and entrepreneurship,” stated Patrick McLaughlin, a senior research fellow at George Mason University’s Mercatus Center, in a report. It also “negatively affects wage growth in some occupations, and disproportionately harms low and middle-income households,” he added.
The perpetual accumulation of regulations slowed U.S. economic growth by 0.8 percent per year on average, according to a 2016 paper by the Mercatus Center. The economy in 2012 would have been $4 trillion—or 25 percent—higher, if the amount of regulation had remained at its 1980 level. This equates to a nearly $13,000 loss for every person in the United States.
A 2013 study found a similar negative correlation between regulations and economic growth, with a gloomier outcome. Economists John Dawson of Appalachian State University and John Seater of North Carolina State University estimated that the past 50 years of federal regulations reduced the economic growth rate on average by two percentage points a year. And the reduction in the growth rate lowered the GDP by $39 trillion, as of the end of 2011.
Deregulation Lessons From Canada and the UK
The “two for one” rule implemented by the Trump administration is not a new idea. A similar plan to cut red tape was first introduced in Canada in 2001. The government of the Canadian province of British Columbia announced it would reduce regulation by one-third in three years. In order to meet this goal, each cabinet minister was required to eliminate at least two old rules for every new regulation.
After surpassing the goal in 2004, the province enforced a regulatory cap mandating no increase in regulatory requirements. This rule, which still applies today, has led to a reduction in regulatory requirements by almost 50 percent since 2001.
Thanks to this deregulation effort, coupled with a reduction in personal income taxes, British Columbia turned from one of Canada’s worst-performing economies to one of the best. Its growth outpaced national economic growth by 1.1 percent between 2002 and 2006. And it continues to be one of the leading provinces in the country, with an average 3.5 percent annual growth rate in the past four years. It has also enjoyed stellar job growth in recent years.
Inspired by this success, the Canadian government also introduced a red tape reduction plan in 2012. According to the plan, “the administrative burden cost” of any new or amended regulation will be offset by eliminating an equal amount of cost from existing regulations. It also required at least one rule be repealed for every new one passed.
The “administrative burden cost” is calculated based on a model that estimates the amount of time and resources that businesses use to comply with a regulation. According to a report by the Brookings Institution, this rule helped the Canadian government to reduce administrative costs and the number of regulations. The rule was codified into Canadian law in 2015.
In 2011, the United Kingdom also introduced a regulatory reform plan, including a “one-in, one-out” system to prevent government policymakers from creating new regulations that would increase costs for businesses.
In 2013, the requirement changed to “one-in, two-out,” and in March 2016, it became “one-in, three-out.”
The “deregulatory” effort in the UK system is not designed to reduce the number of regulations, but rather make regulatory compliance less costly for businesses. According to the Brookings’ report, however, this policy has helped the government in reducing both the number of regulations and the related costs to businesses.
Regulations Hinder US Entrepreneurship
Over-regulation poses significant problems for existing small businesses and potential entrants in the United States. The complexity of the rules, difficulty of interpreting them, and costs of compliance hinder entrepreneurship and innovation.
“The United States now ranks 12th among developed nations in terms of business startup activity,” stated a July 2017 report by the Mercatus Center. “For the first time ever, more businesses closed in America in the past several years than new ones opened.”
The share of people under the age of 30 who own a business has fallen by 65 percent since the 1980s, stated the same report.
According to Trump, unnecessary regulation is stealth taxation, a costly burden to American workers and businesses, and a threat to the nation’s national spirit and freedom.
“We are a nation of explorers and pioneers and innovators and inventors, and regulations have been hurting that, and hurting it badly,” he said.
“By ending excessive regulation, we are defending democracy and draining the swamp,” Trump said.
By cutting regulations, the federal agencies have achieved a net cost savings of more than $8 billion, according to the White House.
Trump plans to push harder to cut more regulations in 2018. He pledged to restore the regulatory environment of the 1960s.
“When we’re finished, which won’t be in too long a period of time, we will be less than where we were in 1960,” he said.