Federal Regulatory Budgeting Would Boost Economic Growth

A Recent Regulatory Budgeting Bill Could Turn Cumulative Regulatory Costs into a Boost for the Economy

The consistent accumulation of federal regulations creates tremendous economic costs – an intuitively obvious problem that economists have begun pinning down with hard numbers in recent years. Since 1970, the number of regulatory restrictions on the books has grown from 400 thousand to almost 1.1 million at the federal level. A report released last year shows that federal regulations cost the economy over $3 trillion (with a T) in 2022; our own research puts that number even higher. This 2020 paper in Review of Economic Dynamics shows (ungated working paper version here) that the accumulation of regulations slows annual economic growth by nearly 1 percentage point. That means the economy would have been 25% larger (i.e., about $4 trillion larger) than it was in 2012 if regulations had been kept at 1980 levels.  

We asked DALL-E to make an image of a stack of law books wrapped up in red tape. Not bad… although I’m not sure what “CIRVIL Law” is.

These very large third order effects of regulatory accumulation could be avoided with a regulatory budget. Readers might wonder what is meant both in that paper and in the paragraph above when we said “if regulations had been kept at 1980 levels.” That means you keep your “regulatory spending” at some predetermined level, by eliminating some old stuff whenever you create new stuff. It’s like putting your household on a spending budget. It doesn’t mean you don’t spend; it just means you make sure any new expenditures are offset by eliminating some other expenditures, balancing out your budget. In the case of the paper mentioned above, that predetermined level was the regulatory spending observed in the year 1980: what would it look like if we had kept regulations at the 1980 level, by eliminating an old regulation every time a new one was created?

But that was a simulation in a dense (and dry) economics study. Some policymakers have tried to make the idea a reality for federal regulations. One recent attempt to acknowledge and address the problems of regulatory accumulation is the newly introduced REG Budgeting Act (H.R. 7867). This bill directs the Office of Management and Budget to establish a statutory regulatory budget (similar in spirit to Executive Order 13771 under the Trump Administration) that would aim to limit further accumulation of regulatory costs for the entire federal government. The bill seems to target a “net zero” effect. Similar to the simulation in the paper mentioned above, any new regulations would have to have their costs offset by eliminating old ones. Should any agency’s rulemaking activity increase the agency’s net regulatory costs, Congressional approval would be required.

The bill doesn’t seem locked into a “net zero” solution, although that is the likely goal. A detail that stands out is that the Act would allow the director of OMB to require that “cumulative unfunded regulatory costs be reduced, including for the purpose of offsetting any additional unfunded regulatory costs…” The language there – specifically, the word “offsetting” -- indicates that the likely goal is net zero. But it seems to allow for reduction in cost beyond net zero because while it mentions the purpose of offsetting, it doesn’t limit the reduction to that purpose only.

This is worth pointing out because keeping the burden of regulations steady, as opposed to reducing them, is already a costly affair (i.e., at least $4 trillion a year costly). And, as in the case of British Columbia, actively cutting net regulatory burden has been shown to have sizeable economic benefits. The Canadian province cut its net regulatory burden by nearly 40 percent, and increased its economic growth rate by over one percentage point as a result. So, it’s probably a good thing that the REG Budgeting Act has that flexibility built into it, if the goal is ultimately not cutting red tape for the sake of cutting red tape but instead finding ways to use regulatory policy to increase economic growth.

In any case, from a growth perspective, the fact that that the concept of placing the brakes on runaway regulatory growth (with its incumbent corrosive economic effects) is being seriously considered in the halls of Congress is a step in the right direction.