Regulation and the US economy

As the US economy slowly recovers from the Great Recession while fiscal challenges still loom, one missing element in the discussion seems to be the potential to liberate economic potential via further regulatory reform. Regulatory reform is not a silver bullet solution, but it can deliver economy-wide medium to long-term benefits via improved performance of American business and government, all at a relatively low up-front cost.

US competitiveness

While the United States remains a dynamic and powerful economy, continued regulatory shortcomings in some areas are nonetheless contributing to a slow erosion of competitiveness. This is evident in several international indicators. For example:

• The Fraser Institute compiles the annual Economic Freedom of the World index for 144 countries. The EFW index “measures the degree to which the policies and institutions of countries are supportive of economic freedom. The cornerstones of economic freedom are personal choice, voluntary exchange, freedom to compete, and security of privately owned property.” According to the Fraser Institute, the US rank has declined from 3rd place during the 1980s and 1990s to 19th in 2010.

• The World Bank maintains the Ease of Doing Business index focused more specifically on regulations as they affect business. In 2013, the index employed 11 sets of objective indicators and covered 185 economies. The United States has maintained a 4th place ranking by performing fairly well in most of the indicator sets, while many other countries were inconsistent (e.g., in some cases performing highly in some categories, but poorly in others). Nonetheless, when one looks into the underlying indicators there are some areas where US performance falls well below the top 10. For example, with respect to the challenges faced by a medium-sized business located in New York City, the indicators of regulatory burdens place the US at 22nd in terms of trading across borders, 25th in terms of registering property, and 69th in terms of paying taxes. The particularly low score with respect to paying taxes is associated with both administrative burdens and financial costs. With a ranking of 69th in this category, the United States places just below Madagascar (68) and just ahead of Mongolia (70).

• The World Economic Forum maintains a Global Competitiveness Index, which is a structured inquiry that takes into account executive opinion of key dimensions of economic competitiveness in 144 economies around the world. The United States has slipped from 1st place in 2006-07 to 7th place in 2012-13 (though subsequently climbing up a few places). Business executives listed inefficient government bureaucracy, tax rates and tax regulation as the top three problems in this context.

International institutions are not only monitoring progress on regulatory issues. Quite a few concrete initiatives are underway to improve regulatory frameworks around the world. For example, the OECD conducts an active program to promote regulatory reform using approaches such as country reviews and development of tools for improving regulation (e.g., a regulatory impact assessment tool). Since 1999, OECD has completed 31 country reviews — including one for the United States in 1999 — to “assess how countries manage the design, adoption and implementation of regulations.”

What to do?

Appropriate regulation is an essential part of a modern economy. The regulatory framework provides rules of the game for business, non-profits, government and other economic institutions. When the rules are properly specified, they provide clear objectives for economic actors without unduly constraining freedom. And, businesses and others should be free to innovate and find efficient ways to attain the regulatory objectives (e.g. reduction of pollution, improvement of safety, facilitation of trade, among others). In striving for these objectives, care should be taken to avoid unnecessarily burdening economic actors, as that would risk gumming up the functioning of the economy.

The United States has succeeded in previous regulatory reform initiatives. For example, one of the significant economic achievements of the Clinton-Gore administration was a streamlining of government regulation. A consensus approach was employed in identifying areas where action would be helpful. According to the Clinton Presidential Center, during the Clinton-Gore tenure some 16,000 pages of regulation were eliminated and 31,000 pages of regulation were redrafted in plain English. Some 640,000 pages of internal government agency rules were cut. In addition, government performance was reviewed and actions were taken to reduce the size of the bureaucracy while improving the operational performance of government agencies. Through such actions, the initiative known as Reinventing Government realized savings of some USD 136 billion during the years from 1993 to 2000. But the benefits extended beyond walls of government, because these actions also liberated businesses to improve their performance and the performance of the economy more broadly.

The OECD’s Review of Regulatory Reform in the United States (1999) was positive in its assessment of this period, while noting areas for improvement with respect to social issues and bureaucratic functioning. As stated in the blurb for the report:

“The United States has been a world leader in regulatory reform for a quarter century. Contrary to popular belief, the United States is not less regulated than other countries, but differently regulated due to the pro-competition policy stance of federal regulatory regimes, and the openness and contestability of regulatory processes. Far-reaching economic deregulation combined with efforts to improve the quality of social regulation have supported the construction of one of the most innovative, flexible and open economies in the OECD, while maintaining health, safety and environmental standards at relatively high levels. However, significant regulatory problems still exist. Improving the performance and cost-effectiveness of expensive social regulations and government formalities is a key challenge for regulatory quality. In a word, the challenge of regulatory reform in the United States is not how much regulation, but how good.”

Regulation remains on the political agenda in the US. Some action is underway, led by the Executive Branch. In May of 2012, the White House announced a series of measures intended to “save nearly $6 billion in the next five years by eliminating outdated requirements and unjustified costs. To ensure that the federal government continues this important work, the President also signed a new Executive Order today, making it a continuing obligation of our government to scrutinize rules on the books to see if they really make sense.”

But, as the international indicators demonstrate, more needs to be done. Some aspects, such as reform of tax regulation, will require co-operation of the Legislative Branch, including a degree of bipartisanship and frank consultation with a broad range of stakeholders. And, this is not to say that regulatory reform is a silver bullet solution. Many aspects of competitiveness are beyond easy reach of regulation or deregulation (e.g., quality of education). In addition, mistakes can be made in deregulation (e.g., some of the blame for the US financial crisis in 2008 may be due to failures of deregulation or failures to properly implement regulations that were on the books). Nonetheless, regulatory reform remains an underexploited policy lever, one that should be pursued because it is clearly in the national interest.