January 21, 2004

January 21, 2004 | WebMemo on Regulation

State of the Union: Small Business, Large Regulation

Almost buried in President George W. Bush's 50-minute State of the Union Address was one line on an issue that could be key to America's economic recovery: regulation. "Our agenda" the President stated, "must help small business owners and employees with relief from needless federal regulation…"

If this signals a renewed effort to reduce the burden of regulation on the economy, it is welcome news. Reducing the regulatory thicket, however, is not an easy task. To make it succeed, President Bush should make it clear that this is now a priority for his Administration, not just a one-time applause line in a speech.

Background

Regulation imposes a huge burden on consumers and the economy. While precisely calculating regulatory costs is difficult, a recent study performed by economists Thomas Hopkins and Mark Crain for the Small Business Administration estimated that regulations cost Americans $843 billion in 2000, or some $8,000 per household - close to what Americans pay in income taxes.

The same report found that small businesses, historically the most effective creators of new jobs, bear a disproportionate share of this cost. Hopkins and Crain estimate, for instance, that firms employing 20 people or less face regulatory costs of almost $7,000 per employee, compared to about $4,500 for the largest firms.

Reducing this burden would do much to speed the economic recovery and create jobs, as well as help consumers. The Bush record on regulation so far is mixed. It has taken some positive steps, most notably in rejecting the Kyoto "global warming" agreement, and its comprehensive limits on energy use. Bush has also strengthened the Office of Information and Regulatory Affairs ("OIRA") - the Administration gatekeeper responsible for approving new rules -allowing it to require that new regulations pass stricter cost and benefit tests than previously.

But available figures on changes in the burden of regulation don't show much progress.. The number of Federal Register pages, for example, topped 80,000 pages in 2002, one of the highest totals ever. In 2003, the total was lower - some 75,000 pages - but still higher than it was during most of the Clinton years. At the same time, nearly 100 economically significant new regulations have been sent each year by the Bush Administration to OIRA by agencies - topping not only the Reagan average of less than 70, but the Clinton rate of 90.

Of course, given September 11 and corporate accounting scandals, it may have been impossible for any administration to achieve net reductions in federal regulation during this period. But at the same time, many opportunities to cut back on unnecessary regulations have been missed.

In early 2002, for example, OIRA requested comments from the public on potential regulatory changes. Some 1,700 commenters made suggestions, resulting in 156 discrete recommendations for changes. Last October, a year and one-half after the process started, OIRA announced agencies would look into 34 of the 156, with no actions yet taken.

 

More troubling, in some cases Administration inaction has led to the failure of deregulatory initiatives. Early in 2002 the FCC was embroiled in a dispute over regulation of telephone companies. Despite efforts by Chairman Michael Powell in favor of substantial deregulation, the Administration declined to take a clear stance, preferring to stay out of the fray.

Making matters worse, the Small Business Administration actually opposed deregulation, because the rules (artificially) protected a number of small telecommunications firms. In the end, much of Powell's initiative failed -- perhaps threatening the telecommunications recovery and thousands of jobs in both small and large firms.

Recommendations

The Bush Administration has a great opportunity to give reduction of the regulatory burden the priority and high-level attention it deserves. The President's statement in this week's speech is a start. But more is needed. Among other things, the President should now:

  • Make clear - to the public, Congress and his own appointees - that regulatory reform is a major priority of the Administration;
  • Further strengthen OIRA - by increasing its staff and tightening the tests that new regulations must pass - to ensure that regulations are well-justified; and
  • Avoid small business protectionism. Policymakers should encourage enterprise by reducing regulatory burdens overall, not by artificially protecting small businesses.

James L. Gattuso is Research Fellow in Regulatory Policy in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.

About the Author

James L. Gattuso Senior Research Fellow in Regulatory Policy
Thomas A. Roe Institute for Economic Policy Studies

Related Issues: Regulation