James L. Gattuso
Research Fellow in Regulatory Policy
The Heritage Foundation
The Subcommittee on Regulatory Reform and Oversight
Committee on Small Business
United States House of Representatives
"Reforming Regulation to Keep America's Small Businesses
May 20, 2004
Chairman Schrock and
members of the Subcommittee, thank you for the opportunity to
testify today on this important topic.
Costs of regulation. Every year, Americans are reminded of the
costs of federal taxation when they filed their income tax returns
with the IRS, and see a clear and specific bottom line telling them
how much they paid to Washington. Not so with the cost of
regulation. These costs are hidden - embedded in the prices of
products and services, reduced innovation, and lost
Yet, by any reckoning, these costs are staggering. According to the
Office of Management and Budget, regulations adopted in the last
ten years alone cost Americans some $34-38 billion annually. All
federal regulations, OMB estimates, could be costing ten times that
much, or some $380 billion.
This estimate, however, is likely a vast understatement. According
to a comprehensive study conducted by economist Mark Crain and
Thomas Hopkins for the Small Business Administration, regulations
cost Americans $843 billion in 2000, or over $8,000 per
That is almost half the amount collected in federal taxes, and
nearly as much as Americans paid in personal income taxes ($999
another way, the total is about 10 percent of America's gross
domestic product - and more than half the output of the U.S.
Crain and Hopkins also found that that these regulatory costs fell
disproportionately on small businesses. In total, they found that
firms employing fewer than 20 people faced regulatory costs of
almost $7,000 per employee, compared to an average of $4,700 for
It should be noted, however, that even these numbers are estimates
- the full impact of regulation is likely even higher. Crain and
Hopkins, for instance, do not include indirect burdens in their
study. For instance, a regulation that increases the cost of energy
also would increase the cost of products that require energy to
produce. Those secondary costs do not appear in the Crain and
Perhaps more important, some costs are by their nature unknowable.
For many economic regulations, for instance, the major cost may not
be any direct burden on consumers or businesses, but constraints on
innovation. There simply is no way to assess such losses - you
can't measure inventions that never were created. In today's 21st
century economy, these unmeasurable costs are perhaps more harmful
than the measurable burdens.
The economic harm from regulatory burdens is substantial - reducing
economic growth, slowing job growth, and reducing Americans'
income. The actual effects vary tremendously, based upon the type
of regulation at issue. But the overall result is clear. Most
recently, the World Bank released a study of regulation around the
world - with a particular emphasis on rules critical to start-up
enterprises, such as entry restrictions. The report underlined the
connection between economic growth and regulation, finding that
"[h]eavier regulation is generally associated with more unemployed
people, corruption, less productivity and investment."
Americans can take heart that their regulatory burden is far less
than much of the world. Yet, we shouldn't be too comfortable. The
study offered three alternative methods of rankings of "least
regulated" countries. The U.S. was in the top ten in only one, and
on that we were tenth.
Bush Administration efforts. To its credit, the Bush Administration
has recognized the problem of regulation, particularly in regard to
small business, the traditional engine of growth and job creation
in the economy. Over the past few years, the Office of Information
and Regulatory Affairs, the OMB unit that oversees executive branch
regulation, has been revitalized - taking a harder look at proposed
new regulations, and implementing new standards for agency analyses
of new rules. In regard to small business, the President signed a
new executive order strengthening requirements for agencies to
assess the small business impact of proposed new rules, and the
expanding the role of the SBA's Office of Advocacy in that
This has led to some successes. The Office of Advocacy in
particular reports that some $6 billion in potential new burdens
were avoided in 2003 due to evaluations of small business impacts.
Yet, much as I would like to believe that the regulatory problem is
being solved, it is not. While the growth of regulation may have
slowed, burdens still appear to be growing - not shrinking.
Continuing growth of regulation. The 2003 edition of the Code of
Federal Regulations, for instance, weighed in at a whopping 144,177
pages, about a thousand pages less than in 2002, but still four
percent more than when President Bush took office in 2000. This
overall increase was led by nine percent increase in the sections
on the environment and transportation.
Similarly, the number of federal rulemaking proceedings which
increase burdens on the private sector still substantially
outnumber those which decrease burdens. Since 1996, the General
Accounting Office has reported to Congress on major rules
promulgated by agencies, as required under the Congressional Review
Act. Excluding from this list those that are "budgetary" in nature
- i.e. establishing terms and conditions for spending programs, and excluding those
that did not clearly increase or decrease burdens, leaves 30 major
final rulemakings from the start of the Bush Administration to the
end of 2003.
Of these, 21 - or 70 percent -- increased regulation.
The record was even more lopsided during the Clinton years. From
1997 through the end of the Clinton Administration, some 106 such
rulemakings were finalized - nearly twice as many per year -- with
over 75 percent increasing regulation. Taking out rules adopted by
independent agencies, the portion increasing burdens during the
Clinton Administration hits 92.5 percent. Bush's executive branch
actions increased burdens 74 percent of the time.
These numbers admittedly are only a rough measure of regulatory
trends. However, they indicate that - while regulatory growth has
been curbed during the Bush Administration - it has not been
stopped. Regulation is still expanding, not shrinking.
Small business and regulation. It should be noted that while small
businesses bear a disproportionate share of the regulatory burden,
the issue should not be considered too narrowly in terms of small
business. Most of the regulatory harm suffered by small business is
not from regulations imposed specifically on such businesses, or
even applied to them directly. Small businesses, like individual
Americans, suffer from the higher prices, reduced economic activity
and hindered innovation caused by excessive regulation. In this
way, even regulation of "big" businesses such as telephone
companies and electric utilities harms small business.
In addition, it should be remembered that the interests of small
businesses are not always the same as consumers as a whole.
Regulations that artificially protect small businesses can
therefore be as harmful to Americans as those that hinder small
businesses. In fact, many of the most heated controversies in
regulatory policies have involved rules that limit competition to
small businesses - ranging from insurance agents to car dealers to
law firms - at the expense of the public as a whole. The goal of
policymakers should be to eliminate unnecessary barriers, rather
than provide regulatory advantage to, any enterprise.
Pending legislation. What then, can be done to curb unnecessary
regulation? Several proposals are pending in Congress that would at
least represent small steps in the right direction. One, H.R. 2345,
would strengthen the Regulatory Flexibility Act in a number of
ways, increasing requirements for agencies to analyze small
business effects before promulgating regulations, and increasing
the authority of the SBA's Office of Advocacy in a number of ways.
Among other things, it would require agencies to evaluate the
indirect, as well as direct, effects of regulation on small
business. This is a positive step, for the reasons outlined
The legislation would also require agencies to periodically review
existing rules for small business impacts. This also would be a
positive step, and is similar to a provision of the
Telecommunications Act of 1996 that requires the FCC to review its
regulations every two years. Importantly, that provision explicitly
requires the FCC to repeal or modify any regulation it finds is not
in the public interest. A similar requirement would be helpful in
In addition to H.R. 2345, the Government Reform Committee has
reported H.R. 2432, by Rep. Doug Ose (R-CA). This legislation is
primarily aimed at improving regulatory accounting - the
calculation of the costs and benefits of regulation. Among other
things, the legislation requires each agency to report to OMB each
year on the costs and benefits of its regulations, and provides for
a pilot program on "regulatory budgets."
Problems with regulatory accounting. Steps to improve the
valuation and reporting of the costs and benefits of regulation are
much needed. Despite improvements over the past few years in the
federal government's ability to assess such costs and benefits -
due in large part to efforts by OMB's Office of Information and
Regulatory Affairs - the information produced by regulators on the
impact of their regulations is still incomplete, inconsistent, and
often unreliable. A large number of major regulations are
routinely adopted without a quantification of both costs and
benefits. According to OIRA, of 12 major non-budgetary rules it
reviewed in 2003, costs and benefits were only quantified for six.
In addition, at least nine major regulations were promulgated
without OIRA review (primarily by independent agencies). Eight of
these failed to quantify costs and benefits. The net result was
that of at least 21 regulatory actions, costs and benefits were
quantified for only seven - a rate of 33 percent. As a result, even
though OMB is required by law to report annually on the costs and
benefits of regulation, those numbers actually cover only a small
portion of regulatory activity.
Moreover, even when costs and benefits are quantified, the numbers
are based upon analyses performed by regulatory agencies
themselves, as part of their justification for their rules. And
despite efforts by OIRA to make the analyses uniform, they have
varied substantially in quality and methodology. Although analyses
are approved by OIRA as part of the review process, they do not
present a reliable or consistent assessment of regulatory
Steps to improve regulatory accounting are much needed. Simply put,
policymakers and consumers deserve to be told more about the costs
being imposed on them by federal regulators. Requirements, such as
those in H.R. 2345 to expand analysis and reporting of costs and
benefits, could be beneficial. At the same time, we need to
recognize the limitations of such reforms.
Certainly, agencies should be required to provide more analysis.
But to the extent that the same people who wrote the rules provide
the analysis, the result will be a too-rosy view of their efficacy.
And, as mentioned above, even the best analysis cannot quantify
every impact of a regulation - especially in innovative industries.
Moreover, even perfect regulatory accounting would not ensure good
regulatory decision-making. As anyone who has seen regulatory
debates first-hand can verify, ultimately decisions are influenced
for good or bad by the facts of the particular case, the values,
principles and priorities of the decision-makers, and (yes) even
Additional reform proposals. For these reasons, steps are needed to
ensure independent analysis of regulations, to ensure that the
risks of overregulation are fully considered at every stage of the
regulatory process. Such steps could include:
Establishment of an independent Office of Regulatory Analysis. Such
an office - charged with providing Congress with information on the
cost and impact of, and alternatives to - regulation -- would
provide an independent source of analysis on regulation. The model
for this new office would be the Congressional Budget Office, with
provides Congress with information on spending programs, and acts
as both a complement to, and check on, the Office of Management and
Establish regulatory review offices, or "mini-OIRA's" within each
regulatory agency. Consideration of the costs of regulation should
not begin when a proposal leaves an agency, but should take place
within an agency as well. To be an effective check, however,
analysis should be from outside the office or bureau implementing
the decision. One model for this is the office I served in Office
of Plans and Policy at the FCC, which reviewed every item presented
before the Commission, and provided comments to the Chairman and
Designation of "regulatory reform czars" at each agency. Sometimes,
the best way to ensure that an issue is given consideration is to
confer responsibility on an individual for making sure that is
done. In 1992, as part of the first Bush Administration's
regulatory review executive order, each agency was required to
designate such officers, known informally as "regulatory czars." No
new staff positions were created, as the individuals typically were
the general counsels or policy directors of the agencies, but
ensuring regulatory restraint became part of their job description.
Certainly, not every one produced a success story, but some did
become jealous advocates of reform, making the case for better
regulation inside their agencies.
independent agencies to submit analyses to OMB. Independent
agencies such as the Federal Communications Commission and
Securities and Exchange Commission produce a substantial share of
the major rules finalized each year - seven of 21 for FY2003. The
overall impact of these agencies is even greater, as they cover
some of the economy's most dynamic and vital sectors. Yet, these
agencies' rules are not subject to outside rule before they are
promulgated, and only rarely are their costs and benefits analyzed.
The problem could be resolved by putting independent agencies under
the requirements of Executive Order 12866. If that cannot be done,
Congress should at least require these agencies to prepare
regulatory analyses of all planned significant rules, and to
forward the analyses to OIRA for non-binding review.
congressional approval of major regulations that place new burdens
on the private sector. Under the Congressional Review Act, Congress
has the ability to veto new regulations coming from agencies. To
date, however, that authority has only been used once - to stop a
new ergonomics rules from taking affect. Our system of government
requires that Congress take responsibility for new rules imposed on
society. Congressional review and approval of major new burdens
should be required. (Rep. J.D. Hayworth has proposed such a step in
Conclusion. There is no "magic bullet" for controlling the
continuing growth of regulation. The proposals now pending in
Congress do largely move in the right direction, but much more is
needed to solve the problem.
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