Spending reform is all the rage in Washington, with both parties offering proposals to rein in the deficit. President Obama has proposed a mix of spending cuts and tax increases to trim $4 trillion from the deficit over 12 years. Rep. Paul Ryan, R-Wis., has proposed $5 trillion in spending cuts over the next 10 years.
But Obama and Ryan both neglect an area of reform as important as spending: the "hidden tax" of regulation.
Federal regulations cost the economy $1.75 trillion a year, according to a Small Business Administration study by Nicole V. Crain and W. Mark Crain. That's larger than this year's budget deficit, half the level of federal spending itself and nearly $300 billion larger than Canada's gross national income.
Regulatory reform is arguably more important than tax reform. Federal tax revenues are strikingly consistent, exceeding 20% of GDP just once in the last 50 years. This despite income tax rates as high as 70% and as low as 28% over that period. Raising rates, as some Democrats are proposing, would have little effect. Lower rates, while nice, would offer little fiscal impact.
On the spending front, neither party is willing to enact cuts sharp enough to align spending with revenues. That leaves only one way to increase revenues and reduce the deficit: economic growth. Lightening regulatory burdens can help achieve that growth.
Regulations cost the average business $8,086 per employee per year. Small businesses are especially hard-hit. Firms with fewer than 20 employees pay $10,585 per employee per year for regulatory compliance, according to the Crains' report. When hiring employees becomes more expensive, fewer get hired. No wonder unemployment is so persistent.
President Obama brought attention to regulatory reform in a Jan. 18 Wall Street Journal op-ed. But the reforms he proposed would change very little. The 2011 edition of "Ten Thousand Commandments," released on tax day by the Competitive Enterprise Institute, finds regulatory problems that Obama's rehash of Executive Order 12866 can do little to fix.
The regulatory deluge is constant. More than 64,000 rules have hit the books since 1995. Last year alone, 3,573 final rules came into effect. Another 4,225 are at various stages of the pipeline right now. The 2010 Federal Register was a record 81,405 pages long.
"Economically significant" regulations are the subset costing more than $100 million annually. Two hundred twenty-four of them are in the pipeline right now, a 22% increase over 2009. If every single one of those rules only costs the bare minimum of $100 million, that's still an economic burden of more than $22 billion to a still-ailing economy.
Record spending begets record regulation. The more government spends and does, the more rules it has to pass. Having a smaller, leaner government is the best way to keep the visible hand of regulation from hampering the economy. But Congress and President Obama are quick to criticize any sizable spending cut as "austere."
We disagree (for example, stop enrolling little babies in the Social Security program), but fortunately there are effective regulatory reforms that don't involve paring back the record spending that remains popular in Washington, if not anywhere else.
One reform is to purge the books of obsolete and clearly harmful rules. There is no need for Washington to have rules still on the books for a Y2K crisis that never even materialized. Nor is there any need for it to regulate the size of holes in Swiss cheese, which it does in great detail.
President Obama should appoint an annual bipartisan commission to comb through the Code of Federal Regulations and recommend rules for elimination. Congress would then be required to vote up-or-down on the package without amendment.
New rules should come with a five-year sunset. It would painlessly allow rules to expire as they outlive their usefulness. If a rule is effective or popular, Congress would vote to renew it for another five years.
Two hundred seventeen bills became law last year, compared with 3,573 final regulations. That ratio needs to improve. Congress should, at a minimum, vote on the manageable slate of economically significant rules. Regulation without representation lets agencies pass unpopular or harmful rules without supervision.
Spending and deficits are important issues. But regulation needs to be on any serious reform agenda. A "deregulate to stimulate" campaign in Congress may even help rein in spending and deficits, as well as regulation itself.