by Jon Sanders
Research Editor and Senior Fellow, Regulatory Studies, John Locke Foundation
Note: This article was originally published on Nov. 23, 2021, by the American Institute for Economic Research.
At the close of the Trump administration, the U.S. Department of Health and Human Services (HHS) finalized a rule instituting a periodic review process with a sunset provision for all agency regulations that affect small businesses. The rule required HHS to review, within five years, all of the regulations affecting small businesses it has issued that are over 10 years old to determine if they are still necessary, need revision, or need repeal. Also, any new regulation issued must likewise be reviewed 10 years after publication or else it would sunset.
The rule achieved an elusive bipartisan goal — effective review of regulations — long sought by previous administrations, from the Obama administration stretching back to the Carter administration, a goal that had proven difficult to achieve. So it is perplexing that the Biden administration now seeks its repeal. The reasons for removing it are even worse. Apparently, HHS is so chock-full of regulations to enforce that it would be a terrible strain on staffing resources just to see which regulations are not worth enforcing. Besides, HHS wants to save small business owners the time and hassle of working with them to identify harmful regulations.
Regulations are an unseen cost of doing business in many way. They redirect productive capital, including labor, into nonproductive or less productive capacities and sometimes foreclose several avenues of commerce and business operations. In some instances the benefits of certain regulations would outweigh the costs, but doing so does not deny that regulations impose costs.
Clyde Wayne Crews’ annual report for the Competitive Enterprise Institute, Ten Thousand Commandments, estimates the annual regulatory costs imposed in the United States. The 2021 edition estimated regulatory costs for 2020 were $1.9 trillion, which would be 9 percent of the U.S. gross domestic product and greater than the economies of all but seven countries (not counting the U.S.).
Regulatory costs must be estimated because they are hidden. They are the lost efficiencies that free entreprisers would otherwise have found or employed. They are the lost man-hours spent on compliance and paperwork instead of productive activities. They are preferred inputs made more expensive or prevented from use for less desirable ones. They are the voluntary transactions not made. They are the imperceptibly slowing of the economy.
Early in the 2013 movie “Rush,” based on the Formula One rivalry between Niki Lauda and James Hunt, an upstart Lauda goads his team into reducing the weight of his car and improving the aerodynamics. Lauda started with a car identical to his teammate’s, which offered him a natural experiment. After the improvements his car was over two seconds faster around the track. Regulations’ effects on an economy are like that of adding weight and aerodynamic drag on a racecar: you can’t see them, but they cause the great machine to slow down.
Furthermore, a slowdown isn’t an isolated matter in one cycle around the track or the calendar. Those lost seconds in racing add up over the course of a race, and lost economic gains due to overregulation compound over the years. The longer it goes, the further back the economy is compared with where it could have been under a lighter regulatory environment.
A 2013 paper by economists John W. Dawson and John J. Seater measured of the relationship of federal regulation and macroeconomic performance over time, finding it to be “negative and substantial.” They wrote, “Federal regulations added over the past fifty years have reduced real output growth by about two percentage points on average over the period 1949-2005.” That two percentage points per year is like two seconds around the track. Dawson and Seater explained, “That reduction in the growth rate has led to an accumulated reduction in GDP of about $38.8 trillion as of the end of 2011. That is, GDP at the end of 2011 would have been $53.9 trillion instead of $15.1 trillion if regulation had remained at its 1949 level.”
Lighter regulatory burdens, however, correspond with faster economic growth. Economist Antony Davies illustrated this dynamic across industries facing different regulatory burdens in a 2014 paper for the Mercatus Center at George Mason University. Davies used a metric counting “binding words” in federal regulation (such things as “shall,” “must,” “may not,” “prohibited,” and “required”) as a way of measuring regulatory burden. He found that the less regulated industries were more productive by far: “The one-third of industries that are least regulated show growth rates in output per hour and growth rates in output per worker that are 1.8 and 1.9 times, respectively, the growth rates for the one-third of industries that are most regulated.”
A sensible way to reduce the regulatory burden — and one long recognized across party lines — would be to get rid of regulations that are unnecessary, outdated, impractical, or failing to live up to their stated purpose. Regulatory review is supposed to take care of that, but a lack of enforcement mechanism has held it at bay — HHS found that “85% of Department regulations created before 1990 have not been edited.” Periodic review backed with sunset provisions, however, is a proven effective method to streamline the regulatory environment. My home state of North Carolina adopted periodic review with sunset provisions in 2013, and by 2019 regulatory agencies had eliminated 2,008 rules out of 19,361 reviewed, just over one in 10.
This argument presupposes that policymakers prefer economic growth and want agency bureaucrats to refine rulemaking toward more defensible regulations and away from unnecessary red tape. In promulgating its rule for periodic review with sunset provisions, HHS under Trump had made strong gains in that direction. While estimating department costs of between $8 million to $25 million per year, HHS anticipated far greater benefits: “the Department believes the benefits from the widespread retrospective reviews to minimize the substantial economic impact upon a significant number of small entities that would result from this proposed rule would far outweigh the costs from any uncertainty resulting from this proposed rule.”
Notably, HHS also warned that continuing to put off reviews of its regulations “would cause the Department to have more work to do in future years and therefore require it to grant extensions to Assess or Review Regulations whose expiration dates are in subsequent years. This could become a vicious cycle.”
Under Biden, however, HHS has a decidedly more insular focus. Gone are concerns about a vicious cycle of unreviewed, untouched regulations going back decades. They have been supplanted by a presumption that review itself is a harmful imposition. Rather than seeing the expiration of rules under the lens of cost burdens on small businesses, HHS switched its focus to how special interests (“stakeholders and the public health”) could be negatively impacted not only by the expiration of some regulations, but by HHS having to “redirect sufficient resources to prevent expiration of certain HHS regulations.”
HHS also estimated its costs saving from not having to review its rules to be vastly greater than previously estimated: $40 million to $111 million per year.
HHS now harbors no concerns about regulations’ well-known negative impacts on regulated entities or the economy. Under Biden, HHS’s concerns are avoiding potential harm to “stakeholders” from loss of certain rules and generating “cost savings” from not having “staff time spent on assessments and reviews.
When it comes to regulated entities, HHS’s concerns are — get this — to “generate cost savings to the general public by reducing time spent on public comments related to these assessments and reviews” and “reduce any regulatory uncertainty from the potential automatic expiration of rules.”
In other words, they want to “save” small business owners from being tempted to spend time informing HHS how certain rules up for repeal are hindering their businesses, with the prospect of those regulations actually being amended or repealed. The Biden administration thinks small business owners and the general public will be soothed by the idea of “regulatory certainty” — that harmful regulations will go on forever and ever.