John Locke Update / Research Brief

How Many Ways Does Red Tape Impede the Economy?

posted on in Law & Regulation, Rights & Regulation
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Government red tape slows down the economy. That is a consistent finding in economic research literature. Federal regulation has been estimated to cost the U.S. economy over $1.9 trillion in 2017. State regulation has been estimated to cost the North Carolina economy as much as $25.5 billion in 2015.

Those are unseen losses. They represent the absence of economic productivity that would be there but for the red tape. Policymakers who understand this aspect of red tape should be interested in cutting red tape and keeping regulatory burdens light and up-to-date.

In previous research updates, I discussed a Florida regulatory reform, called legislative rules ratification, that appears to achieve basically what North Carolina legislative leaders are seeking to do with the “rules throttle” approach in the conference report for House Bill 162. One of its merits is that it sparked good communication and cooperation between the legislature and the rulemaking agencies.

Part of the Florida reform concerns when agencies should prepare a “statement of estimated regulatory costs” (SERC) of a proposed rule. The line is $200,000 in aggregate regulatory costs is likely within its first year. Those costs can be direct and indirect costs, but here’s where the cooperation starts.

The law also says agencies are “encouraged to prepare” a SERC, even when the proposed rule isn’t considered likely to hit that $200,000 threshold where it would be required. But how to make a good-faith effort of estimating regulatory costs? There are so many moving parts involved.

As described in the Florida Bar Journal in 2015, the rulemaking subcommittee of the legislature worked with the agencies, the business community, and affected parties in order to provide recommendations for “improved guidance for agencies preparing SERCs.” A bill was drafted to codify them but only passed one chamber. Nevertheless, discussion and legislative staff analysis of the bill proved valuable in themselves.

How do I impact thee? Let me count the ways.

The legislative packet to outline the discussion to guide agencies in drafting statements of regulatory costs broke out three subcategories of where red tape could have adverse impacts: on small businesses, across a broad array of economic measures, and in compliance costs. The questions they asked under each subcategory are instructive to anyone interested in how red tape interferes with economic growth.

For example, here are the circumstances considered regarding adverse impacts of red tape just on small businesses:

Should agencies acknowledge an adverse impact on small business in each of the following circumstances?

  1. An owner, officer, operator or manager must complete any training or testing to comply, or is likely either to expend 10 hours or to purchase professional advice to understand and comply with the rule in the first year,
  2. Business opportunities are restricted, including but not limited to any limitation on previously offered goods or services or any restriction on ancillary business activities,
  3. Taxes or fees assessed on transactions are likely to increase,
  4. Prices charged for goods and services are restricted or are likely to increase because of the rule,
  5. Specially trained, licensed, or tested employees will be required,
  6. Operating costs are expected to increase, or
  7. Any capital investment is necessary to comply with the rule.

Here are the circumstances they considered regarding red tape’s adverse effects on “economic growth, job creation, employment, investment, business competitiveness, productivity, innovation, and small business”:

Should agencies be required to consider the following in evaluating such impacts?

  1. Increased customer charges for goods and services,
  2. Decreased market value of goods and services produced, provided, or sold,
  3. Increased costs resulting from the purchase of substitute or alternative products or services,
  4. Reduced productivity due to decreases in employment,
  5. Lost business opportunities due to capital costs, time lost for creative and entrepreneurial effort, or any restrictions on investment choices or market entry,
  6. Any other impacts suggested by the Rules Ombudsman, the agency head’s appointing authority, or interested persons.

The packet even had 13 separate circumstances of regulatory impact owing to compliance costs.

Even though the bill ultimately only passed the state House (unanimously), the Florida Bar Journal found its guidelines “beneficial to any agency drafting a SERC” and the broader discussion “useful in training on SERC development.” I think it has utility beyond those things.

This deep dive into how government red tape can affect private enterprise, in so many different ways, can help policymakers in North Carolina and elsewhere realize just how far-reaching regulatory impact can be. It’s eye-opening, and because of that, it could lead to more reforms.

For anyone interested, there’s a good list of potential reforms at the end of my report on “Regulatory Reform.”

Jon Sanders is an economist studying state regulations, that spreading kudzu of invasive government and unintended consequences. As director of regulatory studies and research editor at the John Locke Foundation, Jon gets in the weeds of all kinds of policy… ...

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