Regulatory accumulation hinders productivity growth

Governments worldwide have long recognized that new regulations can create benefits, but always at a cost. More than 30 countries in the Organisation for Economic Co-operation and Development (OECD) have institutionalized the process of evaluating this tradeoff by assessing new rules’ prospective impact — that is, its anticipated costs and benefits — prior to their promulgation. Formal processes for retrospective analysis of specific rules — where a rule’s costs and benefits are assessed in hindsight — are much rarer. A third aspect of the regulatory process deserves attention: cumulative impact of regulation.

{mosads}Over time, as regulations accumulate, an increasing proportion of companies’ resources are devoted to compliance. This necessarily diverts resources away from things like the development of new technology or better training for workers. This diversion of resources may be further affected by the interaction of rules. The overlap of rules could potentially increase or decrease the regulatory burden faced by businesses. We currently know little about either the cumulative impact of regulation or about interaction effects inherent in regulatory accumulation. Data and methodological limitations have so far prevented much serious progress on those fronts, which a draft report from the Administrative Conference of the United States recently recognized.

Fortunately, we are beginning to surmount those limitations. A recent study evaluated whether the levels of regulation faced by different industries was related to different rates of growth in labor productivity, finding that, from 1997 to 2010, labor productivity for the least-regulated industries grew about twice as quickly as the labor productivity of the most-regulated industries.

One important distinction makes this study particularly relevant to assessing the cumulative impact of regulation: This study was not assessing how an individual rule or even a set of rules contained in a regulatory program affected labor productivity; instead, it was assessing how the cumulated stock of all rules affected labor productivity. This was possible because of the development of a database, RegData, which comprehensively quantifies federal regulation over time.

Old rules can continue carrying a cost even long after they’ve stopped yielding benefits — as long as they’re on the books, firms may still have to train employees on them and comply with them. Indeed, the endurance of obsolete or useless rules is a problem recognized by every presidential administration since Jimmy Carter’s. This study takes a step toward estimating that cost. While it’s perhaps intuitively easy to recognize that regulatory accumulation could cause decreased productivity, we can now empirically assess that effect.

Of course, the private sector isn’t the only group harmed by regulatory accumulation. Regulatory agencies also have to deal with them. When training inspectors, for example, does an agency choose to ignore obsolete rules? If it doesn’t ignore them, then it will necessarily waste resources by training on obsolete rules. Even the alternative — choosing to ignore obsolete rules when allocating training resources — requires the attention and active intervention of the person creating the training program.

Perhaps another question should be added to the research agenda regarding cumulative effects of regulation: Does regulatory accumulation not only lead to lower labor productivity for regulated entities, but also for the regulators themselves?

McLaughlin is a senior research fellow with the Mercatus Center at George Mason University.