The topic of ‘regulations’ can sound like a vague, mundane, and complicated process that is hard to grasp and even harder to influence. This brief seeks to provide a tangible peek into the world where the regulatory process originated, outlining and exploring regulations from a free-market perspective with the goal of creating an economic environment where human creativity can best flourish. It includes the steps required to put each individual regulation into place, examples of how regulation influences your daily life, and finally, what you can do to have an impact.
Whether you want to open a restaurant featuring your grandma’s Italian pasta, start a doggie day care business, braid hair, mow lawns or even teach, you can be affected by regulations at the local, state and federal level.
Did you ever run a lemonade stand when you were a kid? By today’s standards, you might have been violating local regulations.
In 2012, The Economist reported a story about regulation and the role it plays in the free exchange of goods and services: “Bureaucratic busybodies in Bethesda, Maryland, have shut down children’s lemonade stands because the enterprising young moppets did not have trading licenses.”
In 2015, the police shut down a lemonade stand in East Texas because the two young girls running it “did not have a ‘peddler’s permit’.”
In 2018, the Denver police shut down a lemonade stand of two young boys who had not paid for a permit. They responded after fielding a complaint from another vendor at the nearby Denver Arts Festival.
Why it Matters
Regulating children’s lemonade stands may seem trivial, but “red tape in America is no laughing matter.” As Milton and Rose Friedman warned, “regulators usually end up serving the interests of the regulated rather than those of the public” (New York Review of Books).
Generally, the purpose of regulations is to keep individuals and/or the environment safe. Yet regulations impact people’s ability to create innovative products or services to serve their communities and employ people. In recent years, we have even seen debates over the “sharing economy” and whether or how to regulate services such as Uber and Airbnb.
Innovative ventures face many challenges, such as adjusting to rapid growth, finding talent, and competing in a fast-paced and diverse economy. When you pile on burdensome regulations that are broadly applied, the chance for success dwindles; according to calculations for U.S. Census Bureau’s Business Dynamics Statistics, only half of startups remain in operation after five years (Kauffman Foundation).
Putting it in Context
In the context of government and business in America, regulations are rules set by government or other bodies that outline how activities in a given industry can operate. Some industries, such as energy products and manufacturing, are highly regulated. Conversely, “churches and the press in America are regulated only by the forces of market competition and by the basic rules of common-law property, contract, and tort” (FEE). What the proper balance is between protecting citizens and not prohibiting growth remains an area of debate, and illustrates the semantic difference between “red tape” and regulations. Red tape has the negative connotation of creating frustrating and unnecessary burdens on individuals and businesses while doing little to protect interests, as opposed to supporting citizens’ well-being and a healthy marketplace.
“The purpose of much federal regulation is to provide protection, either to individuals, or to the environment” (American Society for Public Administration). When a new standard is set – from smog emissions to how banks interact – it equates to more regulations. “Rulemaking” is the procedural process that executive branch agencies use to formally issue new regulations at a federal, state or local level. It can take anywhere from several months to several years.
For federal regulations, the rulemaking process includes:
- A public posting of a draft rule
- A comment and review period
- The promulgation of the final rule, which is the declaration of the final language as put into operation.
This rulemaking process is the same when the goal is to remove an existing regulation. The process of federal rulemaking is governed by the Administrative Procedure Act (APA). According to Encyclopedia Britannica:
“The Administrative Procedure Act (APA), U.S. law, enacted in 1946, stipulates the ways in which federal agencies may make and enforce regulations. The APA was the product of concern about the rapid increase in the number of powerful federal agencies in the first half of the 20th century.
“The purposes of the act were: (1) to ensure that agencies keep the public informed of their organization, procedures, and rules, (2) to provide for public participation in the rulemaking process, (3) to prescribe uniform standards for the conduct of formal rulemaking and adjudicatory proceedings, and (4) to restate the law of judicial review.”
Growth in Regulations
The Code of Federal Regulations (CFR) codifies the general and permanent rules published in the Federal Register by the executive departments and agencies of the Federal Government. The first CFR was published in 1938. It includes 50 broad subject areas from Banks to Agriculture to Highways. Here’s the growth in the last 60 years:
- In 1960, it was 22,877 pages
- In 1975, it was 71,224 pages
- In 2001, it was 141,281 pages
- In 2018, it was 185,434 pages.
This is an increase of over 700% since 1960! It would take over three years to read if that was your full-time job (Argive).
The Role of Government
Regulation occurs at the federal, state or local levels. When the government sets ‘standards’ or ‘policy criteria’ they are writing regulations that people, companies, farmers, etc. must follow. Examples of local regulations include zoning ordinances, rent controls, and restrictions on the sale of mixed drinks at restaurants. Examples of state regulations include legal drinking ages, speed limits, and occupational licensing (Arkansas State University).
In some cases, it is more efficient to have one federal agency than it is to have 50 state agencies. Regulatory compliance costs also tend to be lower when firms face the same regulations in all 50 states, as opposed to needing to comply with multiple regulations across state lines (Arkansas State University).
The following is a broad timeline of agencies and when they were created:
Federal regulatory agencies include the U.S. Food and Drug Administration (FDA). The FDA is a federal regulatory agency that is tasked with maintaining food and drug quality in the United States. According to the agency’s website, they carry out their mandate through the “development of performance characteristics, testing methodology, manufacturing practices, product standards, scientific protocols, compliance criteria, ingredient specifications, labeling, or other technical or policy criteria.”
Sometimes regulation that is meant to achieve one goal – such as reducing environmental impact – can have unintended results, including higher costs and reduction in performance. This includes federal regulations on everyday consumer products you may not think would need regulations, like washing machines.
A Department of Energy rule published in January 2001 was meant to increase washer energy efficiency. Even though it would increase the price of new washers, consumers would save money on their utility bills. However, calculations by the Mercatus Center based on the DOE’s own data showed that households would see a net increased cost due to the regulations unless they used their washing machine at least 300 times per year (5.8 times per week). A 2009 energy consumption survey by the federal government calculated U.S. households run their washing machines an average of 282 times per year. Not only were most consumers not saving money on these more efficient appliances, they were encountering a number of other issues. Front-load machines were meeting standards more easily than top-loaders, but as more households turned to front-load machines, they discovered unexpected mold problems.
The evolution of the quality of front loading and top loading washing machines has been well-documented, demonstrating how a government regulation has impacted the washing machines that many of us use today.
What Does the Federal Regulatory Process Look Like?
The Environmental Protection Agency (EPA) is one of the many (at least 60) federal regulatory agencies. According to the EPA, “Congress passes the laws that govern the United States, but Congress has also authorized EPA and other federal agencies to help put those laws into effect by creating and enforcing regulations.”
To create a law, a member of Congress must propose a bill. If both houses of Congress approve the bill, it then goes to the President to approve or veto. If approved, the new law is referred to as an act or statute. Once passed, the House of Representatives publishes the text in the United States Code (USC), “the codification by subject matter of the general and permanent laws of the United States.”
Even when a law is on the books, if often does not include details for how individuals, businesses, or state and local governments should follow the law. In order to make laws work on a regular basis, Congress authorizes government agencies such as the EPA to create regulations that set specific requirements. This means that regulations are not created by elected officials, even though they carry the full force of the law. For example, the Clean Air Act regulates air emissions, but does not give specifics. Instead, the law also authorizes the EPA to establish standards that explain what levels of what type of pollutant can be legally emitted into the air, and what the penalty will be if those levels are exceeded.
Congressional Review Act (CRA)
The Congressional Review Act was adopted in 1996 to give Congress more authority over executive branch regulations. The Act “establishes special congressional procedures for disapproving a broad range of regulatory rules issued by federal agencies” (CRS).
The CRA can be a tool to lighten the weight of regulations on innovation. As outlined in a March 31, 2017, article published in The Hill:
“By simple majority vote, the Congressional Review Act (“CRA”) can overturn any regulation that affects a third-party, (…) and it is not subject to the filibuster.
“The only limitation is that Congress can only utilize the CRA within 60 legislative days of being notified of the regulation. (…) there are countless regulations, guidance documents and rules that have never been submitted to Congress for review, going all the way back to 1996!”
Current Challenges and Areas for Reform
The level of regulations must balance the need to keep individuals and/or the environment safe, while minimizing the impact on entrepreneurial activity which is the engine for economic growth and employment.
Broad Efforts at Reform
Founding Father James Madison made the following case for a less complicated system of rules and regulations: “It will be of little avail to the people, that the laws are made by men of their own choice, if the laws be so voluminous that they cannot be read, or so incoherent that they cannot be understood: if they be repealed or revised before they are promulgated, or undergo such incessant changes, that no man who knows what the law is today can guess what it will be tomorrow” (James Madison in Federalist 62).
Given how long it would take any person to read and understand hundreds of thousands of pages of regulations that implement our laws, various strategies for reform have been discussed.
Experts in regulatory reform have categorized three types of reform efforts. According to Jeff Rosen, these could take the form of:
- Vertical Reforms, which change regulatory procedures individually at each agency, one unique agency at a time.
- Horizontal Reforms, which improve the rulemaking process across all agencies at once.
- Comprehensive Reforms, which directly control the most costly and significant forms of regulation across the entire Executive Branch.
The president can improve the management of the federal bureaucracy from the executive branch, but should also work with Congress to institutionalize the improvements through legislation (National Affairs).
Regulations come with a price tag. A regulation needs to be published and then enforced, which then requires people, processes, and systems in government agencies as well as in the organizations that are affected by the regulations. For example, small businesses need to hire lawyers or specialists familiar with relevant regulations in order to conduct adequate tracking and reporting, which increases the costs involved in delivering a service or producing a good. By one estimate, compliance costs for manufacturers rose 7.6% each year between 1998 and 2012.
Estimates of the cumulative total annual cost of regulations fall somewhere between $1.25 trillion and $2 trillion per year, according to the following studies:
- Small Business Administration (SBA) Study (2010): $1.75 trillion
- National Association of Manufacturers (NAM) Study (2014): $2.028 trillion
- Competitive Enterprise Institute (CEI) Study (2017): $1.963 trillion/year
- Office of Management and Budget (OMB) Study (2002, adjusted to 2013 dollars): $1.25 trillion
The U.S. treasury collected approximately $1.4 trillion in individual income taxes in 2014, meaning “the annual costs of regulations may be roughly as consequential as what the public pays in income taxes” (National Affairs).
Tracking the cost of regulations, however, is not straight forward. The Federalist Society’s Regulatory Transparency Project notes, “there is nothing equivalent to the fiscal budget to track regulatory costs,” which means no estimate is completely reliable. Additionally, we can never know the value of jobs never created or businesses never started. Knowing the cost of regulations is essential to holding administration officials accountable for spending taxpayer dollars. This has led to a call for placing regulations on a budget.
The table outlines the budgetary growth that federal agencies have undergone in order to hire regulatory staff.
According to Mercatus’s Regulatory Accumulation and Its Costs, policymakers “pay little attention to how the buildup of regulations over time has hindered innovation and damaged economic growth.” Since 1997, total regulatory restrictions have increased by almost 20% to over 1 million.
During the Clinton Administration, the average annual number of major regulations with an economic impact of over $100 million was 36. During the Bush Administration, it increased to 45, and again to 72 during the Obama Administration. In 2013, a study in the Journal of Economic Growth determined U.S. economic growth was hampered on average 2% per year between 1949 and 2005 due to the accumulation of federal regulations.
Mercatus estimates these losses in economic growth amount to income losses of cumulative $13,000 per American, but final costs can be as much as six to eight times more as a share of income for low-income households compared to high-income households since regulatory accumulation is often associated with higher prices.
Most regulatory agencies rely on third parties to track, manage, and analyze regulatory activity. Generally, this means service providers lack the expertise needed to properly understand the regulatory process, and multiple service providers for different agencies leader to redundancy, mismanagement, and fragmented systems that add to regulatory buildup. Esper is a regulatory technology company “pioneering a new platform to manage the end-to-end rulemaking processes in government agencies.” Implementing technology that organizes regulations and creates a searchable database that demonstrates how regulations across the country are related can help ease regulatory accumulation and its associated costs.
According to the National Council of State Legislatures (NCSL), occupational licensing requires “workers to submit verification of training, testing and education – and often pay associated fees – before beginning a job in their chosen field.” In some cases, improper training can cause harm to the public, so having a license can increase public safety. The overwhelming problem, however, is that licensing can create a barrier to employment and “licensing burdens often bear little relationship to public health or safety.”
For example, a report by the Institute for Justice, a public interest law firm, found a cosmetologist needs 11 times as much training to become licensed as an emergency medical technician. This is just one of the 25% of all jobs that requires an occupational license today. Sixty years ago, only 5% of jobs required a license (NCLS).
Licensing is a requirement at the local, state, and national level. Truck drivers and cosmetologists, for example, typically have state-issued licenses. Some workers, such as taxi drivers, may be licensed by their city. Workers in a few occupations, such as airplane pilots, must obtain a federal license (Heritage). This poses an additional dilemma, as it makes it difficult for people to relocate.
One way to solve this problem is through licensing reciprocity. Licensing reciprocity is the concept of developing “common frameworks for how states recognize licenses from other states” and can include mutual recognition or acceptance of licenses granted by other jurisdictions, similar to how a driver licensed by Arkansas is lawfully allowed to operate a motor vehicle in California. Currently, the Nurse Licensure Compact “allows nurses to practice in states that participate in the compact without undergoing additional licensing requirements,” and Arizona’s Universal Occupational Licensing bill, enacted in April 2019, sets guidelines for recognizing licenses from out of state. For more on Arizona’s legislation, listen to this podcast from the Federalist Society’s Regulatory Project.
You can read about your state license and permit requirements here. For a few state comparisons, like those pictured below, see this analysis of your state in the 2017 Institute for Justice report or this National Occupational Licensing Database produced by NCSL, the National Governors Association for Best Practices, and the Council of State Governments.
Impact on Small Business
Regulations are often “promulgated without regard for the unintended consequences, particularly for small businesses” (Strategic Finance Magazine). A 2015 Mercatus Study found “that as complication in regulation grew, there was a decline…in the number of small firms; the increase in complication of regulation had no effect on large firms” except for an association with a decrease in hiring among all firms.
Entrepreneurs and small businesses are often subject to four levels of regulation: federal, state, county, and municipal. These include licenses, permits, and certificates. These regulations can overlap and conflict, which makes compliance confusing and costly. According to the National Federation of Independent Businesses’ (NFIB) 2015 Small Business Playbook, the estimated cost of proposed and final regulations published in 2014 was $181.5 billion, and first-year regulatory costs average over $83,000 for small start-up businesses. The NFIB also found over half of American independent business owners say they wouldn’t start a business today. One small business survey found two-thirds of respondents indicated either cost or complexity of complying with regulations was the primary difficulty facing their businesses.
The Regulatory Flexibility Act and subsequent amendments consider the effects of regulations on small businesses and organizations, but regulations still pose problems for small businesses and prospective entrants. A further step proposed is to exempt small businesses from certain regulations if they are not a source of the problem the regulation seeks to solve (Mercatus).
This PragerU video explains how “Big Government Kills Small Business”
Interested in reading about your state license and permit requirements for small businesses? Click here.
The more of a society’s resources are allocated by the government, the less the market can direct to their most productive uses. Excessive government regulation stifles growth and should be limited (see the The Policy Circle’s Economic Growth Brief for more.)
In January 2017, President Trump issued an executive order that required the costs of any new regulations to be balanced by repealing at least two old regulations. One month later, this was followed by another executive order Enforcing the Regulatory Reform Agenda, which directed federal agencies to designate an employee to review existing regulations to target outdated, unnecessary, or ineffective regulations when identifying offsets. Halfway through 2019, Competitive Enterprise Institute reported just over 1000 rules and regulations had been issued; for context, the annual count has not been below 3000 since the 1970s. For more, see the Office of Management and Budget’s Unified Agenda of Regulatory and Deregulatory Actions.
How do U.S. regulations compare to those of other countries? Similar to President Trump’s Two-for-One executive order, the Netherlands, Canada, Australia, and the UK have all adopted legislation that requires the government to offset costs of new regulations. The Netherlands adopted a “net quantitative burden reduction target” to reduce regulatory burdens by tying new regulations to revisions of existing regulations. Canada’s 2012 One-for-One rule is similar to an Australian policy that says the cost burden of one new regulation must be fully offset by reductions in existing regulatory burdens. The UK went one step further: its “One-in, One-out,” rule became “One-in, Two-out” in 2013 and “One-in, Three-out,” in 2016.
In recent years, European policymakers have started to ease regulations in an effort to “champion entrepreneurship that can kick-start much needed economic growth.” Still, “costs and hassle” facing new companies, startups, and entrepreneurs are a constant reality.
Unlike in the United States, where entrepreneurs “have used stock options for employees to spur innovation,” many entrepreneurs in the EU are stifled by the need to “navigate onerous tax rates and restrictions.” Currently, 49% of venture capitalists and founders say European regulations make them hesitant to invest. This in turn makes it more difficult for startups to generate a profit and spur economic growth, and speaks to a larger debate in economics that focuses on the role of regulation in the economy and its impacts on economic growth. Take a look at the graph comparing different countries’ tax revenues.
There is a fine line between regulations that benefit society and keep individuals and the environment safe, and red tape that stifles entrepreneurial activity, economic growth, and employment opportunities. Understanding the costs and consequences of imposed regulations, and exercising restraint to prevent such adverse effects, are key to local, state, and national level environments that allow individual creativity to thrive.
How to Get Involved/What You Can Do
The first way to impact regulations is to get involved during the lawmaking phase. Making sure only smart, helpful legislation is passed in Congress will ensure our regulatory agencies are taking action to draft rules and regulations that make sense for us. For more on how the legislative process works, refer to the Policy Circle Brief, “The US House of Representatives, Explained.”
During the rulemaking process, submit public comments at regulations.gov.
Research the regulations impacting your life. Many regulations have unintended consequences and require an informed public in order to shine a spotlight on them.
Neomi Rao: Nominated to head the Office of Information and Regulatory Affairs. The OIRA administrator is often referred to as the “regulatory czar.”
Jeff Rosen: Putting Regulations on a Budget, National Review
Chris Demuth: (Regulatory Reform leader for President Reagan) – A New Approach for the Trump Era, Weekly Standard
Susan Dudley: Director of the George Washington University Regulatory Studies Center
- Argive, a nonprofit focusing on making regulatory processes more accountable and accessible. They analyze the impacts of regulations through public and private partnerships to support data-driven, transparent policies.
- “Over Regulated America,” The Economist
- List of Most (to least) Regulated States, Mercatus Center
- The Strategic Finance Magazine column (above) is published quarterly by the Research and Education Subcommittee of the IMA Small Business Financial and Regulatory Affairs Committee. Authors:
- Cindy Stark-Jones, CMA, works with her husband in the family business, B.R. Jones Roofing Company. She’s a long-time member of IMA’s New Hampshire Chapter and serves on IMA’s SBFRC. You can reach her at firstname.lastname@example.org.
- Jim Kuba, CMA, is a semi-retired management accountant who works for several entrepreneurial SME companies, including Ross Valve Manufacturing and Metweld International. He is a member of IMA’s Tech Valley Chapter and a member of IMA’s SBFRC. You can contact him at email@example.com.
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