President Obama, in his State of the Union address Tuesday night, was right to focus on the challenges the United States faces as domestic companies try to compete with low-cost global competitors. But he was wrong to suggest that the United States can “win the future” by getting Washington more involved in innovation and education.
As the president conceded elsewhere, Washington is, in fact, a big part of the problem - with high corporate tax rates and excessive regulation.
Just a week earlier in a Wall Street Journal article, the president elaborated on this, rhetorically declaring a truce with business and laying out the administration’s strategy for moving “toward a 21st-century regulatory system.”
Mr. Obama said this new system would need to strike a balance between the innovativeness, job-creating capacity and robust growth produced by free markets and the responsibility of government to impose “common-sense rules” to protect the public. He called for a “government-wide review of … rules already on the books,” and said that “careful consideration” would be given to the costs and benefits of all pending regulations. But as Yogi Berra once said, “This is like deja vu all over again.”
Presidents Clinton and Reagan both signed executive orders requiring that proposed federal regulations be implemented only if their economic benefits exceeded the costs of complying with them. Reagan even established a branch within the Office of Management and Budget - the Office of Information and Regulatory Affairs (OIRA) - to make sure executive branch agencies complied. The executive orders by and large were ineffective.
In fact, the federal government has been expanding its control of the private economy since the 1890s, on the theory that vulnerable people must be protected from cradle to grave by an omniscient bureaucracy that knows what’s best for them. The growth in regulation typically has been justified by analyses, prepared by the regulatory bureaus themselves, which grossly overstate regulation’s benefits and understate its costs.
Research by Vanderbilt University’s W. Kip Viscusi has shown that the regulatory cost per life saved has ranged, in constant 1985 dollars, from $100,000 - the cost of requiring air bags in passenger vehicles - to $812.7 million, the cost of preventing a single premature death from exposure to wood-preserving chemicals.
As examples of his administration’s common-sense approach to regulatory review, Mr. Obama touted a December 2010 Environmental Protection Agency decision to remove the artificial sweetener saccharin from its list of hazardous wastes (one can hear the sigh of relief from diet soft-drink consumers), the adoption of new fuel-economy standards for cars and trucks, and the Food and Drug Administration’s supposedly implemented promise to streamline the approval process for new medical devices.
Unfortunately, Mr. Obama’s enthusiastic embrace of far-reaching new federal regulations affecting the financial services and health care industries belie his self-styled conversion to common-sense, centrist politics.
There is no doubt that federal regulations are a mess: multiple departments and agencies, often working at cross-purposes, propose thousands of new rules and regulations each year. The compendium of these regulations, the Federal Register, now runs a mammoth 82,590 pages long.
According to an analysis by Nicole and Mark Crain of Lafayette College, published by the U.S. Small Business Administration last September, regulatory mandates already cost the economy some $1.75 trillion per year. For firms with fewer than 20 employees, the cost per employee was estimated at $10,585. And there’s more to come, with some 195 new regulations in the pipeline.
Don’t expect regulatory relief any time soon. The regulatory state is shaped by special-interest-group politics. Regulations rarely are adopted because consumers demand them or because they enhance society’s welfare. Rather, as the now-deceased Nobel laureate George Stigler once famously observed, private firms often lobby for regulations that they believe will give them an advantage over their competitors.
Federal regulations are as responsible as anything for America’s lagging competitiveness. The solution is not another dose of regulatory review, but a curb of Washington’s regulatory powers.
William F. Shughart II is a fellow with the Independent Institute and economics professor at the University of Mississippi.