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Regulation: Innovation Enabler or Destroyer?

John Dearie

Founder and President , Center for American Entrepreneurship

Why are there so many regulations?

 

Regulation is essential to market economies.  It establishes the rules of competition, ensures a level playing field, governs participants’ behavior, and protects consumers, public health and safety, private property, and environmental resources.  In this important sense, innovation, economic growth, and wealth creation depend on the promulgation and enforcement of regulation.

 

But regulation isn’t free, or without consequence.  Regulation imposes costs – costs borne by businesses.  A wave of new, inconsistent or outdated regulations, or complex and confusing regulations can distract business owners’ focus and time away from their product line and the marketplace.  They can impose costs that consume resources that could otherwise be invested back into businesses. Regulation can also create economic distortions, entrenched interests, and powerful constituencies, and lead to cronyism and dependency.  Perhaps most insidiously, regulation and its costs operate like an invisible and, therefore, easily overlooked, tax.

 

Michael Mandel, chief economist at the Progressive Policy Institute, has pointed out that the sheer accumulation of regulations over time can begin to suppress innovation and growth – even if every individual regulation, considered in isolation, is determined to be sound and reasonable.

 

“The problem is that it’s possible for every individual regulation to pass a cost-benefit test, while the total accumulation of regulation creates a heavy burden…I call this the “pebble in the stream” effect.  Throw one pebble in the stream, nothing happens. Throw two pebbles in the stream, nothing happens. Throw one hundred pebbles in the stream, and you have dammed up the stream. Which pebble did the damage? It’s not any single pebble, it’s the accumulation.”

Red Tape and Tech

 

The stifling effect of regulatory burden and complexity is particularly acute for startups.  New businesses lack the resources and scale of larger firms over which to absorb and amortize the costs of compliance.  Moreover, their very survival, especially during the initial

years, depends on the energy, focus, and flexibility of their leaders.

 

At roundtables my colleagues and I regularly conduct with entrepreneurs around the country, regulation frequently comes up as a major headache, and even a roadblock to their success.

Some entrepreneurs object to the sheer burden of regulatory compliance.  Others cite regulatory complexity and uncertainty, particularly when Federal, state, and local regulations conflict.  Still others emphasize the frustration of complying with redundant or outdated regulations.

 

Regulatory statistics confirm that the message from our roundtables is more than mere griping.  For example, the Code of Federal Regulations (CFR), the codification of all rules and regulations promulgated by federal agencies, has tripled – from 71,224 pages to more than 180,000 pages – since 1975.  Clyde Wayne Crews of the Competitive Enterprise Institute estimates the total economic cost of federal regulations alone (not counting state and local regulations) to be $1.96 trillion annually – an amount equivalent to the world’s seventh largest economy, 10 percent of U.S. gross domestic product, and more than all federal individual and corporate income tax receipts combined.

 

Clearly, the mounting scope and scale of regulation – together with the layering of federal, state, and local regulation – can be a major obstacle to innovation and entrepreneurship.  And this friction is likely to intensify as innovation pushes into and disrupts virtually every aspect of the economy, a point Steve Case makes in his 2017 bestseller The Third Wave.

 

So, what can be done to better balance the costs and benefits of regulation?

 

Fixing the Problem

 

One intriguing idea is the creation of a Regulatory Improvement Commission (RIC), as proposed by Michael Mandel of the Progressive Policy Institute.  Modeled on the Base Closure and Realignment Commission (BRAC) – which provided independent, objective, nonpartisan review and analysis of U.S. military installations – the RIC ’s purpose would be to serve as a procedural mechanism for the regular evaluation, simplification, streamlining, consolidation, and even elimination of selected existing regulations in pursuit of objectives such as encouraging innovation and enhancing competitiveness.  

 

The RIC would be comprised of a bipartisan group of highly qualified stakeholder appointees and staffed by experts seconded from various regulatory agencies, Congress, and independent organizations.  After selecting a portion of the regulatory code for review – a “scoop”

of pebbles from the pile in the stream – the RIC would solicit input from individuals, businesses, other affected stakeholders, and outside experts, hold public hearings, and carefully and objectively examine the evidence in an open and transparent manner.  Upon completion of its analysis, the RIC would submit a package of recommended improvements to Congress for a “fast-tracked” up-or-down vote. Following Congressional approval, the package would be sent to the White House for the President’s approval and signature, ensuring that the reforms carried the force of law.

 

Such an independent RIC framework would provide a politically feasible alternative to ideological and indiscriminate deregulation efforts, and would avoid the obvious flaws and limitations of regulatory agency self-review.   Moreover, by considering the cumulative impact of regulations across agencies, the RIC would also escape the self-defeating trap of focusing on individual regulations that, considered in isolation, often appear perfectly sound and reasonable. And by requiring Congressional approval by way of a fast-tracked up-or-down vote, the

RIC process would provide legislators with sufficient political cover to deliver authentic regulatory reform and improvement, safe from the conflict and interest group pressure that consideration of individual regulations would provoke.

John Dearie is founder and president of the Center for American Entrepreneurship in Washington, DC.  Visit www.startupsUSA.org

John Dearie

Founder and President , Center for American Entrepreneurship