Council of Economic Advisers Keeps Small Business Regulatory Reform in Sight

By at 11 November, 2017, 2:38 pm

A Crucial Part of a Pro-Growth Agenda to Encourage Startup Activity and Small Business Growth

by Raymond J. Keating-

It’s important to realize that excessive regulation is not just a business issue. In reality, burdensome regulations negatively affect each man, woman and child in the United States.

How? By raising the costs and diminishing incentives for starting up, building, operating and investing in businesses, over-regulation undermines economic, income and job growth.

It also must be understood that no matter what was claimed by elected officials choosing to impose more regulations on “big business,” the ills of regulation almost always fall heaviest on the backs of small businesses. Indeed, small businesses are on the frontlines, trying to survive the onslaught of the regulatory state.

It’s encouraging to see that the Council of Economic Advisers, now under the leadership by economist Kevin Hassett, has produced an important summary report recognizing these and other ills of over-regulation, and the real, substantial benefits that would materialize across the economy from a substantive, sound, well-reasoned deregulation effort.

The report – titled “The Growth Potential of Deregulation – provides a review of the economic literature on regulation, noted the scope and costs of U.S. regulation, and highlighted the potential benefits of deregulation.

Harmful Costs of Regulation

No matter which measure is used, the number and reach of U.S. federal regulations are significant, and have been mounting unrelentingly.

As for regulatory costs, it was noted by the CEA:

“In 2012, the total cost of Federal regulations to the U.S. economy was estimated at $2.03 trillion (in constant 2014 dollars) by Crain and Crain (2014) as part of a study for the National Association of Manufacturers (NAM). Equaling 12 percent of U.S. GDP, this metric considers both the direct and indirect costs of complying with regulations, such as performing mandated operations and updates, hiring compliance officers, and the alternative use of funds – that is, other ways money could have been spent on firm growth.”

And according to the same study, small businesses bear a heavier burden when it comes to regulation. As pointed out by the CEA:

“Rather than encouraging business development and investment, excessive regulation disproportionately discourages small business growth through the higher burden of regulation.”

Of course, part of the burden of regulation has to do with increased administrative costs. Looking at an assortment of studies zeroing in on such costs, it’s noted:

“Regulations place an administrative burden on businesses by increasing resources spent on compliance, thus diverting time from more productive activities. Put simply, the number of hours devoted to paperwork in order to comply with regulation acts as tax on production.”

The CEA report made clear that both regulatory costs and uncertainties have negative effects on investment, including both restraining and distorting private-sector investment. It was noted:

“If burdensome enough, ‘red tape’ can alter a firm’s investment decisions by discouraging them from increasing production capacity… Regulation can also limit the return a firm can realize from a particular input, altering capital-labor decisions.”

For good measure, this review of assorted economic studies pointed to regulatory burdens falling heavily on low-income Americans who spend more of their earnings on goods produced by heavily regulated industries.

Benefits of Regulatory Reform

It follows that the positives in terms of deregulation can be quite substantial. The CEA reported:

“The evidence generated by economists from many such measures of the extent of a regulatory environment uses variation across countries and suggests that lower regulation increases economic growth.”

Consider, for example, that one study estimated “that if we held fixed the number of industry-relevant regulations at levels observed in 1980, the U.S. economy would have been about 25 percent larger (roughly $4 trillion) in 2012. According to the study, the cumulative effects of regulation have slowed economic growth in the United States by an average of 0.8 percent per year since 1980. This amounts to a loss of approximately $13,000 per capita.”

And on the small business front, the CEA highlighted:

“Additional evidence on how benefits of deregulation accrue to the owners of small businesses in particular comes from analysis at the individual country-level. Analyzing a period of deregulation in Portugal, Branstetter et al. (2014) document evidence of gains in employment and firm formation. They estimate that gains accrue disproportionately to small businesses and to businesses in brick-and-mortar ‘low technology sectors’ like the agriculture, construction, and retail sectors. These results are consistent with a standard model of regulation as a fixed cost – the type of costs that larger firms can shoulder, but that drive small firms out of business or prevent them from entering in the first place. Small businesses suffer more from the costs of regulation, the results in Branstetter et al. (2014) show.”

If people are serious about getting the U.S. economy back on a path of robust, sustained growth, about expanding job opportunities, and about higher wages for workers, then they must be serious about rolling back onerous regulations.

President Trump’s actions to date, in terms of repealing 15 congressional review act (CRA) resolutions along with his various executive orders are bearing fruit, with agencies across government taking meaningful action. The sea change in regulation is a big reason why small business optimism remains high.

Congress must also continue to work to fully reform the regulatory system, by making important changes on how regulations are made and making federal agencies more accountable, transparent and responsive to small business input and concerns. As noted by SBE Council president & CEO Karen Kerrigan, legislation advancing change must be meaningful, such as embodied in the Small Business Regulatory Flexibility Improvements Act (S. 584), which has made its way of committee in Senate and stands ready for floor action. A similar bill passed the House (as part of a larger piece of legislation supported by SBE Council) and President Trump’s signing this legislation into law would make a profound difference in improving the policy ecosystem for startups, small business growth and U.S. competitiveness.

Related Content: Review SBE Council’s report “Regulation: Costs, Incentives, and the Need for Reform” for more on the costs and ills of regulation, and the need for regulatory relief and reform.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

Keating’s latest book published by SBE Council is titled Unleashing Small Business Through IP:  The Role of Intellectual Property in Driving Entrepreneurship, Innovation and Investment and it is available free on SBE Council’s website here.

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