Regulation

The Congressional Budget Office (CBO) and Office of Management and Budget (OMB) should be directed, by Congress and the Administration, to co-develop a reduced, “light touch” regulatory framework (i.e., a “regulatory on-ramp”) to which new businesses would be subject for the critical first five years after formation.  The framework should be comprised of only the most essential product safety, environmental, and worker protection regulations as co-determined by CBO and OMB.  Co-development of the framework by CBO and OMB is important since regulation is the implementation of Congressional intent by Executive branch agencies.  To minimize regulatory uncertainty, the new business framework should also protect new businesses from new regulations for the critical first five years.

To be sure, the startup regulatory framework would need to be updated, improved, and refined from time to time by CBO and OMB.  But any changes would apply only to new firms the following year and not to young firms already operating within the five-year window of regulatory certainty.   To avoid abuse of the regulatory on-ramp – such as business owners simply renaming or reconstituting existing companies every five years – the Internal Revenue Service (IRS), working with the CBO and OMB, should develop appropriate definitions, characteristics, and limitations regarding the meaning of “new business.”

CBO and OMB should also be directed by Congress and the Administration to co-conduct third-party analysis of the economic costs and benefits of all proposed new regulations with an economic impact deemed greater than $100 million.  The third-party review should require analysis of the costs of the proposed regulation in relation to other federal regulations, as well as in relation to existing state and local regulations.  In particular, the third-party review should focus on the impact of proposed new regulations on new and small businesses.  Proposed regulations deemed to have economic costs, or costs to new and small businesses, that exceed identifiable benefits should require Congressional approval for enactment.

In a November 20, 2024 Op/Ed, Elon Musk and Vivek Ramaswamy outlined the new Department of Government Efficiency, or “DOGE,” the purpose of which, they wrote, is “to cut the federal government down to size.”  DOGE will identify “a plethora of current federal regulations that exceed the authority Congress has granted,” and present that list to President Trump “who can, by executive action, immediately pause the enforcement of those regulations and initiate the process for review and rescission.”  They also promise “mass head-count reductions across the federal bureaucracy.”

Whether such plans pass muster with statutory civil service protections, the Administrative Procedure Act, and the U.S. Constitution remains to be seen.  But as entrepreneurs, Musk and Ramaswamy understand that the approach one takes to executing a bold initiative is critical to the success of that initiative.  And, indeed, there is an ingenious and Constitutionally bullet-proof alternative to the highly subjective and legally dubious approach they propose, one that cleverly and effectively includes outside experts, the American public, and both Congress and the President – a Regulatory Improvement Commission, or RIC, as proposed in 2013 by Michael Mandel and Diana Carew of the Progressive Policy Institute.

Regulations are essential to market economies.  Regulations establish the rules of competition, ensure a level playing field, govern participants’ behavior, and protect 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 regulations.  For these reasons, Article I, section 8, clause 3 of the Constitution confers upon Congress the authority to regulate commerce.

But regulations aren’t free, or without consequence.  Regulations impose costs – costs borne by businesses that could otherwise be invested back into the business.  A wave of new regulations, complex and confusing regulations, or inconsistent or outdated regulations can distract business owners’ focus and time away from their product line and the marketplace.  Regulations can create economic distortions, entrenched interests, and powerful constituencies, and can lead to cronyism and dependency.  If overdone or unwisely implemented, therefore, regulations can cease to be a facilitator of economic activity and, instead, become an obstacle – stifling innovation and investment, and undermining economic growth and job creation.

As PPI’s Mandel explained in a 2012 Congressional testimony, the sheer accumulation of regulations over time can suppress innovation and growth – even if every individual regulation, considered in isolation, is sound and reasonable.

“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’ve dammed up the stream.  Which pebble did the damage?  It’s not any single pebble, it’s the accumulation.”

And, indeed, the accumulation of regulations is relentless.  According to George Washington University’s Regulatory Studies Center, over just the past decade federal regulatory agencies issued nearly 35,000 final rules – 1,961 of which were economically significant, defined as having an annual cost exceeding $200 million.  As a result, the nation’s cumulative Code of Federal Regulations (CFR) has increased 15 percent since 2010 and has nearly tripled since 1975.

Not surprisingly, the bureaucracy required to administer the ever-expanding regulatory code has also ballooned.  The combined budgets of federal regulatory agencies now exceed $80 billion annually, up 48 percent since 2010.  Staffing at the regulatory agencies surpassed 288,000 in 2021, up 6.5 percent since 2010.  If the federal government’s regulatory operations were a business, it would be the 10^th largest corporation in the country, with more employees than Boeing, Apple, and McDonalds combined.

According to the National Association of Manufacturers, the total economic cost of federal regulations (not counting state and local rules) exceeds $3 trillion annually, an amount equivalent to the world’s eighth largest economy, 12 percent of U.S. gross domestic product, and more than all federal individual and corporate income tax receipts combined.

The fundamental problem is that the federal government has a large, multi-faceted, and very effective apparatus for crafting and promulgating new regulations, but no mechanism for regular, systematic, and independent review to address ineffective, duplicative, or outdated regulations.

With this reality in mind, Mandel and Carew have proposed the RIC.  Modeled on the Base Realignment and Closure (BRAC) commission – which provided independent, objective, nonpartisan review and closure recommendations regarding U.S. military installations – the RIC’s purpose would be to serve as a procedural mechanism for the regular evaluation, simplification, consolidation, and elimination of existing regulations.

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 each year – 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 regarding the merits and costs of the regulations under review, and objectively examine the evidence in an open and transparent manner.

Upon completion of its analysis, the RIC would submit a package of recommended reductions and 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.

The RIC would provide a systematic, informed, and thoroughly Constitutional alternative to a highly subjective, indiscriminate, and ideological deregulation effort, 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 would provide legislators with sufficient political cover to deliver authentic regulatory reform, safe from entrenched interest pressure that regulatory review often provokes.