With an anemic economic recovery, unemployment still hovering around 9%, and an election year looming, this summer’s budget battle in Washington is going to be contentious. While the majority of the debate will no doubt focus on the big ticket items such as entitlements and defense, perhaps Congress and the President should also focus responsible cuts in appropriations to federal regulatory agencies as a means of stimulating GPD and creating private sector jobs.

Today, the United States’ federal budget for regulatory efforts sums to $60 billion annually, and has trended upward (in real terms), both in its level and as a percentage of Gross Domestic Product (“GDP”), over the past forty years. 

Increases in the regulatory budget continue to outpace economic growth by a significant amount. Yet, while $60 billion may seem a bit like chump change when compared to the overall federal deficit, the effects of regulation on the economy far exceed that. Even President Obama has recognized that the excess of federal regulations “have stifled innovation and have had a chilling effect on growth and jobs…” If we can rein in regulatory activity by curtailing appropriations to the overall federal regulatory budget, therefore, then it may also possible to make the regulatory process work better for America.

Fifty-years of data on regulation and the economy prove the point. Indeed, there is a strong empirical link between regulatory activity to jobs and economic output. Reducing appropriations for federal regulatory agencies across the board by just five percent (5%) may cost 12,000 federal regulatory jobs, but that loss if offset by a staggering 1.2 million private-sector jobs and $75 billion more in GDP each year. If we were to double the cut to 10%, the domestic economy picks up close to $150 billion in new GDP and 2.3 million new private-sector jobs annually. Either way, given current economic conditions and the current federal government budget crisis, that’s a heck of deal.

Putting in another way, each year, a single federal regulatory employee (i) cuts GDP by $6.2 million; (ii) eliminates 98 private sector jobs; and (iii) destroys the equivalent of the economic output of 134 persons. Given that the total annual appropriations for regulatory agencies in the federal budget is only about $60 billion, the “cost per regulator” clearly shows the pervasive effect regulation has on the overall economy. The Obama administration recently estimated that a single modification to a hazard label would save U.S. firms $585 million per year.

Equally as important, to the extent reducing regulation can aid economy recovery, expanding regulation can hurt. Each million dollar increase in the regulatory budget costs the economy 420 private sector jobs. Thus, the 2000-plus page law designed to give health insurance to all Americans (which, among other things, also burdens small business with the costly requirement of having to file a 1099 for every vendor paid over $600 a year) and the creation of the new half-billion-dollar Consumer Finance Protection Bureau (“CFPB”) work against a robust recovery.

So what does this all mean?

Common sense would dictate that each regulatory agency should conduct a cost/benefit analysis before it promulgates any new regulation. This option, however, requires that such analysis can be done in a non-partisan and competent manner. Good luck with that. Absent binding review by dispassionate outsiders and the purging of partisan politics from the process, cost/benefit analysis is far too squishy to drive real reform.

This fact leads us to the alternative: Given the established relationship between budget appropriations for regulatory agencies and the economy, perhaps it is time to investigate responsible cuts to the federal regulatory budget. Indeed, if regulators are forced to do their jobs with fewer resources, then perhaps they will direct their activity to essential interventions rather than pursue marginal interventions that impose high costs but few benefits. A better regulatory system is good for the economy and private-sector employment; the reduction in government spending is a bonus.

Dr. George S. Ford is the Chief Economist, and Lawrence J. Spiwak is President, of the Phoenix Center for Advanced Legal and Economic Public Policy Studies, a non profit research institute based in Washington, DC. A copy of their study providing the calculations set forth above, Regulatory Expenditures, Economic Growth and Jobs: An Empirical Study, may be downloaded free from the Phoenix Center’s web page at: www.phoenix center.org. The views expressed in this article do not represent the views of the Phoenix Center, its Adjunct Follows, or any if its individual Editorial Advisory Board Members.