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BRT Letter to Hill on “Regulation Nation: The Obama Administration’s Regulatory Expansion vs. Jobs and Economic Recovery”

September 19, 2012

Dear Chairman Smith and Ranking Member Conyers,

Business Roundtable, an association of chief executive officers of leading U.S. companies, is writing in regard to the hearing on September 20, 2012, entitled “Regulation Nation: The Obama Administration’s Regulatory Expansion vs. Jobs and Economic Recovery.”  We request that this letter be made part of the hearing record.

Three years after the end of one of the worst recessions in its history the U.S. economy remains mired in a fragile, uneven and uncertain recovery.  Gross domestic product growth has averaged just 2.2 percent a year since the economy hit bottom, about half the normal economic growth rate following a recession.  The unemployment rate remains stuck at more than 8 percent and only about half of the 8.4 million workers who lost their jobs during the recession are back at work.  Simply put, America’s economy is underperforming.

Amid this backdrop of unacceptably low economic growth and unacceptably high unemployment, policymakers have an obligation to identify and address factors that continue to impair U.S. economic growth and job creation.  Although a variety of factors may enhance or inhibit a sustained economic recovery, business and policy leaders are increasingly concerned about the degree to which regulatory burden and uncertainty is impeding growth in the private sector.

These concerns reflect the fact that, for better or for worse, a nation’s regulatory system has a significant impact on the overall business environment.  On the one hand, smart regulations that clarify the “rules of the road” and align with broad societal values over multiple election cycles can provide an environment of stability, inspire business confidence and accelerate investment.  On the other hand, regulations that create uncertainty and reflect shortsighted political interests can impose unproductive cost burdens on businesses and consumers, undermine confidence and delay investment.  The key objective, therefore, is not to increase or decrease regulation but to ensure that regulations adopted are effective and efficient and strike an appropriate balance between costs and benefits.

The importance of achieving smarter regulation is heightened by the reality of today’s hyper-competitive global economy.  The rise of global supply chains and unprecedented capital mobility have greatly expanded the geographic scope of investment opportunities, allowing business to direct capital toward those jurisdictions that offer the most favorable conditions in terms of input costs and operational efficiencies.  In a globalized world, even moderate increases in regulatory burden and uncertainty can be a decisive factor in a company’s decision to invest in the U.S. economy.

Federal regulation of business has a profound impact on the public, on business investment and on U.S. competitiveness.  Regulatory costs operate like hidden taxes: not apparent but nevertheless significant in their impact on businesses, consumers and workers.  While exact estimates vary, the total costs of regulation can be measured in the hundreds of billions of dollars per year. 1  

In response to increased regulatory costs, businesses are often forced to raise prices, reduce production, eliminate jobs, cut research and development or even go out of business entirely.  The resulting negative impact on economic growth and job creation can be significant.  For instance, a recent study released by the Manufacturers Alliance for Productivity and Innovation (MAPI) estimates that the growing regulatory burden will reduce manufacturing output by 2 to 6 percent over the next decade and could potentially reduce manufacturing exports by up to 17 percent this year alone. 2

Although the direct costs of regulation are typically imposed on businesses and governments, they are ultimately passed on to the American consumer through higher prices, diminished wages, reduced quality or availability of products and services and increased taxes.  The same MAPI study estimates that the regulatory burden will ultimately cost each U.S. household between $1,800 and $5,000 in lost purchasing power in 2012. 3

The current regulatory environment not only imposes direct compliance costs but also creates significant uncertainty which undermines investment, growth and job creation.  If companies cannot anticipate the regulations they will face, they are understandably reluctant to undertake costly investment.  As explained in a 2010 statement by Richard W. Fisher, President of the

Federal Reserve Bank of Dallas, uncertainty regarding the “rules of the game” can have significant negative impact on investment spending, payrolls, and the economy at large:

Operating a business under conditions of excessive uncertainty is like playing a game when you don’t know the rules.  Without rules, it is impossible to develop a strategy or playbook.  Business leaders are forced to call a time-out: They remove their players from the field and anxiously wait on the sidelines until they have a better idea how to play the game.  Too much uncertainty can create economic stasis as more and more decisions get delayed, retarding commitments to expansion of payrolls and capital expenditures and slowing the entire economy. 4

The notion that regulatory uncertainty has a negative impact on business investment is not theoretical — recent studies have confirmed the effect on firms’ behavior.  For example, a 2011 study by Randall Billingsley and Carl Ullrich examined the impact of electricity market deregulation on corporate investment behavior in the 1990s and early 2000s.  The authors concluded that uncertainty surrounding plans for industry deregulation caused firms to reduce or delay their capital investment decisions and that this effect was even stronger for green technologies. 5 Similarly, a 2012 study by Kira Fabrizio focused on the pattern of renewable generation assets in the electricity industry following states’ adoption of Renewable Portfolio Standards (RPS).  The author found that firms invested less in new renewable generation assets in states in which the perception of regulatory instability was greater. 6

Nevertheless, there is still significant political debate regarding the extent to which regulations affect the economy.  As both a theoretical and empirical matter, however, the direction of this impact seems clear — regulatory burden and uncertainty harm economic growth and job creation.  Even if one believes that the ultimate impact is likely to be relatively small, prudence dictates that policymakers should proceed cautiously when promulgating new regulations during periods of economic weakness and widespread joblessness.  Equally as important, measures that reduce regulatory burden and uncertainty can have a positive effect on the economy — unlocking new domestic investment, accelerating innovation and enhancing productivity.

Government regulation can and must be improved.  Although some regulations have been beneficial, there is a great need—and much room—for a smarter, more cost-effective approach to regulation.  Accordingly, Business Roundtable supports legislative efforts to advance smarter regulation (for example, the Regulatory Accountability Act (H.R. 3010)).  Ultimately, Business Roundtable believes that through smarter regulation the nation can sustain our commitments to public health, safety and environmental quality without compromising our ability to grow the economy and put Americans back to work. 

Sincerely,

John Engler 

 

 

[1] Greenstone, Michael (2011).  “Improving Regulatory Performance: Lessons from the United Kingdom.”  Testimony before the Senate Budget Committee Task Force on Government Performance.  November 16, 2011.

[2] NERA Consulting (2012).  “Macroeconomic Impacts of Federal Regulation of the Manufacturing Sector.”  Prepared for Manufacturers Alliance for Productivity and Innovation. 

[3] Ibid.

[4] Fisher, Richard W. (2010).  Remarks before the Greater San Antonio Chamber of Commerce.  July 29, 2010.

[5] Billingsley, Randall S. and Carl J. Ullrich (2011).  “Regulatory Uncertainty, Corporate Expectations, and the Postponement of Investment: The Case of Electricity Market Deregulation.”  SSRN No. 1944217.

[6] Fabrizio, Kira R. (2012).  “The Effect of Regulatory Uncertainty on Investment: Evidence from Renewable Energy Generation.” Journal of Law, Economics, and Organization.

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