The hidden danger of a regulatory recession

Easing the burden on employers can be as useful as tax cuts or lower interest rates when an economy is slowing.

The R-word, recession, is haunting the US. In the bipolar world view of the markets, it is believed that one of two things can rescue the economy: further cuts in interest rates or lower taxes. Only this conviction explains the storm of coverage surrounding Congressional passage of President George W. Bush's mild tax rollback last week. But few of the recession-obsessed focused on another law passed in the same week. That was the repeal of a plan to compel businesses to introduce new ergonomics rules aimed at reducing work-related injuries in the private sector.

This is a shame, since such humdrum-sounding legislation, when combined with similar measures, has as much power as tax and interest-rate adjustments to smother or nurture growth. Regulation, after all, is a hidden tax. Increases in regulation over the decades have done much to slow the US engine. The causes of the 1970s doldrums were not only monetary but also regulatory. And when the economy teeters, as now, regulations can tip the balance. It is possible, in other words, to have a "regulatory recession".

So why isn't the "threat of regulation" part of the US economic equation in the same way that "the threat of high interest rates" or "the threat of high taxes" is? Two reasons. The first is that, even today, regulation tends to be discussed in social terms, with economic aspects subordinate. The second reason is that regulation's consequences, while far-reaching, tend to be indirect. New rules place burdens on employers, who pass costs along to workers and consumers, which in turn affects the overall economy. This chain of events is difficult to trace and quantify. We can speak of a 50 basis point interest rate increase but we cannot say a 50 basis point increase in regulation. The result is that a regulation's cost becomes visible too late.

Today even those who know nothing of Britain are arguing that the foot-and-mouth disaster was foreseeable, the result of regulatory changes that forced the shutdown of local abattoirs. It was shipping cattle hundreds of miles for slaughter that increased the chances of the infection spreading. At the time of the rules' implementation, though, such dangers went ignored.

Consider, too, America's ergonomics story. The plan, put forward by the Clinton administration, included a range of standards that would have required small businesses to engage ergonomics experts. The new rules strengthened workers' legal standing and promised compensation for employees suffering back pain and other workplace injuries amounting to 90 per cent of their old pay. All this was presented as a social bonus.

The regulations' supporters downplayed the potential for damage. They ignored the fact that the regulations gave workers an incentive to claim injury. Under America's workers' compensation regime, payment for injury is not taxed, which means that many people would collect more than they did while working. And the new legal rights would have made America's already litigious workplaces even more litigious, backing employers into a corner.

Worst of all, the ergonomics regulations, like most other such rules, were based on a false rationale. The premise was that unregulated employers would push employees to the maximum, with reckless disregard for their health. This may have been true in the Manchester of Friedrich Engels but it is not true in tight labour markets such as America's. When companies cannot spare workers, the profit motive and the worker-safety motive overlap. Indeed, the private sector is often better than the public sector at preventing injury. As Paul O'Neill, the Treasury secretary, discovered when he moved from Alcoa to the public sector, the paper-pushing Treasury had a worse rate of worker injury/absenteeism than did the world's biggest aluminium producer.

Still, while even supporters of the ergonomics regulations conceded there were costs, those costs were tough to calculate. The Occupational Safety and Health Administration estimated the rules would cost businesses $4.5bn a year. Another public office, the Small Business Administration, put the price at $100bn, or the budgetary equivalent of some of the components of the Bush tax cut plan.

The huge disparities in the cost estimates made it harder for lawmakers to split the difference and compromise, as they would have on taxes. They also gave an air of unreality to assertions of damage by opponents of the legislation. In the end, repeal prevailed, but only because lawmakers were willing to spend outsized amounts of political capital on the project.

The victory was an exception. In the US, battles against increased regulation are almost always lost. The scale of this defeat has been measured in a primitive way by Jay Cochran of George Mason University's Mercatus Centre. In the 1960s, Mr Cochran found, the number of new regulations increased by 1,000 pages a month. Today that figure is 5,000. John Blundell of the Institute of Economic Affairs tracked a similar expansion in the UK. The number of statutory instruments passed by parliament has risen from 1,000 a year in the 1970s to about 3,000 today.

But what about a macro measure of costs? From time to time, economists have tried to create one. Thomas Hopkins of the Rochester Institute of Technology estimates that regulations amount to a burden of 9 per cent of US gross domestic product, or $7,000 to each household. In the UK, using a rough measure, Graeme Leach suggests an "intervention index" - the sum of public spending and regulation as a share of the economy.*

More precise meters are worth attempting, in the UK and the US. Developed nations will reduce regulation only if they recognise that they need fear not only The Big R, but also The Big RR.

* The Devil or the Deep Blue Sea (www.iea.org)

© Copyright 2001 Financial Times

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