Free & Clear: June 2013

Expirations on regulations
By John Hood

Slowly but surely, North Carolina is emerging from the bottom of the economic heap. While our unemployment rate is still one of the nation’s highest, and has remained above 9% since early 2009, broader measures of economic growth show modest improvement. show modest improvement. In the Bloomberg Economic Evaluation of the States Index, which includes things such as personal income and asset prices, North Carolina ranked 46th in the first quarter of 2011. Two years later, it was 37th.

Obviously, it is way too soon to proclaim a Carolina comeback. If you consider not just jobless people looking for work but also those who are not or settling for part-time work, the true unemployment rate for North Carolina during 2012 was 16.3%. Though that’s down from 17.7% in 2009, it remains a staggeringly high number.

State economies prosper or struggle for myriad reasons, most outside the control of policymakers. What governors, legislators and local officials can do is ensure the effective delivery of core government services (i.e., public investment) while avoiding high taxes or regulatory burdens that repel entrepreneurs, executives and high-value professionals (i.e., private investment).

For too long, North Carolina got this mix all wrong. We kept the cost of doing business too high while spending too much tax money on giveaway programs that subsidized consumption rather than improving our physical and human capital. Fortunately, things are beginning to change. Since 2011, state lawmakers have reformed our tort system, regulatory process and unemployment-insurance program. Gov. Pat McCrory’s new administration wants to reduce the cost of North Carolina’s Medicaid program (the most expensive in the South) and shift transportation spending to high-value projects that relieve traffic congestion and create jobs. Both the legislative and executive branches have promised pro-growth reforms of the state’s tax code, though in early May it wasn’t clear what — or if anything — will pass this year.

Those are good first steps. But there remains plenty of room for improvement. For example, I hope they don’t think the regulatory reforms of 2011 and 2012 put an end to overregulation. North Carolina should do more.

The logical next step is in a bill filed in both the Senate and House this year. Called “Periodic Review and Expiration of Rules,” it would phase in a 10-year sunset for all state regulations, rules that, if violated, result in fines or civil penalties. Administrative agencies would be free to seek the readoption of any rule subject to sunset. The bill would not create a regulatory budget that requires the adoption of any costly new rule be offset by the repeal of an equally costly old rule. What it would do is ensure that the state cleans out its closet on a regular basis, so that rules are judged as wise or foolish not on their projected effects at time of adoption but on their actual effects in retrospect.

Prudent regulation is educated guesswork. Even when done properly — to enforce the rights of residents to clean air, clean water and unencumbered enjoyment of their property against the intrusion of polluters — regulation consists of appraising past harms, estimating future harms and projecting the costs of government mandates intended to address those harms. The terms appraising, estimating and projecting ought to be clues that there is potential for miscalculation. New technologies, innovations or market developments can change the math. New scientific discoveries can challenge previous assumptions of cause and effect. In economic terms and practical effect, regulatory policy isn’t all that different from fiscal policy. Governments can take resources from the private sector through taxation and spend them to accomplish some public end. Or governments can compel the private sector to spend the same resources to accomplish some public end. The difference is that government taxes and expenditures show up on an annual budget for all to see. They can be judged in real time and adjusted accordingly. But once enacted, regulations fade into the background.Only affected parties tend to pay attention to them. However vestigial or counterproductive, they linger.

The best-available empirical evidence suggests that if your goal is to reduce the overall weight of government regulation, sunset provisions are crucial. A 2012 study by George Mason University’s Mercatus Center of state regulatory reforms found that of all forms of external review, cost-benefit analysis or assessment, by far “the single most important policy in a state is the presence of a sunset provision.”

Regulation is justified to protect the public interest. But it is a costly power that should be used judiciously. After all, the public interest is also served by a dynamic, growing economy. 

John Hood is chairman and president of the John Locke Foundation. You can reach him at jhood@johnlocke.org.