Federal Regulations Impact on Business
This is an executive summary of a 109-page research document by the Manufacturers Alliance for Productivity and Innovation (MAPI).
Public awareness about the importance of manufacturing’s role in economic growth is on the rise judging by the increased recognition policymakers have given this key sector over the past few years. At the same time, concern is increasing about the number of federal regulations on the books, the rate at which the number of new regulations is growing and the impact of regulation on business, particularly manufacturing.
To help enable more rational, fact-based public discussion on this issue, the Manufacturers Alliance for Productivity and Innovation (MAPI) commissioned NERA Economic Consulting to examine the qualitative and quantitative impacts of federal regulations on the U.S. manufacturing sector. NERA applied its general equilibrium model of the U.S. economy (the NewERA Model) to evaluate the macroeconomic consequences of regulations based on cost estimates of major federal regulations. The framework captures the direct and indirect effects of increases in the cost of production in the manufacturing sector by modeling interactions among all parts of the economy.
Note: The cost findings in the NERA study were based on review of major (over $100 million) regulations. Because the federal government does not track the costs of non-major regulations or independent agencies (such as those promulgated by the Securities and Exchange Commission), they are not included in the cost estimates. NERA estimates that because 95% of regulations are non-major and therefore not accounted for in this study, the aggregate burden of these unaccounted regulations could well be as large as the cost of the major regulations.
Key findings of this important study include:
• Since 1998, growth in the cost of major regulations has far exceeded manufacturing-sector growth and overall economic growth. In that span, the cumulative inflation-adjusted cost of compliance for major manufacturing-related regulations grew by an annualized rate of 7.6%. Over this same period, annual growth in the physical volume of manufacturing-sector output averaged a mere 0.4%, while U.S. inflation-adjusted GDP growth averaged 2.2% a year.
• U.S. manufacturers today are subject to an estimated 2,183 unique regulations promulgated between 1981 and April 2012. Separating these using the North American Industry Classification System (NAICS), we find: 41 major regulations and 375 non-major regulations are directly related to the NAICS 31 sector, which includes food, beverage, and textile manufacturing; 65 major regulations and 755 non-major regulations are directly related to the NAICS 32 sector, which encompasses businesses involved in wood, paper, printing, petroleum, chemicals and plastics; 185 major regulations and 1,423 non-major regulations are directly related to the NAICS 33 sector, which includes machinery and transportation equipment.
• Major regulations could reduce manufacturing output by up to 6.0% over the next decade. Energy-intensive sectors are affected most, and chemicals and petroleum products’ sectoral output could be on average 10% lower due to major regulations over this time.
• NAICS 31 sectoral output could be reduced by up to 5.0% over the next decade below what it would be without the estimated regulatory burden.
• NAICS 32 sectoral output could be reduced by up to 6.5% over the next decade below what it would be without the estimated regulatory burden.
• NAICS 33 sectoral output could be reduced by up to 5.5% over the next decade below what it would be without the estimated regulatory burden.
• In 2012, major regulations could reduce the total value of shipments from the manufacturing sector by up to $500 billion in constant 2010 dollars. This is a loss in shipment value equal to 85% of the 2010 pre-tax profits of the entire manufacturing sector.
• In 2012, manufacturing exports will be up to 17% lower than they would be without the estimated burden from major regulations.
• By count, the Environmental Protection Agency (EPA) imposes the largest regulatory burden on manufacturers (972 regulations in total, 122 major), followed by the Departments of Transportation (880 regulations in total, 69 major), Labor (214 regulations in total, 27 major) and Energy (106 regulations in total, 17 major).
• By cost, the EPA imposes the largest regulatory burden on the manufacturing sector ($117 billion in constant 2010 dollars), followed by the Departments of Transportation ($25 billion in constant 2010 dollars), Health and Human Services ($10 billion in constant 2010 dollars) and Homeland Security ($7 billion in constant 2010 dollars).
NERA’s analysis notes that while federal regulations analyzed in isolation may have a small economic and financial impact, when they are analyzed collectively – or “layered” on top of another in practice – this interaction creates additional distortions that lead to higher costs, both for manufacturers and the overall economy.
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A Study Provided by: The Manufacturers Alliance for Productivity and Innovation