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What drives state economies?

A state government can influence the state’s economic performance in two areas.* The first is fiscal policy, taxes and spending. The second is regulatory policy.

Fiscal policy and regulatory policy

We write alot here about Minnesota’s fiscal policy. The short version is that taxes and state government spending are too high.

We write rather less about regulatory policy. We do cover particular examples, such as occupational licensing and alcohol laws, but we are guilty of committing the same sin as many economists: not writing about that which we can’t put a number on.

Tax rates, and to a slightly lesser extent actual burdens, are, by their nature, fairly easy to quantify. But how do we quantify regulatory burden? People regularly attempt to do so at the federal level, but at the state level the picture is much thinner. Here, economists at the Mercatus Center at George Mason University are, at present, the only game in town. They:

…gathered and analyzed the regulations of 46 states plus the District of Columbia. (Unfortunately, the regulatory codes of Arkansas, Hawaii, New Jersey, and Vermont were not able to be analyzed owing to data limitations.) Mercatus researchers then used text analysis and machine learning algorithms to quantify how many words and regulatory restrictions each state’s regulations contain as well as to estimate which sectors and industries of the economy those regulations are likely to affect. As in all RegData datasets, regulatory restrictions are a metric designed to act as a proxy for the number of prohibitions and obligations contained in regulatory text, as indicated by the number of occurrences of the words and phrases “shall,” “must,” “may not,” “required,” and “prohibited” in each state’s regulations.

While appreciating their efforts, I have some concerns.

How do we quantify regulatory burdens?

First, how tightly drafted are the regulations? It might be better to have ten precisely worded regulations containing words like “shall,” “must,” “may not,” “required,” and “prohibited” then one loosely worded one. In the former case, individuals know exactly what the situation is. In the latter, there will be substantial uncertainty. For a business, the former situation will usually be preferable to the latter.

Second, the regulatory burden is only partly a function of the wording of regulations. It is also partly a function of how those regulations are enforced. In 2007, for example, the Supreme Court ruled that the Environmental Protection Agency was required to regulate greenhouse gases but, citing the so-called ‘Chevron deference’. the Bush administration ignored this ruling. Then, when the Obama administration took office, the EPA issued new rules to comply with the decision. The regulatory burden was markedly different not because of new regulations but because of their enhanced enforcement.

Even so, this attempt is to be applauded and will, I hope, be refined over time. The impact of state regulations on economic performance is a big topic and it would be wrong to continue to neglect it.

*National governments can also, usually, use monetary policy.

John Phelan is an economist at the Center of the American Experiment. 

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