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3Q: Red tape, green tech, black-letter law: Obama’s regulatory reform

President Obama has ordered a government-wide review of business regulations in order to stimulate job growth and create a more internationally competitive economy. Dan Danielsen, a professor of law and expert in corporate regulatory strategies at Northeastern University, explains how the review may affect businesses, consumers, and the economy.

How might an effort to streamline business regulation be helpful to business?

At the most basic level, eliminating duplicative, unnecessarily burdensome or ill-conceived business regulation can improve business performance by removing the costs of compliance with the bad rules — an obvious benefit for business. Things get more complex, however, when we move beyond the regulations that fall within the “excessive red tape” category to the much larger range of substantive rules that affect business. This is because regulations almost always benefit some businesses and hurts others. For example, eliminating a rule requiring power plants to reduce greenhouse gas emissions may reduce costs for the plants, but it may also reduce business opportunities for the firms that supply the green technology to reduce emissions. In other words, streamlining substantive business regulation will involve tough policy choices that may split business interests — with some business winners and some business losers with each rule change.

Will this effort to streamline regulation help or hurt consumers?

To the extent businesses achieve costs savings from eliminating regulatory “red tape,” consumers should see a benefit in the form of lower prices, assuming that the businesses pass some of those savings on to their customers. Assessing the net effects on consumers of changes in substantive business regulation is a much more difficult undertaking. Returning to our power plant example, eliminating a rule that requires the reduction of greenhouse emissions may lower the price of power, helping particularly those consumers least able to afford the higher price. On the other hand, a decision to eliminate the emissions rule may anger some consumers, including some poor consumers, who value a cleaner, safer environment and are willing to pay for it. Once again, we can see that substantive regulatory reform will involve policy choices that may split consumers, making it difficult to claim a net benefit for consumers in general.

Could this regulatory reform plan create jobs and stimulate the economy?

The short answer is “maybe.” To the extent the plan reduces unnecessary regulatory compliance costs, it should free up previously misallocated resources for more productive use. If these resources are significant, firms may invest them in ways that produce jobs and growth. Moving beyond the “red tape” rules, if substantive regulatory reform is to lead to increased jobs and economic growth, the aggregate cost savings for the regulatory “winners” (like the power plants in the emissions rule example) would have to be larger than the aggregate adverse effects of the changes for the regulatory “losers” (like the green technology businesses that used to help the power plants comply with the old emissions rule). Needless to say, anticipating the costs and benefits for the U.S. economy of numerous substantive changes in business regulations is an extremely difficult enterprise. As a consequence, President Obama’s regulatory team will face significant challenges as it tries to ensure that the regulatory reforms actually undertaken do more good than harm for the economy as a whole.