Many governments talk about cutting regulation but few manage to

It can be hard to distinguish good regulations from bad. (Illustration: Kyle Ellingson/Economist)
It can be hard to distinguish good regulations from bad. (Illustration: Kyle Ellingson/Economist)

Summary

Yet radical deregulation is often a big boost to growth

He brandished a chainsaw at campaign rallies, to signify his eagerness to clear-cut the thickets of bureaucracy and regulation impeding the economy’s progress. Perhaps more strikingly, he has actually lived up to this act. In November Javier Milei, the president of Argentina, told The Economist he had already taken 800 steps to reduce red tape and planned 3,200 more such “structural reforms".

He is not alone. Politicians around the world, on both the right and the left, are embracing deregulation. Donald Trump has created a “Department of Government Efficiency" (DOGE) headed by Elon Musk, an entrepreneur, to shrink government and slash red tape. He has also initiated a maelstrom in the civil service. Last year New Zealand set up a “ministry for regulation", to which citizens can report any “red-tape issue". On January 29th the European Commission pledged to cut corporate reporting requirements by 25%, and by 35% for small firms.

Chart: The Economist
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Chart: The Economist

Even countries renowned for their powerful states are joining in. François Bayrou, France’s prime minister, promises “a strong movement of de-bureaucratisation". Vietnam plans to abolish a quarter of government agencies. India’s bureaucracy, a byword for Dickensian obstruction, is slimming down. The push to reform how Western governments operate “is potentially bigger than the Reagan-Thatcher revolution" of the 1980s, argues John Cochrane of Stanford University.

The world is not short of red tape to cut. According to the Regulatory Studies Centre at George Washington University, federal regulations in America now exceed 180,000 pages, up from 20,000 in the early 1960s. Official figures suggest that the federal government imposes 12bn hours of paperwork on Americans each year, or about 35 hours per person, up from 27 hours per person in 2001. The complete text of all German laws has 60% more words than in the mid-1990s. Over the past 20 years tax codes from Canada to Morocco have swollen (see chart 1).

Friend or foe?

Not all regulations are onerous. Shortly before John Quincy Adams became America’s sixth president in 1825, he described the confusion caused by the absence of a unified system of weights and measures, noting that it hindered trade between states. As president, he supported rules to make life easier for both companies and consumers. Today regulations help reduce the number of people sickened by rotten food, impoverished by financial scams or disadvantaged by racism.

It can be hard to distinguish good regulations from bad. Bureaucrats hoping to reduce outbreaks of salmonella may in the process prevent children from setting up lemonade stands without a licence. Weighing the benefits against the costs is sensible, but tricky. Take estimates of the cost to American banks of filing the “currency transaction report" required by law every time someone withdraws or deposits $10,000 or more. The government says this costs about $3.50 a report; banks $10-80.

Despite these caveats, however, there are many indications that the regulatory build-up is harmful. It seems logical that as a society evolves, some new rules should be added and some old ones scrapped. Yet research by Davide Furceri of the IMF and colleagues finds “a remarkable slowdown" in rescissions since the 1990s in rich and poor countries alike. The share of Americans who think the government does “too much" currently exceeds those who want it to “do more" by an unusually wide margin, according to Gallup, a pollster.

Productivity statistics offer another clue. Data from Britain suggest that the administrators of government benefits are 20% less productive than they were in the late 1990s. Excluding defence, Canada’s federal bureaucracy is no more productive than it was a decade ago, even as private-sector productivity has grown by 7%. In Australia productivity in non-profit professions, including public administration, fell over the past decade. According to a recent study from the European Central Bank which focused on the euro area’s five biggest economies, “the public sector made a negative contribution to productivity per person" over the past five years.

One of Mr Trump’s recent orders called for “modernising federal technology and software to maximise governmental efficiency". In the 1970s and 1980s the average federal employee had three times as much software at her disposal as the average private-sector employee. Now she only has 1.7 times as much. No surprise, then, that although federal productivity grew by 50% from 1987 to 2010, it has since flatlined.

Many rules are clearly pointless. Hundreds of thousands of firms in California must put up signs stating that their premises “contain chemicals known to the state of California to cause cancer". Other firms must post signs in bathrooms telling staff to wash their hands. Hotels must have signs next to pools urging people with “active diarrhoea" not to bathe. In France a house cannot be sold unless a notary reads the contract aloud in the presence of the buyer and seller. Each of these bureaucratic follies is typically only a minor expense and inconvenience. Cumulatively, however, they stifle economic activity, like Gulliver tied down by lots of pieces of string.

A recent paper by Leah Brooks of George Washington University and Zachary Liscow of Yale Law School gives a sense of how regulatory burdens can add up. From the late 1950s to the mid-1980s, they find, the cost in America of building a mile of highway rose from $8.5m in 2016 prices to more than $25m. (It has risen further since.) Cost overruns and huge delays are now par for the course when it comes to infrastructure. Some big projects, including a high-speed rail system in California, will probably never be built, given how tied up they are in environmental reviews. Britain has a vast queue of planned wind farms awaiting the promise of a future grid connection before beginning construction.

Chart: The Economist
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Chart: The Economist

Across the rich world house-building has become much less responsive to rising house prices in recent years, making homes harder to afford (see chart 2). Architects and builders face long delays and high costs getting projects approved. The labour market is also hamstrung. Across the rich world the share of employment in jobs with mandatory qualifications is rising. Bakers, hairdressers and painters often have to obtain licences before being allowed to work. That reduces competition and raises prices.

Regulations distract businesses from more profitable pursuits. In France senior managers spend 20% of their time dealing with them, according to the World Bank. Businesses in Germany typically need 122 days to obtain an operating licence. Getting an import licence takes about a month in the Netherlands. In 2023 more than 40% of Greek firms identified tax administration—as opposed to the rates themselves—as a “major or very severe constraint" on their operations. In America thousands of firms a year are eligible for a tax refund after making a loss. But the process is so complex that only 37% of eligible firms actually claim the money, according to a paper published in 2021 by Eric Zwick of the University of Chicago.

Economists have tried to calculate the macroeconomic costs of all these bits of string. Mr Bayrou has cited a paper by Bruno Pellegrino of Columbia University and Geoffery Zheng of New York University, which finds that red tape costs the French economy close to 4% of GDP every year. (“Insupportable!" declares the prime minister.) The OECD estimates that compliance costs eat up around 4% of business output in member-countries on average. Chang-Tai Hsieh of the University of Chicago and Enrico Moretti of the University of California, Berkeley, attribute similarly staggering costs to land-use regulations.

These papers focus on particular types of red tape, though, rather than bureaucratic inflexibility in the round, and thus can provide only a partial view of the problem. It is tempting to look at the economic performance of countries that have slashed red tape in recent years. Under Mr Milei Argentina has climbed out of its perma-recession. Greece, previously an economic laggard, topped our end-of-year rankings of the best-performing economies in both 2022 and 2023.

Research by Goldman Sachs, a bank, has identified a group of companies, including banks, telecoms firms and energy firms, that are most likely to benefit from a deregulatory drive in America. Since the middle of last year, as the chances of a bonfire of red tape have grown, their share prices have risen by 23% on average, compared with 14% for the wider market.

Capital flows are another indicator. Drawing on statistics from PitchBook, a data provider, we estimate that in the past decade two-thirds of the world’s venture capital has flowed to industries with relatively little red tape, such as consumer services and tech, whereas only a third has gone to more heavily regulated ones such as health care and manufacturing.

Why has the rich world allowed itself to be tied up? One explanation is a growing appetite for safety. Richer people, after all, have more to lose and older people are more risk-averse. Consumers, via their political representatives, thus demand regulation. Forcing businesses to remind employees to wash their hands feels reassuring, even if it achieves little in practice.

In fact, efforts by governments to give citizens more say on policy may have helped red tape to proliferate. A Supreme Court case in 1971, Citizens to Preserve Overton Park v Volpe, established the idea that pressure groups could seek judicial reviews of government agencies’ decisions. This prompted regulators to be more exacting and firms to go to greater lengths to be sure they are following the rules.

Regulation also tends to work like a ratchet, always getting tighter. In part, this reflects risk-aversion on the part of regulators: why scrap a rule and suffer recriminations if that goes wrong when you can simply leave it in place? Bureaucracies also have their own interests. A person whose only job is to enforce a rule is unlikely to wish to abolish that rule.

As a result, many promises to cut red tape come to little. In the 1980s Ronald Reagan created his own DOGE, the Grace Commission, which did not achieve much. In 2010 Britain set up an Office of Tax Simplification, which stood by helplessly as the tax code expanded. In 2023 the government decided to abolish not all its byzantine tax rules, but the OTS.

DOGErs talk about firing half of America’s bureaucrats. But that does not in itself reduce red tape. If the rules stay the same then the remaining half will have twice as much to do, making the bureaucracy even slower than before.

Yet governments sometimes manage to pare regulation. The Grace Commission was a dud, but Reagan did deregulate certain industries. A paper published by the OECD in 2006 found that between 1975 and 1985 roughly a fifth of America’s rules about energy, transport and communications were scrapped. That inspired other rich countries. By the 2000s across the OECD as a whole product markets for airlines, telecoms and energy firms were about half as regulated as in the 1970s.

Some countries, inspired by America, have gone even further in their anti-red-tape drive. In “The Other Path", a book published in 1986, Hernando de Soto documented the months of waiting, and constant demands for bribes, faced by Peruvians trying to start a business. The process now takes 26 days on average, the World Bank estimates. Post-Soviet countries have been particularly enthusiastic reformers. In the mid-1990s Estonia introduced a flat tax for both corporate and labour income, replacing a far more complex system. It has followed up by moving almost all government services online, which officials estimate produces savings worth 2% of GDP. Following the Rose Revolution of 2003 Georgia cut the number of taxes from 21 to six, while reducing the number of types of businesses which required a licence to operate from 909 to 159.

What needs to happen for a red-tape revolution to succeed? A deep recession or a debt crisis, as in Greece, may focus minds. In post-Soviet states, not only were their economies swooning, but people were also eager for a clean break from the past. Disillusionment with the status quo, visible in surging support for populist politicians, may mean that today’s voters have more appetite for change than normal.

Certainly there are more concrete plans for what needs to be done. In Britain activists have launched the Looking for Growth group, providing politicians with ideas on how to get the economy moving. One idea is that instead of trudging from agency to agency for years, developers should apply only to a single entity. A recent report written by Mario Draghi, a former Italian prime minister, has sensible recommendations for streamlining the EU’s labour and product markets. New Zealand’s new ministry for regulation has turned its attention to the approval process for agricultural goods and the rules governing barbershops, among other things. Even in San Francisco, red-tape central, things are changing. Small-business owners recently rejoiced at a tweak to a rule specifying that security doors on shop windows had to be 75% transparent. Now just 20% will do.

Cutting red tape will not necessarily send growth soaring. Even if Mr Musk is successful, Mr Trump’s other policies, such as jacking up tariffs and deporting millions of workers, could easily erase the benefit. Effective deregulatory drives anger people who lose out, including those exposed to more competition and NIMBYs who dislike growth. But a boost to construction, business formation and innovation is worth ruffling a few feathers for.

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