Should we regulate less during recessions? It’s not so simple.

at 10:56 AM ET, 10/28/2011

There’s no evidence that “regulatory uncertainty” is the main problem with the U.S. economy right now. But even so, wouldn’t it be a good idea to go extra-light on government regulations during a downturn? It’s a tricky question.

(Keith Srakocic/AP)
In the Economist this week, Greg Ip makes the case for giving new federal rules more scrutiny during downturns. Generally speaking, he notes, the federal government doesn’t tally up lost jobs when assessing the cost of a new regulation. The number-crunchers assume that laid-off workers will find a new job at roughly equal pay. But that’s certainly not always true during economic slumps. And the human toll of protracted unemployment can be devastating: Steven Davis of the University of Chicago and Till von Wachter of Columbia University have estimated that male workers laid off during recessions see a 19 percent drop in future earnings.

The flip side, though, is that some regulations can arguably boost economic activity. In the 1990s, Harvard Business School’s Michael Porter argued that pollution was a waste of resources and that reining in pollution could actually make the economy more productive — and, in some cases, trigger innovation that offsets the costs of the rules. This recent literature review from Resources for the Future summarizes the evidence on this score. As it happens, the Office of Information and Regulatory Affairs rarely counts induced innovation in its cost-benefit analyses, either. So what’s the best way to sort this out?

Michael Mandel has explored this topic at greater length, making a case for “countercyclical regulation.” The innovation benefits of regulation may be real, he notes, but they usually take longer to materialize than the layoffs. And, since the human cost of job losses are so severe during recessions, he argues that it makes sense to regulate less when the economy’s limping and more during booms. Granted, there are some rules that might pass muster even during a downturn — for instance, as RFF’s Richard Morgenstern showed in a 1999 study, some EPA rules have forced paper mills, plastic manufacturers, and refiners to spend more on compliance. During a recession, as Paul Krugman has argued, induced spending can create jobs. But that benefit, too, rarely gets counted.

Then, of course, there’s the possibility of loosening up on barriers to new infrastructure projects during downturns. Larry Summers, for one, tentatively supported the idea in his chat with Ezra back in August: “This could be very important. Harvard built a whole football stadium in the 1890s with less than two years from the idea’s conception to the stadium opening. That kind of thing does not happen today. My attitude is we probably slow things down unnecessarily with our various approval processes. So I’m sympathetic to speeding the regulatory process during recessions.”

One obstacle, though, is that there doesn’t seem to be a practical way of making countercyclical regulation a reality. At the moment, Democrats are largely supportive of labor and environmental regulations, though willing to abandon rules when the economic costs appear too high (as when the White House nixed the ozone standard), whereas Republicans seem to be implacably opposed to all regulations at all times. It’s hard to see how anyone could enforce an agreement between the two parties to go easy during downturns and “catch up” with delayed regulations during the good times.

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