Regulatory reform and the U.S. manufacturing sector: the focus is on improving efficiency

Business Economics, Jan, 2006 by Thomas A. Hemphill

The Bush administration, through the Office of Management and Budget, Office of Information and Regulatory Affairs (OMB/OIRA), has shown renewed interest in regulatory reform as an important public issue, especially as it pertains to the nation's manufacturing sector. On March 9, 2005, OMB/OIRA announced that Federal agencies will be taking practical steps of an administrative nature to reduce the cost burden on manufacturing firms operating in the United States by acting on 76 suggested reforms of federal regulations suggested by the public. Recommended actions range from gathering and reporting additional information to issuing modernized regulations, with reforms to be implemented through rulemaking procedures that include an opportunity for public participation.

**********

Concerns about the declining economic health of the U.S. manufacturing sector in the global economy, especially with regard to this sector's ability to generate net employment, has been public fodder for business economists and industry analysts. Most recently, this sentiment was succinctly expressed by the President's Council of Economic Advisers:

       The manufacturing sector was affected by the latest economic


        
    
    
    
    
   slowdown earlier, longer, and harder than other sectors of the

        
    
    
    
    
  economy and only recently have manufacturing losses begun to abate.

        
    			
       
		
        			
		
	
    
    
    
    
   Over the past several decades, the manufacturing sector has    experienced substantial output growth, even while manufacturing    employment has declined as a share of total employment (Council of    Economics Advisers, 2004). 

According to the U.S. Department of Commerce, output fell six percent in U.S. manufacturing from 2000 to May 2003 (when the manufacturing recession ended), even though the general recession was relatively shallow overall. Furthermore, employment fell by 2.6 million jobs in manufacturing, accounting for all of the net job losses from the fourth quarter of 2000 through the third quarter of 2003 (U.S. Department of Commerce, 2004). The indirect effects of manufacturing sector changes can be more widespread in the economy, including impacts on consumers or suppliers in the form of higher or lower prices and impacts to employment trends to the extent that manufacturing employment experiences higher productivity gains than other sectors (Council of Economic Advisers, 2004). In spite of the Council of Economic Advisers' less-than-optimistic appraisal of its economic performance, the manufacturing sector still accounts for 14 percent of U.S. GDP (Yuskavage and Strassner, 2003) and 11 percent of total U.S. employment (U.S. Department of Commerce, 2004).

The Bush administration has not been oblivious to the manufacturing sector's economic woes. In a March 2003 speech to the National Association of Manufacturers (NAM) in Chicago, Illinois, then Secretary of Commerce Donald Evans announced his agency's Manufacturing Agenda, which established clear policy priorities--including pro-growth tax policies, free and fair trade, and education and health care reform--to enhance economic growth and create higher paying employment in the manufacturing sector (U.S. Department of Commerce, 2003). To implement the Manufacturing Agenda, a complementary manufacturing initiative was instituted to answer the ultimate question: What federal government actions help or hinder American manufacturers as they compete in global markets? To that end, Evans directed his staff to seek policy input from American manufacturers to identify the root causes of the manufacturing sector's current challenges and the specific obstacles that government policy might pose to U.S. manufacturing competitiveness (U.S. Department of Commerce, 2004). What became apparent to Commerce staff (as this initiative was implemented) is American manufacturers' concerns over the ever-growing burden of regulatory costs that the manufacturing sector must absorb in global competition--an item not included on the Bush administration's original Manufacturing Agenda.

The Regulatory Burden on the U.S. Manufacturing Sector

In order to establish a common point of analytic departure, this section will provide a brief review of regulation in the United States, particularly as it affects manufacturing. Ostensibly, regulation is undertaken to enhance society's general welfare. The means to this end is to limit the choices available to individuals, corporations, and sub-governments (Mitnik, 1980). This limitation of choice includes (in the case of anti-monopoly regulation) maintaining choices available to some segments of the economy by restricting choices available to others and rectifying harms caused by externalities (such as industrial pollution).

The American business community is confronted by two primary forms of regulation. The first form, economic regulation, controls prices or wages, allocates public resources, establishes service territories, sets the number of participants, and rations resources. This form of business regulation has its antecedents in 19th century America and was originally applied to specific industries exhibiting monopoly power (e.g., communications, electric utilities, and transportation). The second form, social regulation, is concerned with environmental protection, employee and consumer safety, employment discrimination, and public health. This form of regulation is processoriented, has cross-industry applications, and has its genesis in legislation enacted by the U.S. Congress in the 1970s. A third type of regulation involves paperwork to document compliance for payment of taxes and fees. Although this type of regulation has much less impact on direct business operations, it involves significant expense. In 1997, the Office of Management and Budget (OMB) calculated that the cost of business compliance with federal regulation made up 3.7 percent of U.S. GDP in 1997 (U.S. Department of Commerce, 2004).