White House Estimates Cost of Federal Regulation on Economic Growth
Commentary by Steven Lofchie
In its Annual Report to Congress, the Council of Economic Advisers ("CEA") estimated the annual cost of federal regulation at $2.1 trillion.
In Chapter 2, "Promoting Prosperity through Regulatory Reform," the CEA asserted that federal regulatory expansion has imposed substantial costs on U.S. businesses and households. Binding restrictions in the U.S. Code of Federal Regulations grew from approximately 400,000 in 1970 to 1.1 million in 2024. The CEA estimated the economy would be approximately 25 percent larger - roughly $5.4 trillion - had regulatory growth been held flat since 1980. The CEA also underscored that compliance costs disproportionately burden small businesses, which lack the legal and administrative infrastructure of large incumbents, effectively turning the regulatory code into a competitive moat for established firms.
The CEA drew sharp distinctions between the Biden and Trump administrations on regulatory philosophy. The CEA estimated that Biden-era rules carried lifetime present value costs of between $1.8 trillion (by agencies' own accounting) and as much as $5.8 trillion when adjusted for what the CEA argued was systematic underreporting of true economic costs. The CEA argued that regulation also functions as a form of "hidden taxation" — imposing costs on businesses and consumers without appearing on the federal budget — and that the current administration intends to treat regulatory costs with the same fiscal discipline applied to direct spending. The CEA outlined the administration's rulemaking framework, including:
- Regulatory budgets. Executive Order 14192 requires agencies to eliminate at least 10 existing regulations for every new one issued, with a cost cap requiring that net new regulatory costs for fiscal year 2025 be less than zero.
- Sunsetting. Executive Order 14270 mandates automatic expiration dates for energy-related regulations, requiring agencies to affirmatively re-justify rules rather than allowing them to accumulate indefinitely.
- Cost-benefit discipline. Rules must demonstrate that expected social benefits outweigh costs and compare favorably against alternative uses of resources.
The CEA also highlighted the administration's 20 executive orders and presidential actions, covering: a freeze of all pending regulatory proposals (averting an estimated $180 billion in long-run costs); removal of obstacles to domestic energy production; targeted relief on housing, food, and healthcare costs; promotion of U.S. leadership in artificial intelligence ("AI") and digital assets; and rescission of regulations the administration characterized as unconstitutional restraints on competition.
Commentary
The purpose of cost-benefit analysis is to force the government to justify its regulations, to demonstrate that they provide benefit sufficient to justify their costs. In practice, it may not be easy to quantify the benefits of regulation; and while it should be somewhat easier to quantify costs, previous regulators often seemed somewhat lax as to their estimates, consistently low-balling costs.
Under the Biden Administration, at least in the area of financial regulation, cost-benefit analysis played almost no role in inhibiting new regulations. This was not just an issue with individual regulators; it was policy. Shortly after his election, President Biden issued a Memorandum instructing the OMB to "modernize and improve" the regulatory review process to take into account regulatory benefits that are "difficult or impossible to quantify." (See President Biden Instructs OMB Director to Rethink Cost-Benefit Analysis.) Although this Memorandum was justified as a continuation of long-existing policy, it was in reality, the opposite; it effectively removed any need to conduct a serious cost-benefit analysis. So it is not surprising that the Memorandum failed to attract much attention at the time, given that it did not itself do anything material. In retrospect, it foreshadowed a philosophy: rather than governmental proposed rules requiring real justification, any effort to block such rules could be dismissed on the basis of benefits that were "impossible to quantify."
While the policy of the CEA is all to the good, the requirement that 10 rules be eliminated for every one adopted is a wholly artificial standard. The notion that the net cost of rules should not be increased may be somewhat more realistic. What is most importantly needed, which is evident among current federal financial regulators, is a change in culture: new rules (and existing rules) must be actually justified; there must be a serious attempt at quantifying the costs of regulations, which are more readily assessed than benefits.
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President Joe Biden instructed the Director of the Office of Management and Budget to improve and modernize the regulatory review process and to produce recommendations for "ensur[ing] swift and effective Federal action."