Regulation of the US Manufacturing Sector
This week, the National Association of Manufacturers (NAM) issued a new report, Holding US Back: Regulation of the US Manufacturing Sector, which describes the breadth and depth of federal regulations affecting US manufacturers. The report was written by Pareto Policy Solutions, LLC, which also conducted the underlying research..
This is the first report to identify the cumulative burden of regulation on a sector of the economy, and the results are astonishing: federal regulators impose nearly 300,000 restrictions on domestic manufacturers. Every step of the manufacturing process is affected, diverting resources away from new and improved products and services, and negatively impacting US competitiveness.
Because US manufacturers represent 12% of GDP, employ 9% of US workers, and generate $1.81 for every $1 spent, policy makers should take this report seriously. Even small, positive improvements in regulation make a big difference to the national economy.
The NAM study entailed three separate exercises: (1) a review of the voluminous Code of Federal Regulations, (2) a survey of the entire NAM membership, and (3) interviews with 19 compliance officials across six companies representing different sub-sectors. The big takeaways:
- Among the cost pressures facing manufacturers over the next 6-12 months, regulatory cost ranks relatively high--among the top three (along with health care and labor). Driving this trend is regulation at the federal level, particularly in the areas of EH&S, tax, and labor.
- Compliance officials say that regulatory burden has increased within the last five years; 72% of respondents believe it has increased significantly; less than 1% believe it has declined.
- Manufacturers follow the same five-step process to ensure compliance with new regulations: (1) identify new requirements; (2) understand these requirements and determine if and how they impact the company; (3) develop new or modify existing standard operating procedures (SOPs) to ensure compliance; (4) implement a compliance plan through dissemination of SOPs, capital improvements, training employees, creation of management systems, etc.; and (5) periodically self-audit to ensure compliance over the long-term.
- This generic compliance process is not simple, nor is it easy. The NAM survey shows that the most challenging steps are the very first ones, especially for smaller manufacturers.
- Aside from the cost of compliance, which is equivalent in magnitude to corporate taxes, regulation diverts resources from discretionary activities such as capital improvements to make manufactured goods more effectively and efficiently.
What can US policy makers do to reverse these troubling findings? The report makes three specific recommendations:
- Start measuring and reducing cumulative burden. Reform efforts should employ data analytics to identify the full swathe of regulatory requirements imposed on any particular sector of the economy or on any particular business establishment.
- Emphasize compliance assistance, especially for the smallest companies. Particular emphasis should be placed on enhanced public engagement prior to the writing of a proposed rule—so regulators can best understand the businesses they aim to regulate, and businesses can find out which new regulations are coming their way. As one company compliance official noted, “The single biggest problem is that people who write the rules have never spent time in the field implementing them.”
- Take aim at excessive compliance burden (e.g., where regulation is particularly prescriptive and additional regulatory compliance options are possible), ambiguous or unclear regulatory requirements (e.g., where regulatory programs show significant rates of noncompliance), and inordinately delayed regulatory decisions (e.g., pre-market product approvals that take years or decades, infrastructure permit applications that languish).
The full report, Holding US Back, is available on the NAM website at www.nam.org. At 10 am on Thursday, January 19th, it will be discussed at a congressional hearing on regulatory reform in the Senate Homeland Security and Government Affairs Committee.