Small businesses and startups are responsible for a big chunk of U.S. economic growth and job creation. Unfortunately, many of them are stymied by state and federal regulation. The good news is that the Regulatory Flexibility Act, originally enacted in 1980, could provide a lot of help. If the administration of President Donald Trump starts to pay attention to it, it could give that tired old law a lot more energy - and promote important economic goals.
The law focuses on “small entities” — not only small businesses but also small nonprofits and small governmental units such as towns and school districts. It recognizes that small entities often bear no responsibility for health and safety problems that give rise to regulation; that regulation deters potential entrepreneurs from innovating; that treating small entities the same as large ones impairs productivity; that regulation is often a barrier to entry; and that it can be easy for big companies, and tough for small ones, to comply with expensive federal mandates.
To reduce the problem, the Regulatory Flexibility Act directs federal agencies to identify and reassess existing rules that have “a significant economic impact upon a substantial number of small entities.” The legal requirement is simple: Ten years after rules are finalized, agencies have to determine whether they are having such an impact, and must decide whether they should be amended or rescinded.
These reassessments have led some agencies to reduce regulatory burdens - for example, by eliminating excessive or duplicative paperwork. But the overall results have been disappointing, failing to deliver anything like the kinds of savings for which the law’s advocates originally hoped.
That’s where the Trump administration comes in. One of its quieter executive orders, released last month, calls for “Regulatory Reform Task Forces” within each agency to produce recommendations to repeal, replace, or modify existing regulations. Though the executive order requires the task forces to engage with small businesses, it does not say one word about the Regulatory Flexibility Act.
That’s a big gap. The task forces should fill it. By explicitly connecting regulatory reform efforts with the 1980 law, and by eliminating unjustified burdens on small entities and startups, the Trump administration could give them a real and immediate boost.
The law also aims to protect small entities from new regulations. It does so by requiring agencies to produce a “regulatory flexibility analysis,” which explores not only the likely effects of new rules on small entities but also the possibility of giving them partial or total exemptions, delayed compliance dates and reduced paperwork burdens. For small companies, those are magic words.
Under the law, the Office of Advocacy of the Small Business Administration acts as a kind of conduit to federal agencies, warning them about proposed regulations that are giving heartburn to small businesses. As a direct result, federal agencies have sometimes responded by giving real flexibility to small business.
In January 2016, for example, the Department of Energy reduced energy-efficiency requirements for small manufacturers of beverage vending machines, thus saving them over $500,000. But over the years, small entities have often complained that agencies do not treat either the Office of Advocacy or the regulatory flexibility law with a lot of respect. Because agencies are focused on their primary missions (clean air, worker safety, highway safety), pleas for greater flexibility often fall on deaf ears.
With a memorandum issued in 2011, President Barack Obama explicitly drew attention to the requirements of the law, directing agencies to offer flexibility to small entities unless they justified their failure to do so.
That was a start, but the Trump administration could go further. For example, it could make explicit provision for public outreach to small entities whenever it appears that they will be adversely affected by an expensive regulation. It might require agencies to respond, in writing, to serious objections from the Office of Advocacy (and thus give greater power to that occasionally important office). It might state that the Office of Information and Regulatory Affairs will not approve significant rules unless the most adverse effects on small entities have been eliminated, reduced or justified.
To be sure, small entities are not entitled to automatic exemptions from regulations. Whether large or small, companies should not be allowed to impose serious health risks on their workers. But it always makes sense to ask whether the arguments that justify regulation - for example, those in favor of increased energy efficiency - really apply to small companies, or whether the costs of burdening them outweigh the benefits.
The Regulatory Flexibility Act was a terrific idea, but it hasn’t realized its promise. If the Trump administration wants to reduce regulatory burdens on small entities, and to give the economy a boost in the process, it should shake the dust off this potentially powerful tool and give it new force.
Sunstein is a Bloomberg View columnist. He is the author of “The World According to Star Wars” and a co-author of “Nudge: Improving Decisions About Health, Wealth and Happiness.”