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Fubon Center Doctoral Fellow Research

Regulatory Intensity

Joseph Kalmenovitz, a Finance PhD candidate at NYU Stern, studies how the enormous burden of federal regulations affects capital investment and employment.

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We know very little on how federal regulations affect the economy. To make inroads into that territory, we must first overcome a major challenge: how should we measure regulation as a whole?

That challenge motivated me to write this paper. I focus on paperwork regulations, which are reputed to impose enormous costs on companies. For example, a Wall Street Journal Editorial from 2019 warned that the “overly broad and dubious” paperwork burden creates a “real threat to more than 5 million small businesses.” The National Small Business Association reported in 2015 that “[w]hile the financial tax liability for small firms is a huge issue, the sheer complexity of the tax code is actually a more significant problem.” Indeed, as of 2018, federal agencies collectively impose 25,800 forms on the public: corporations file tax returns, truck drivers record on-duty hours, patients and doctors fill out privacy forms, and so on.

As it turns out, federal agencies must by law report to the White House how many forms are filed and how much time it takes to comply with each paperwork regulation. I obtained all the original reports prepared by federal agencies since 1980, and created the first daily measure of the intensity of federal regulations. I call it RegIn, and it summarizes the number of active paperwork regulations, responses, and compliance hours. I show for example that more than 5% of total working hours in the United States are devoted to filling out federal paperwork, and that the intensity of paperwork regulations is correlated with the President’s political affiliation.

With the new regulation index, I provide the first evidence for the real economic consequences of federal regulations: when regulatory burden increases, companies cut back on investment and employment. Plenty of anecdotes support this conclusion, and with the novel measure of regulation we are finally able to formally test that. The economic mechanism is simple: since compliance is more costly, companies are forced to repurpose resources toward compliance and forgo current investment opportunities. In the long run, high compliance costs reduce future cash flows and hence companies reject marginally profitable investment projects.

There is a growing recognition of the need to better understand how regulation in all its forms affects economic activity. In this paper I introduce a new measure for the intensity of federal regulations, which is a substantial improvement over the current literature. I also contribute to our understanding of the economic value of regulation, by documenting the significant negative relation between regulatory intensity and investment and employment. It is a topic frequently discussed by scholars, politicians and media commentators, but empirical progress has so far been limited. In future research, I plan to use the new index to study various economic consequences of regulation.

Read the full paper here.