09/15/2014 09:02 am ET Updated Nov 15, 2014

The Two Trillion Regulatory Burden

The overall cost of complying with federal regulations is somewhere north of $2 trillion per year according to a recent report from the National Association of Manufacturers (NAM), a venerable organization where once I hung my hat.

Of course, the focus of the NAM study, performed by economists Nicole V. and Mark Crain, was manufacturing. All businesses must spend money complying with regulations but manufacturing is a special case. By its very nature -- wresting natural resources from the earth, transporting them over large distances, employing huge amounts of energy to transform them into useful products -- manufacturing poses unique challenges to worker safety and the environment.

Crain and Crain found that manufacturing businesses bear a disproportionate share of the burden -- or $19,564 per employee per year -- or nearly double what the average business pays to comply with federal rules. And small manufacturers pay more than three times as much as the average U.S. firm, or $34,671 per employee per year. This also should come as no surprise to anyone. Complying with complex regulations requires expertise and small companies, whether in manufacturing or another sector, do not have the same access to safety engineers, industrial hygienists, environmental scientists and lawyers that characterizes larger firms.

This latest study builds on earlier work the Crains performed for the U.S. Small Business Administration's Office of Advocacy. In essence it validated the earlier reports with more recent data. "Our data continue to show that small businesses and manufacturers bear a disproportionate share of compliance costs," said Nicole V. Crain.

The study did not attempt to gauge the impact of the Environmental Protection Agency's upcoming ozone regulations that may be, according to NAM President Jay Timmons, "the most expensive regulation in history." Nor did it factor in the burden of state and local rules.

This NAM report is credible and important and the only thing I would add are some basic suggestions for regulatory reform.

There is no question that we need a dynamic regulatory system to ameliorate private sector failure to protect the environment and consumer welfare. But in today's globally competitive environment, it is imperative we use smart regulation. I would suggest:

• Comprehensive review of all existing regulations.
• Use of cost benefit and cost effectiveness analysis to make sure rules are justified.
• Flexible performance standards to permit more innovative, less costly ways to meet regulatory objectives.

Without question, the cost of federal regulations is eventually borne by workers, consumers and investors. We cannot afford a $2 trillion regulatory bill. We have laws on the books to address these issues. They should be enforced.

Jerry Jasinowski, an economist and author, served as President of the National Association of Manufacturers for 14 years and later The Manufacturing Institute. Jerry is available for speaking engagements. September 2014