How Declining Budgets at U.S. Regulatory Agencies Could Improve Performance

Stack of money

by Marcus Peacock, Distinguished Research Professor

September 19, 2016

Download the working paper (PDF)


Although spending on U.S. regulatory programs has doubled in the last 20 years, that trend is unlikely to last. How these programs manage budget cuts will determine whether downsizing harms or helps regulatory performance. Leaders of regulatory agencies must avoid satisfying tighter budgets with temporary “mindless austerity” measures that anger workers. Instead managers should use scarcity to find, with workers, “frugal innovations” that can significantly and permanently improve program value.


An unprecedented change in U.S. government spending is squeezing the budgets of regulatory agencies. Scarcity can motivate managers to be creative, but lower budgets can also spell disaster for how these offices perform in the future. Recent budget cuts in federal operations have often been met by across-the-board and temporary cost-cutting measures such as hiring freezes and eliminating travel. This type of “mindless austerity” can anger workers and be counterproductive to improving agency performance. An alternative approach is for managers to reject short-term fixes and embrace scarcity as a long-term condition that can encourage innovation. This attitude, called “frugal innovation,” includes engaging employees in rethinking systems to maximize program value.

This paper lays out why regulatory agencies will soon need to downsize, why budget cuts can hurt performance—or greatly enhance it, and why leadership is needed to encourage frugal innovation as a means of improving regulatory activities.

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