January 13, 2013
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August 4, 2010

The Winds of Over-Regulation

By Rosslyn Smith
The EPA is on the verge of declaring that naturally occurring dust is a pollutant. This means they will penalize farmers whose livestock and horticultural operations create what the Washington bureaucrats consider to be too much of it. Needless to say, the proposal has become a huge issue in farm states. Twenty-one senators recently signed a letter to the EPA. The senators state:
We respect efforts for a clean and healthy environment, but not at the expense of common sense. These identified levels will be extremely burdensome for farmers and livestock producers to attain. Whether it's livestock kicking up dust, soybeans being combined on a dry day in the fall, or driving a car down the gravel road, dust is a naturally occurring event.

Fertile soil is the most precious asset a farmer possesses. Modern agricultural practices are already designed to keep soil erosion to a minimum. One wonders what the EPA thinks farmers are supposed to do in a drought -- allow an already meager crop to go unharvested lest they raise any more dust? Is a rancher to allow his cattle to starve in place rather than move them to better grazing? That a bunch of desk-bound theorists would presume to second-guess those whose very livelihood depends on soil conservation is beyond mind-boggling.

KWTV in Oklahoma City asked some local farmers about the proposed EPA rules.
One farmer said the possible regulations are ridiculous.

"It's plain common sense, we don't want to do anything detrimental," said farmer Curtis Roberts. "If the dust is detrimental to us, it's going to be to everybody. We're not going to do anything to hurt ourselves or our farm."

Roberts, a fourth generation farmer and rancher in Arcadia, said regulating dust in rural areas will hurt farmers' harvest, cultivation and livelihood.

"Anytime you work ground, you're going to have dust. I don't know how they'll regulate it," Roberts said. "The regulations are going to put us down and keep us from doing things we need to be doing because of the EPA."
These regulations are particularly ironic because those beloved organic crops of the politically correct set often require extensive dust-producing cultivation in lieu of chemical herbicides if the weeds are to be kept from overwhelming the food crop. That's one reason my own vegetable garden, which is on a ten-degree slope, is not organic. If it were, much of my topsoil would be on its way down the French Broad River into Tennessee after every thunderstorm. 

The comments to the above KWTV news story greatly expand on the sentiment in the last line of the senators' letter: "Common sense requires the EPA to acknowledge that the wind blows, and so does dust."

My question after reading this was can the EPA stop tornadoes? I ask because a whirlwind of voter outrage may be heading their way come November. Overreaching by the EPA and other federal regulators is one of those issues that tend to fall under the radar screen of the national political press, even as it can come to dominate discussions among insiders in a given industry. Name the industry, and it is a good bet the trade magazine and association websites report on each proposed rule change in the Federal Register, while the industry specific blogs have lively discussions on all the implications.

For example, how many of the political press, who write about members of Congress frequenting steakhouses and the Obamas patronizing a barbeque joint while on vacation, know that the U.S. Department of Agriculture has pending broad-ranging rules about meat subject to marketing agreements (e.g., Certified Angus or Sterling SilverTM)? The USDA is concerned that such arrangements may be "unfair." Beef cattle associations, the swine-producing industry, and meat-packers aren't talking about much else lately. A common concern is whether the USDA attention to the fairness of the prices asked of branded meat products means that class-action lawyers will have an open invitation to sue on behalf of anonymous consumers. This would mean the end of branded meat, because the lawyers for the meat-packers would deem the practice too risky to continue. That would be unfortunate, as consumers seem quite willing to pay a premium for the more uniform product in a branded beef marketing arrangement, whether it be a lean, certified organic, grass-fed cut for braising in the crock pot or a heavily marbled ribeye to be seared on the backyard grill. Again, the irony is that the longer time needed to bring an animal to market weight on grass and the smaller demand means that organic grass-fed beef could disappear from the market if the premium price for the product is deemed unfair.  

One rancher commenting on these proposed regulations had this to say.

Twenty years ago, my dad made a trip to Russia as a paid consultant by the Eaton group. The purpose of his trip was to help devise a plan to supply quality beef to a tourist hotel being built in St. Petersburg. What he found there was a system that was extremely fair, but an absolute economic, production and quality disaster!

Producers were all paid the exact same. The exact same! There was no difference paid for pounds, quality, yield, type, breed etc. This was done in the name of fairness and equality. But nobody won. The price paid for every head was the minimum. Quality was nonexistent. Availability was minimal. A consumer after standing hours in line would get whatever was passed through a window and had no choice of cut or price. As a result, Russia couldn't supply a single hotel in St. Petersburg with any product that would satisfy a foreign tourist.

Dad's recommendation was that they import Certified Angus Beef from the United States because there was nothing to work with in Russia and would take billions of dollars and years to build any system that would deliver quality. That is what they were reluctantly resigned to do. Today Russia is still trying to recover from this central planning economic disaster and are now importing into Russia some of the very best of American genetics that they can find. So that they may jump start the building of an economically viable system. This was also my father's recommendation 20 years ago.

Currently, I have a Russian order for 1,000 bred registered Angus heifers that I am trying to fill. What I am afraid of with these GIPSA rules is that 20 years from now we may need to go back to Russia and buy back our own genetics to recover from our own central planning mistakes.

All of this has political implications. There are a large number of Democrat congressmen and senators from areas in which the EPA, the USDA, and other government agencies in the Obama administration are busy making a lot of enemies. The entire state of West Virginia comes to mind, with its traditional ties to coal mining. There comes a time when even constituents who think the incumbent is a really nice guy start to wonder if he has a clue about what his political affiliation is doing to their pocketbook. Democrat Congressman Rick Boucher of rural SW Virginia is under a triple curse these days, as he has both coal and beef interests in his district, which is in the middle of an abnormally dry spell, so farmers working their fields are raising more dust than normal.  

The cumulative effect of dissatisfaction with rising government regulation has been a potent political force before this election. Most political pundits attribute George H.W. Bush's defeat in 1992 to a poorly timed recession and his broken pledge on taxes, but there was another factor. After being partially reined in under Reagan, federal regulation was again on a noticeable rise by the time of the 1992 election. In 1990, both the Americans with Disabilities Act (ADA)and the Clean Air Act were passed, and with them came a burst of new federal regulation. Many business owners were particularly unhappy with the ADA, as it increased costs for both their own businesses and for local governments as countless facilities were refitted to accommodate the disabled. 

Perhaps of even greater importance was the amount of uncertainty it created. The ADA greatly increased the possibility of a business being sued by activists, who sometimes took the good intentions behind the act to the extreme. This led to some totally ridiculous situations. I recall a local cable channel during this period that hired a news reader whose speech impediment made her all but incomprehensible to viewers. The cumulative effect of these burdens further enhanced the ability of Ross Perot to inject himself into the race as a fiscal conservative who understood the concerns of the small business that line Main Street America.  

Word also moves fast in industry circles about overzealous enforcement of existing rules. One consultant who helps smaller businesses come into compliance with government regulators recently made these observations.   

I have seen a marked and large spike in administrative enforcement action from agencies on all levels of government, even after a company has rapidly and completely achieved compliance.  Not only are there more such cases -- many more -- but the fines sought have risen dramatically.  Prior to the last six months, when such enforcement action was taken -- if the company had been cooperative and achieved compliance - fines sought would be of the nuisance variety.  That is to say a few thousand dollars.  But since the beginning of 2010 I have seen the fines sought rise, in more than one case, to levels of 20-25% of the gross annual sales of the company in question.

The methods by which such exorbitant fines are extracted are certainly unpleasant, to say the least.  What are supposed to be negotiations are generally exercises in intimidation by the agency in question -- often accompanied by the prosecutorial department of their particular branch of government.  People that have clearly acted in good faith are treated to accusations and characterizations that I have seen bring grown men to tears, or worse physical manifestations.

Obviously there has been a policy change within the governmental agencies.  They no longer seek to bring the regulated community into compliance, rather they seek to punish the community for being out of compliance.  What is very sad is that they can do so with virtually unchecked power.  All they need do is decide to interpret a specific regulation differently, and instantly, even the majority of the community that was in compliance no longer is, and is subject to fine.
Main street businesses hate both over-regulation and the overhead costs necessary to bring about compliance. They don't have a personnel director -- excuse me, human resource professionals -- to enforce politically correct hiring standards. They don't have government relations departments that pore over the Federal Register and send memos to line managers about upcoming changes. Nor do they measure performance on what an accountant says their book income was for the year under International Financial Reporting Standards. They want results, measured in simple terms of do I have more cash and net hard assets this year than I had last year? To get that cash, they will often take a great many risks, but only when they feel the odds of a successful outcome aren't stacked against them. Being docked a quarter of the annual revenue for an inadvertent mistake that was soon corrected amounts to playing against a dealer with a crooked deck.  

As the compliance consultant pointed out, when faced with such a hostile regulatory environment, some businesses decide to shut down operations. Those who labor on are deprived of the cash needed to grow and hire new employees. The owners know this and vote accordingly. So do many in their work force. Indeed, the idea of regulating the wind is an excellent metaphor for what has gone wrong with our economy. Once reason blue-collar whites have been hostile to this administration has to do with the fact that if they are not self-employed contractors in the construction trades, they are increasingly employed by small businesses. Unionized blue-collar American industry, such as the giant auto, steel and textiles operations, has been in a forty-year decline and is but a shadow of its historic self as an aggregate of employers of working-class Americans. For example, UAW Local 599 in Flint, Michigan has seen its membership more than decimated, in the literal meaning of that word, to a mere 2,500 members today from a peak of 28,000. My neighbors, who are skilled electricians, have been mowing lawns of late. Their long-term employment prospects are gone in a wind of market-distorting over-regulation that began with lending laws that mandated mortgage loans be made to non-creditworthy home buyers and which continue unabated today across almost every industry. 

Small businessmen and women often have dirt under their fingernails or grease stains on their work clothes and may lack the social polish the political class too often mistakes for actual intelligence. Our current administration is dominated by government-sector lawyers and academics who have seldom, if ever, worked in the private sector. The people in the private sector they do associate with are almost universally the well-groomed senior executives of the largest international conglomerates. These businessmen and women are socially smooth while being both risk-adverse and creatively hampered by an over-reliance on conventional wisdom. The conglomerates they run can factor in increased regulatory costs and are often doing very well in the current political environment. Indeed, regulation can be the friend of a public business, as it often acts as a barrier that keeps those pesky new competitors at bay. What these conglomerates increasingly do not do is hire large numbers of American workers.

Someone as obtuse about Main Street America as David Brooks understands that it is American small business that controls the growth of jobs in our economy. 

Over the past decade, professionals - lawyers, regulators and legislators - have inserted themselves into more and more economic realms. The princes are perfectly at home amid these tax breaks, low-interest loans and public-private partnerships. They went to the same schools as the professionals and speak the same language. The grinds try to stay far away and regard the interlocking network of corporate-government schmoozing with undisguised contempt.

The upshot is that we have an economy that is inching toward recovery but that is not creating much in the way of new innovations and new jobs. It's not that the overall labor markets are shrinking. It's just that very few grinds are bringing new ideas to scale and hiring workers to enact their us-against-the-world schemes.

For jobs to recover, the grinds have to recover, but it's hard to see how that will happen so long as households are still so leveraged, government debt is still so unnerving and the business climate is still so terrible for entrepreneurs.

We've been mired in debates over macroeconomic models recently. But maybe the real issue is how we are going to light a fire under the country's loners, its contrarians and its narrow, ambitious outsiders.

One sure way not to light that fire of growth is to tell these innovators that they'll be fined if their F-150 kicks up dust on a country road on a typical summer day.
on "The Winds of Over-Regulation"