April 7, 2011
Regulatory DysfunctionBy Jerry Shenk
Government costs us more than the taxes we pay (and the money we borrow), because taxes do not include the cost of regulatory compliance. Compliance costs are built into the price of goods and services purchased by American consumers and businesses.
If we are to emerge from recession, America's business regulatory burden must be reassessed.
In a 2008 review of the cost of government regulations entitled Ten Thousand Commandments, Wayne Crews of the Competitive Enterprise Institute estimated that the cost of government regulations to businesses and, ultimately, to consumers was $1 trillion or more annually. Regulations added 70,000 pages to the Federal Register. Regulatory costs almost matched all corporate profits in 2007 and were seven times higher than the 2007 budget deficit. Crews wrote that "Federal environmental, safety and health, and economic regulations cost hundreds of billions of dollars every year over and above the costs of official federal outlays."
In a 2008 article in US News, Matthew Bandyk wrote:
Guess who's paying those costs.
Regulatory costs are de facto taxes on consumers, a drag on the national economy, and, because of their impact on household budgets, impose costs that stall families and local economies as well.
A high American jobless rate, a lagging economy, and inflation all demand that the seemingly constant increase of government regulation must be reversed. Not only does regulation create artificial inflation by increasing the costs of the products we buy, the business resources necessary for compliance eventually elbow out actual production. Small businesses, especially, are hurt by the costs of compliance. As the engine of American job creation, small businesses need regulatory relief, not more regulations.
Sarbanes-Oxley, an "accountant accountability" regulatory bill, was a hastily passed overreaction to the auditing failures which resulted in the Enron scandal. Ironically -- but not surprisingly -- the regulatory reaction to Enron's auditors' failures have had unintended consequences. Sarbanes-Oxley has benefited the huge accounting firms that make many millions in fees for conducting the business audits the law requires. By placing onerous requirements on public companies, SarbOx has created a money machine for those who audit them. Despite media and political demands to "manage" the big accounting firms after Enron collapsed, the passage of Sarbanes-Oxley made the same accounting firms big winners.
It isn't just the cost of outside auditors that has increased. Every regulated business loses productivity because executives and company employees are required to spend time assembling and certifying the data necessary to meet regulatory requirements. Head count and associated internal costs are increased simply to meet compliance standards. Scott McNealy of Sun Microsystems called Sarbanes-Oxley "buckets of sand in the gears of the market economy."
Here's an example closer to the average consumer: In 2007, more than a year before bailing out two of them, Congress inflicted $85 billion in new regulatory costs on the Big Three American automobile manufacturers by mandating a 40 percent fuel-efficiency increase by 2020. Those costs will be passed through to car buyers. Members of Congress told us that an increase in the CAFE standard was a benefit, despite the fact that it will increase the costs of automobiles and reduce their safety. The bailouts themselves will cost American taxpayers more than $85 billion.
Legislation isn't the only regulatory problem source. Regulation by unelected-bureaucratic fiat must be stopped. In December, 2010 the US Department of the Interior assumed the authority to declare public lands "Wild Lands," a usurpation that will allow the agency to control development of domestic energy resources. At a time when the cost of energy is skyrocketing, allowing the government one more tool to impede energy exploration and production is overkill.
Also in December, the federal Environmental Protection Agency declared plant-sustaining CO2 a greenhouse gas, intending to regulate electric generating plants and oil refineries. Cap-and-trade failed in the Congress, but the EPA would implement cap-and-trade by regulatory means.
These are but a few examples of excessive federal regulatory micromanagement. What should be done about regulation? Finding and electing more business-savvy politicians would be best. But the business-savvy are busy running businesses.
If we want to increase real income and economic living standards for Americans, ensure a strong currency, and improve international trade balances, we must, among other priorities, make sure the free-market private sector is by far the largest and fastest growing share of the national economy. Getting the government out of the way of business and industry is central to American competitiveness in world markets.
The economy and consumers would benefit from the organization of applicable industrial business review boards to work with congressional representatives to overhaul current regulations with an eye to removing the frivolous and leaving practical, responsible regulations either modestly revised or untouched.
Industries, trades, and businesses should have voices in the future regulatory atmosphere in which they do their business. But we should proceed with some caution. Large corporations sometimes encourage regulation. Regulations that raise compliance costs which large businesses can manage are encouraged to disadvantage smaller competitors. It's essential that the small business community, the segment of American business least able to absorb the costs of regulations and most hurt by them, be well-represented in the end formulations of regulatory structures.
Businesses should follow the rules, but the rules must make sense.