Monday, February 27, 2012

The over-regulation of US businesses


The Economist has a very thought-provoking article about how over-regulation is stifling US businesses and strangling economic recovery. Here's an excerpt.

Consider the Dodd-Frank law of 2010. Its aim was noble: to prevent another financial crisis. Its strategy was sensible, too: improve transparency, stop banks from taking excessive risks, prevent abusive financial practices and end “too big to fail” by authorising regulators to seize any big, tottering financial firm and wind it down. This newspaper supported these goals at the time, and we still do. But Dodd-Frank is far too complex, and becoming more so. At 848 pages, it is 23 times longer than Glass-Steagall, the reform that followed the Wall Street crash of 1929. Worse, every other page demands that regulators fill in further detail. Some of these clarifications are hundreds of pages long. Just one bit, the “Volcker rule”, which aims to curb risky proprietary trading by banks, includes 383 questions that break down into 1,420 subquestions.

Hardly anyone has actually read Dodd-Frank, besides the Chinese government and our correspondent in New York (see article). Those who have struggle to make sense of it, not least because so much detail has yet to be filled in: of the 400 rules it mandates, only 93 have been finalised. So financial firms in America must prepare to comply with a law that is partly unintelligible and partly unknowable.

Dodd-Frank is part of a wider trend. Governments of both parties keep adding stacks of rules, few of which are ever rescinded. Republicans write rules to thwart terrorists, which make flying in America an ordeal and prompt legions of brainy migrants to move to Canada instead. Democrats write rules to expand the welfare state. Barack Obama’s health-care reform of 2010 had many virtues, especially its attempt to make health insurance universal. But it does little to reduce the system’s staggering and increasing complexity. Every hour spent treating a patient in America creates at least 30 minutes of paperwork, and often a whole hour. Next year the number of federally mandated categories of illness and injury for which hospitals may claim reimbursement will rise from 18,000 to 140,000. There are nine codes relating to injuries caused by parrots, and three relating to burns from flaming water-skis.

Two forces make American laws too complex. One is hubris. Many lawmakers seem to believe that they can lay down rules to govern every eventuality. Examples range from the merely annoying (eg, a proposed code for nurseries in Colorado that specifies how many crayons each box must contain) to the delusional (eg, the conceit of Dodd-Frank that you can anticipate and ban every nasty trick financiers will dream up in the future). Far from preventing abuses, complexity creates loopholes that the shrewd can abuse with impunity.

The other force that makes American laws complex is lobbying. The government’s drive to micromanage so many activities creates a huge incentive for interest groups to push for special favours. When a bill is hundreds of pages long, it is not hard for congressmen to slip in clauses that benefit their chums and campaign donors. The health-care bill included tons of favours for the pushy. Congress’s last, failed attempt to regulate greenhouse gases was even worse.

Complexity costs money. Sarbanes-Oxley, a law aimed at preventing Enron-style frauds, has made it so difficult to list shares on an American stockmarket that firms increasingly look elsewhere or stay private. America’s share of initial public offerings fell from 67% in 2002 (when Sarbox passed) to 16% last year, despite some benign tweaks to the law. A study for the Small Business Administration, a government body, found that regulations in general add $10,585 in costs per employee. It’s a wonder the jobless rate isn’t even higher than it is.


There's more at the link. Highly recommended reading.

Charles Hugh Smith points out that over-regulation is particularly inimical to small businesses.

... it's very easy for well-paid pundits who have never started a single real enterprise or met a single payroll to pontificate about "opportunity" and small business as the engine of growth, blah blah blah. It's also easy for those with no actual experience to reach all sorts of absurd conclusions about how easy it is to turn a small business into great wealth. (No, Bain Capital or other Wall Street outposts of financialization are not "small business.")

In real life, it's only easy to run a small business into the ground, especially when there's a thousand tons of junk fees, taxes and useless bureaucratic requirements on your back.

. . .

There is nothing mysterious about the cause of this Kafkaesque Status Quo: each city, county, state and Federal fiefdom must justify its existence and payroll, and everyone in each fiefdom will fight with every fiber of their being to protect their turf. Politically, it's a fight to the death to trim even the thinnest slice of bureaucracy, and so little if any ever gets trimmed.

Nobody will care until the city, county and state's revenues collapse as people opt out of supporting the bloated dead-weight of the Status Quo with their own sweat and blood.

The only way to survive is to not have a "real" business, i.e. you write code in your living room or parents' basement, or you do enough business in the informal sector (cash) to support your high-cost formal business.


Again, more at the link.

Finally, of course, it's not merely over-regulation we have to worry about. Over-taxation is also a very important factor in the health (or otherwise) of businesses: so much so, in fact, that a Florida physician recently placed this advertisement in the Panama City News Herald.




Politicians! Grrrr!





Peter

6 comments:

Stephanie said...

I would like to post this on Facebook I wonder how I could?

C. S. P. Schofield said...

I wonder what would happen if a faction of one party or the other ran a Congressional Election campaign on a promise to seriously try to repeal one law per day of Congressional Sessions. Not specific laws, mind, just one law or regulation per session-day. Do you think anybody could assert with a straight face that there aren't at least that many laws and/or regulations that are complete wastes of time?

raven said...

I just went to http://www.regulations.gov/#!home

If anyone wonders why businesses are reluctant to hire. look no further. I went here to comment on a proposed table saw safety standard, that effectively would force all manufacturers to use one guys invention, thus using the club of government to enrich him via royalty, and place every cabinet shop in the country using older equipment at liability.

But that is drop in the bucket- businesses surveys show the number one complaint is constant nagging over regulation- here is an example- in the last 90 days, there have been five thousand, eight hundred and forty nine new regulations to comply with. (5,849).
“The road to hell is paved with good intentions”.

trailbee said...

While in a local store yesterday, I overheard a telephone conversation between an employee (A) and another employee (B), regarding B's return to work after being "ill" for a couple of days. I was thinking, never mind the regulations, how can you even motivate and staff a small store in a very small town, daily, year after year, in order to remain in business? Add a plethora of restricting rules, and you HAVE to give credit to those who attempt it!

ShallNotBeInfringed said...

"Vacation"???!!! From what? Does she actually work?

Anonymous said...

Bureaucracy is the only truly human created life form. The people contained within the bureaucratic structure are only cells. It lives only to grow. More than just a little bit like cancer.