Regulations' High Costs

This article from the Economist is the best layman explanation of regulations’ cost that I have seen. Be sure to follow the embedded links in the article. It is featured as the lead article in a venerable London-based business-oriented magazine that endorsed Barack Obama for president, so I think we can say that they are not either the right or the left wing echo machine.

Swinging both left and right they write, "Governments of both parties keep adding stacks of rules, few of which are ever rescinded.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." Seems right on to me.

About health care they go on to point out that, "Every hour spent treating a patient in America creates at least 30 minutes of paperwork, and often a whole hour."

Financial regulation manages to cause lots of damage "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." And "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."

The bottom line cost "regulations in general add $10,585 in costs per employee. It's a wonder the jobless rate isn't even higher than it is."

My father told me never to spend a dollar to make a nickel decision. This kind of sensible logic applies to many things. Not every problem requires a regulatory solution and those that do should be solved in the simplest, least political way.

Posted by Christine & John at February 19, 2012 7:29 PM
Comments
Comment #337057

Here’s a response one fellow had.

The article doesn’t impress me much. It’s stocked to the gills with axioms about how bad regulation is, numbers of pages of regulations, and the general argument that regulation is bad, m’kay.

Is amount what’s important, or the efficiency and elegance of the rules in protecting the public interest?

I think it’s perfectly possible to bloat the federal registers with regulation and legislation whose main job is to make government the handmaiden of business, to have more regulations in an objective line for line sense, but less regulatory effect.

Also: if we’re talking the economic effect, well, sometimes we do want it to have a negative effect. Some behavior ought not to be profitable or easy. That’s the point of regulation, isn’t it?

If you want some understanding of why red tapes remained a problem, despite the benevolent offices of the GOP’s thirty year program of tape-cutting, then it pays to understand that sometimes people say they’re going to simplify things so they can have the opportunity to complicate things in a lucrative fashion.

Naturally, nobody’s going to hand you more power if you tell them that they’re going to use it to hand more of the tax burden on to you. So, you give them a pittance of a tax cut, then use that to sell them on cutting the taxes of rich to the tune of tens of thousands to millions of dollars.

Naturally, nobody’s going to hand you more power if you tell them you’re going to rig the system to better favor the rich, the powerful, the big corporations over the smaller, etc. So they talk in broad terms about freedom, and the cruel, crushing weight of regulation, how it’s killing their jobs. You don’t mention that some of them are going to get mangled in machinery because the rule changes will allow people to put one person on a machine three or five people should be running. You don’t mention that they might get their work title changed just so their employer can overwork them without paying them overtime.

You don’t mention all the ways that it will shift risk and cost onto them. If you did, they’d laugh in your face and tell you to go make sweet, sweet love to yourself, though likely in less civil terms than that.

This whole small government thing is a con game, either way you go. On one hand, it distracts from the question of what’s good government, by replacing it with abstract question of size. Notice how nobody has an actual figure on exactly what size is ideal?

On the other hand, the truth is, “small government” is an excuse to rollback regulations they don’t like with the right hand, while they put friendly regulations in their place with the left.

Since it’s very difficult to prove enough has been done to make government small enough to make America safe for Capitalism, it becomes a perpetual license to rewrite the rules and laws of our nation to favor those who have the lobbyists and the big campaign finance checks on their side.

You’ve stated over and over again that government power is an inherent temptation to others to abuse the system, and that’s why we have to get rid of it. But what if that corruption was the point of that “small government” push in the first place? What if the point of that whole philosophical drive is to merely put you in a position where for one reason or another, you’re not objecting to changes in rules, regulations, and law that hurt you and others financially, that undercut your ability to redress greivances against corporations, that hinder your ability to force financial institutions to serve your interests first instead of merely their own?

If you ask me, “Do we need to simplify the regulations?”, I’d say, certainly, just make sure it still does the work the public needs it to do, in the face of litigation and everything modern businesses do in order to bypass the rules.

The problem, as far as I see it, is that this attitude of open defiance to any constraint. Half the reason regulations are so complex is to close up loopholes. Otherwise, we could rely on simple common sense agreement instead.

The complexity of the modern system is a product of the perversity of the business community when it comes to dealing with it.

Posted by: Stephen Daugherty at February 20, 2012 12:11 PM
Comment #337058

Jack,

If, after more than 200 years, we cannot even agree on what a “well regulated militia” means, how are we to agree on what regulations are necessary?

One of the comments contained in the link you provided posits that “relatively free market” of the 1950’s was vastly better than what we have now.

Well duh.

I would submit that we have had to pay for that lack of regulation ever since. The price for that relatively free market can be seen in the examples of “Love Canal” and the Maryvale AZ cancer cluster.
I grew up outside of Los Angeles in the ’50s and ’60s, and I breathed that air. I was in Dalian, China in 1995, and I would be hard pressed to tell the difference between the two cities.
Yes, Los Angeles is now better, but it wasn’t due to a lack of regulation.

The free market will not regulate itself when the bottom line is at stake.

Now I am sure that we can do much better than we have as far as burdensome regulations, and I am all for simplifacation. But there has to be a balance.

That balance will not be found when the two political parties are more interested in taking pot shots at each other than they are in serving the best interests of the American people.

Rocky

Posted by: Rocky Marks at February 20, 2012 1:30 PM
Comment #337061

C&J good subject for discussion. It seems to me the more we try to convince ourselves that the government can’t do anything right the more we find regulations getting longer and more cumbersome. We still seem to want to blame the cops for the bank being robbed though and the writer of the article you linked to is no exception. The reason we have such a proliferation of regulations is due to the bad businesses yet these businesses seem to continue to exist.

Would returning to Glass-Steagall have solved the problem or is the increase in the number of pages required to deal with the complexities we face in the financial world today? It’s fun to look back and say they did in with so much less paper in the past but the world wasn’t as complex as it is today. Perhaps we have technology to blame for this problem as well as the businesses that have found loopholes to exploit in the past as well as seeded the regulations with perks for themselves.

What I find ironic here is the concern for business interest and not for the individual interest of we the people. Here in Colorado we have just had a bill introduced to test welfare recipients for drugs. Despite the costly failure of the Florida debacle into drug testing my foolish uber conservative representative promoted this bill. It is expected to cost the taxpayers $1.3 mil next year to save approximately 2% of that amount if Fla is any example. Yet here we go with conservative ideology over practicality.

The reason I bring up the individual is we are faced with even more regulations than the business when we go to work. We as workers not only have to deal with the reg’s from the government but the reg’s from the business entity as well. If you think the government is anal about it you need to visit some of these companies and their requirements. It may be just the age of specialization and computers we are in that causes this need to regulate.


Posted by: j2t2 at February 20, 2012 3:18 PM
Comment #337062


The home of laissez fair was done in by BP, Union Carbide, seven tobacco company executives and many other individuals known as corporations. The majority doesn’t like laissez people.

Posted by: jlw at February 20, 2012 4:01 PM
Comment #337064

What’s basically happened is that regardless of what the mathematics are on the number or variety of regulations, people dislike how the current status quo has worked out, and don’t appreciate the way Government has put the interests of those companies ahead of theirs. They want some balance, if not some help.

Posted by: Stephen Daugherty at February 20, 2012 6:13 PM
Comment #337067

Stephen

You didn’t read the articles from the Economist did you. If you had, you would not feel the need to attack the GOP. You would have learned that the Obama administration was fighting regulation and that they had been unable to get a handle on it. You would have learned that Obama appointed Cas Sunstein to attempt to make regulation more rational If you had bothered to read instead of just attack, you might have understood that this is a bipartisan challenge.

But partisans are partisan, right?


Rocky

The problem with regulations is that it is easier to count the “savings” than it is to count the costs of things not achieved.

Many regulations just don’t do what they are supposed to do. They are captured by those they regulate.

J2t2

As the articles says, both Republicans and Democrats like regulations; they just like different things.

Government can do lots of good things. But when those things become politicized we get trouble.

Jlw

As I wrote to Stephen, I suggest you read the articles before you respond. They do not advocate zero regulations. But do you feel safer now with more regulations? You mention BP. The oil and gas industry is drowning in regulation. They didn’t work. Maybe the answer is not more but better.

Posted by: C&J at February 20, 2012 9:21 PM
Comment #337070

Who can disagree with simplicity and elegance in regulation? Smart and efficient regulation. That is hardly a novel concept. So, why are we so complex?

The author hints at the cause (monied interests and lobbyists) but he seems to treat it as though it were a minor factor. In my opinion, it is the major factor. Bright line rules create clear winners and losers. Politicians, though, want to have their cake and eat it too. The recent health care and financial reform legislation illustrate this problem.

The health insurance reform is a hybrid attempt at creating a universal coverage system while retaining the structure of a market based system. Something for both liberals and conservatives. However, it is a difficult model to implement and demands complexity. It would be a lot simpler to institute a single payer, national or regional pool system. One payer, one set of rules, one consolidated medical record ,etc. But, that would result in the elimination of the private health insurance market as we know it. Not politically possible. But, why fight the fight when we can have both, abeit at the expense of complexity.

The financial reform is another hybrid effort to recapture the essence of Glass-Steagall (“Volcker Rule”) but at the same time provide for the international competitive “benefits” of large integrated financial institutions. Somehow, someway, with new and improved monitoring of capital structure, etc., we can safely allow integrated commercial and investment banking, along with insurance. It would be a lot simpler to go back to the “bright line” separation of Glass-Stegall, but that would result in the breakup of some the largest financial institutions in the world. Not politically feasible. So, once again, we are left with a complex “work around” regulatory scheme to manage the problems experienced after the repeal of Glass-Steagall.

Politicians of both parties are reluctant to pass legislation with clear “bright line” rules and organizational structures with clear and definite operational missions. There is no ability to hedge the bet. There is no escaping accountability for their success/failure and to withstand blowback from the potential losers. Maybe an entire industry should be sacrificed, but who is going to make that call? Better to overlay the industry with complex regulation in the hope that they will mitigate the problem.


Posted by: Rich at February 20, 2012 10:35 PM
Comment #337073

Jack,

“The problem with regulations is that it is easier to count the “savings” than it is to count the costs of things not achieved.”

I am pretty sure that Union Carbide “saved” a ton of money by locating their pesticide plant in Bhopal.

As I said before, given the opportunity to regulate itself the “free market” won’t.

Believe me when I say that I think that writing regulations for every possible contingency is ludicrous, however I am not so naive to think there isn’t a job description in virtually every corporation designed to find a way around every regulation to jack up the bottom line.

The problem is that when writing regulations for the big guys, the little guys often get caught in the middle.

BTW, while riding around in my car yesterday I was listening to the “best of Hannity”, and he assured me that unless a conservative was elected to the White House, America was absolutely going to turn into Greece.

Rocky

Posted by: Rocky Marks at February 21, 2012 1:12 AM
Comment #337079
As the articles says, both Republicans and Democrats like regulations; they just like different things.

Of course C&J it is both as they make up the huge majority of the government. However you seem to be missing the logic behind the government issuing laws and regulations, it is their job. But it is us, we the people, that cause these regulations to be put into place. You blame the cops not the robbers. Were we fair and reasonable would we need so much regulation? Or do we just turn it over to the strongest or best shot in order to keep the number and size of regulations down?

Posted by: j2t2 at February 21, 2012 11:39 AM
Comment #337082


C&J, I read the article. So what if it indicts both political parties? It is still the same old story.

the Economist has been around for more than a century and it was created to serve one function, to promote a laissez faire, caveat emptor free market system based on the principle of natural law.

With one exception, all of creation dwells within and abides by nature and it’s laws. That exception is Man, and Man has proclaimed himself above, outside, of natural law. Man, most often in the name of his God, has given himself the task of waging war on nature and it’s laws, we have put the earth to the plow, we have created a civilization, we have created our own laws, we attack the natural world, alter it, pollute it, in our determination to reshape it and make nature and it’s laws conform to our needs, our desires, to the detriment of nature and all the creatures that abide within it’s realm.

As others have pointed out, we have listened to the rhetoric, we have seen the legislative proposals, which basically proposes to take a hatchet to government regulation and entitlement programs, leaving the military component intact, while creating a more robust Internal Security Service.

IMO, anyone who is capable of reasoning the ramifications of the free market cabal should be able to understand that what is being proposed in this is a modern day feudalistic system; which is no surprise considering that many economic historians have proclaimed the European feudal system the first and only true free market economy.

Some argue that this country was founded on free market principles and I don’t doubt that, but the base of those free market principles was indentured servitude and slavery. As others have pointed out, the Constitution left the door open for the common people and they have exercised their rights to disagree with the proponents of a feudalistic free market system.

You say that these new regulations are to long, to complicated, wishy washy, and that hardly anyone has read or understands them. Well, I agree that they are to long, to complicated, to wishy washy, but I dispute the fact that these financial institutions know little of what is in them because there attorneys had a part in producing them.

You say they have created bad results for the market. I agree, those bad results favor those institutions and to the alleged negatives, the markets results speak for themselves.

“The Economist: In response to the Irish famine of 1846-1849, in which 1.5 million people died of starvation, they argued that for the government to provide free food for the Irish would violate natural law.” Wiki.

“you would have learned that Obama appointed Cass Sunstein to attempt to make regulation more rational…”

You don’t have to take a shoe off to count the number of conservatives out here in the hinterlands who know that. They have been told that Obama spends most of his time writing new strangling regulations on business and individual liberty minded individuals, who have their own set of regulations to attack individual liberty. Your right wing pundits have these conservatives believing that Obama has regulated more that all previous presidents combined.

And we are supposed to work with a party that has done all it can to obstruct, disrupt, and lie about all that this president is attempting to do, while treating compromise as capitulation?

You want rationality, you want logic? Abandon the Republican party.

Posted by: jlw at February 21, 2012 3:49 PM
Comment #337084

It seems that we wil have to put up with the old Obama isn’t “Christian” enough meme again during this election cycle.

Rick Santorum, Franklin Graham, and now Pat Buchanan have questioned the President’s faith.
This combined with Newt’s claim that Obama is bad for the security of America and Hannity’s rant last week about the economy going into the crapper, I am wondering if now is the time to invest in tin foil manufacturers before the run on hats begins in full before the election.

Surely one of these dullards will ask, yet again, for Obama’s birth certificate in the coming weeks.

Rocky

Posted by: Rocky Marks at February 21, 2012 5:18 PM
Comment #337085

C&J-
Thank you for another unsuccessful attempt to read my mind.

Yes, I did. What I found there was little more than the standard repetion of page counts, and the standard failure to admit that a lot of the complexity comes from the lobbying efforts of the industries themselves.

In other words, they may very well be silent partners in their own regulation headache.

The real trouble here is that you’re pushing a line that the biggest drag on the economy is its regulatory burden, but it’s not. The biggest drag is how many people are out of work because of the cascading failures of an improperly regulated economy, where the regulation schemes were insufficiently tough on pathological, often disastrous behaviors.

The biggest problem is that there is an inherent conflict of interest with letting those subject to regulations shape those regulations, especially since the effect is never equally beneficial to all involved.

My basic theory is that sometimes it’s good for government to have it’s own operational goals, rather than work hand in glove with business. It’s a sort of organization meant to fulfill different objectives, and if we weren’t so captured by current conservative theory, which tries to make government business’s best friend.

There are middle grounds, but they’re not necessarily direct blendings of the two methodologies.

Posted by: Stephen Daugherty at February 21, 2012 6:58 PM
Comment #337087

Rocky

You assume that more regulation is a solution. I expect that India had extensive rules and regulations … that were not properly followed.

I know from my own work that the more detailed rules people are supposed to follow, the more they ignore them, or worse use them to avoid the goals of the rules.

jlw

Please see above re regulations.

I know Cass Sunstein as a intelligent and thoughtful man, whose expertise could be useful in regulation. Unfortunately, the regulations often do not respond to intelligence or thoughtfulness.

Sunstein’s faults, BTW, are that he is a bit too cerebral for a political position and the he is a strong animal rights advocate. His approach to regulation is smart.

Stephen

If you read and understood the articles, you would not have written “standard failure to admit that a lot of the complexity comes from the lobbying efforts of the industries themselves,” since the article stated “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.”

If you want to stop an organization form working, one of the best ways is to create complex rules that are difficult to understand and perhaps impossible to implement.

And if you are trying to find a way to avoid accomplishing a given task, one of the best places to be is where you can hide among complex rules and bureaucracies.

You call for the miscreants who cause trouble to be punished, but you don’t seem to understand that they cannot be punished because the complexity of regulations have provide them safe havens and plausible dependability.

The problem with people inexperienced in actually doing things, a group that included many politicians, is that they want to solve every problem with a specific rule. Each time they do it, is sounds good. But the totality of all those “good” things is very bad. The rules are often contradictory.

Posted by: C&J at February 21, 2012 8:28 PM
Comment #337099

Jack,

“You assume that more regulation is a solution.”

Absolutely not. I assume nothing. I want easily understood rules with huge teeth.
I want people that flaunt the rules to go to jail, not receive golden parachutes, and bonuses.

The guys that even got jail time over the Bhopal disaster, which eventually killed 10’s of thousands of people and affected more than half a million, got a relative slap on the wrist IMHO.

I think I have told this story before;

When I was in Korea in the ’90s, a department store collapsed killing nearly 500 people. The design called for a 4 story building. The steel that was ordered was for a 4 story building. The owner bribed the inspectors and built a 5 story building and put a swimming pool on the roof.

I was told by the Koreans I worked with that the owner was jailed for life, and his bank account forfeited.

With penalties like that I think we could clean up the problems in a heart beat.

Rocky

Posted by: Rocky Marks at February 21, 2012 10:28 PM
Comment #337100


Obama’s U.S. Justice Dept. Southern District of New York: 56 convictions for mortgage fraud and other Wall Street crimes without a loss. Wall Street is not pleased about this in the least.

To cerebral? Do you mean like yellow cake Cheney, leave those IEDs alone and find me some WMDs Rumsfeld and your doing a heck of a job Brownie.

The American people have a conservative clouded choice this fall, let’s see if they are more intelligent than the Republicans think they are.

Posted by: jlw at February 21, 2012 10:45 PM
Comment #337105


Lowered the corporate tax rate to 28%? Manufacturing lowered to 25%?

How can Republicans effectively argue against that.

Posted by: jlw at February 22, 2012 9:37 AM
Comment #337115

Rocky

The Chinese sometimes give the death penalty to corrupt officials and business people. Yet they have a lot more corruption there than we have here.

The best programs are not those that deal out fierce penalties sporadically but those that effectively catch the little problems.

Of course, you don’t know if your Korean example got the true bad guys. The higher level officials who got the bribes may have let the little guys fall on their swords.

jlw

I don’t know if “Wall Street” is pleased or not. We are all pleased when actual fraud is uncovered and punished. 56 convictions would seem to be fairly modest if there is as much fraud as we are led to believe. In fact, you could probably find that many actors at only one big firm.

Re Cass Sunstein - I am not attacking him. I have read all his books and I like the idea of being cerebral. But I think that politics doesn’t mix well with his kind of thinking. This is unfortunate and is a weakness of politics, but it is a weakness that has always existed. This is why I prefer not to drag too much into the political realm.

Posted by: C&J at February 22, 2012 11:45 PM
Comment #337132


C&J, in common people court, they march them in, convict and sentence a dozen and break for lunch. For privileged characters court, 56 convictions in 3 years is rather impressive I would think. But, your right, 56 is a drop in the bucket considering the large number of deserving.

‘We probably could find that many, I prefer the term players, in just one of these big firms.’ That is why these big firms would rather go to court as a large single entity rather than have the guilty singled out. If convicted, the firm pays a fine, maybe someone gets fired and has to go to work for another firm or has little to do but manage his Facebook account from his estate. Through the whole process, business continues for the firm.

Rocky said, “I want easily understood rules with huge teeth.”

I agree. I also agree that there are regulations that are outdated, no longer serve a function, redundant, etc. I also agree that there are areas where regulation needs to be written or strengthened. The problem that I have is understanding how it would serve the public good to have a political party that has taken a political stance to not cooperate or compromise be a part of the evaluation process.

We here on the left could probably negotiate fairly positive results with you, but you often take an approach to an issue without regard for your parties stance on that issue.

I agree that cerebral often has problems operating among the irrational that wants to drag issues around the political arena time after time to be used over and over for the purpose of trying to gain political support.

Politics has become our Roman circus and while it can be entertaining at times, the consequences are often less than enjoyable. The Emperor provides the entertainment seemly free of charge.


Posted by: jlw at February 23, 2012 3:00 AM
Comment #337193

Jack,

“The Chinese sometimes give the death penalty to corrupt officials and business people. Yet they have a lot more corruption there than we have here.”

However, just as here in America, I don’t think the corruption in China is endemic.
When I was in China in the ’90s, if you traveled even a few blocks away from the city centers, or off of the main thoroughfares you basically entered a “Third World” country where “sway-back” horses pulled vegetable carts through the neighborhoods.

I am sure that during your travels you have seen what I have seen with the common people we meet. They are all virtually the same. What they want is to be able to make a living and to be treated fairly.

In America we are all supposed to be treated equally under the law, but you know as well as I do this is not always the case.
Corporations are treated differently than small businesses, because regulations are often not applied the same across the board.

Rocky

Posted by: Rocky Marks at February 24, 2012 6:41 PM
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