American businesses are worried about regulation more than ever before. According to a recent Deloitte survey, as told by Fortune in their fascinating cover story about red tape, American CFOs believe burdensome regulations to be the biggest threat to business behind a possible recession.
This, to me, is no surprise. Government regulations do hurt small businesses and cost jobs. There are benefits, too, but as always these should be measured carefully against the drawbacks.
An earlier survey by the National Federation of Independent Business identified “unreasonable” regulations as the biggest threat behind rising healthcare costs. And for the fourth consecutive year, Business Roundtable’s survey of CEOs reveals that regulation is the top challenge facing business. The regulatory framework is expansive and complex, so here are five important facts that help to understand it better.
1. The regulatory framework is expanding rapidly.
According to the George Washington University Regulatory Studies Center, over the first seven years of the Obama Administration, 560 major regulations were published, impacting the economy by $100 million or more. Although George W. Bush’s presidency saw the publication of fewer regulations, it still yielded 494 new ones. The most prominent new regulations over the Obama presidency have been the Affordable Care Act and the Dodd-Frank bill, which, according to Davis Polk, has generated over 22,000 pages of rules.
2. Sweeping new regulations often result from upheaval.
The Dodd-Frank bill is the Obama Administration’s response to the 2008 financial crisis. The 849-page statute was designed to compel big banks to retain more capital, thereby reining them in. It also created the Consumer Federal Protection Bureau–an agency responsible for consumer protection in the financial industry. While consumer protection is important, CFPB has some major issues and was even ruled unconstitutional in October of 2016.
Similarly, the Crash of 1929 led to the creation of the Securities and Exchange Commission as well as the rest of the framework for modern financial regulation. The September 11 attacks were one of the biggest upheavals and led to an even bigger regulatory framework. In fiscal year 2016, the Department of Homeland Security—created in response to the attacks—operates on a $27 billion budget, which accounts for 43 percent of the federal government’s spending on regulations.
3. Figuring out which regulations are effective and which create red tape is especially challenging.
Models that evaluate whether regulations are beneficial or harmful need to account for things like stability and transparency that keep financial markets steady. They also should incorporate other outside factors that impact the economy. However, it is not always clear how to manipulate these models to perform such tasks.
Economists believe that the U.S. economy’s slow growth is at least partially due to regulation.
At the heart of the issue is that too many “rules, regulations, and procedures […] have a compliance burden but do not achieve the functional objective of the rule.” But the problem is not the number of rules, rather their content. According to Barry Bozeman, the director of the Center for Organization Design and Research at Arizona State University, “you can have one rule and it can be nothing but terrible red tape if it doesn’t accomplish a goal. Or you can have a bunch of rules that are incredibly effective, and none of them would be red tape.”
4. There is no mechanism to stop the proliferation of new regulations and evaluate problems with current ones.
Rulemaking machinery is geared toward creating, not removing, regulations. Once new regulations are introduced, they usually remain without repeal. According to Michael Mandel, chief economic strategist at the Progressive Policy Institute, part of the problem is that the federal bureaucracy prevents the existence of a central place in the government where problems with regulations can be reported. Such a place would lead to a database of complaints, which could help analyze patterns and identify overlaps that need to be addressed.
5. Regulations dating back from the 20th century may be unfit for a rapidly evolving 21st-century world.
Today, technological development is advancing at a rapid pace, resulting in many kinds of new business models entering the market. Regulators have the potential to slow down these advancements even as they struggle to keep up with them. Uber is an example of a startup that built a global brand by racing ahead of regulators, either ignoring them or battling them in a number of markets. Now the company is worth over $60 billion, but its haphazard approach is not appropriate for all new businesses.
The bottom line? The best regulations should protect consumers without crippling businesses or the economy. Certain guidelines may always be necessary, but wherever possible, the free market should be given the opportunity to provide a panacea to its issues (whereas regulations sometimes make things worse.) Rather than taking a simple black or white position, it’s worth understanding the nuances of business regulation to evaluate what is moving us forward and what is holding us back.
