4. Suffocation of the Economy through Regulations

“If we had to follow all the regulations, then Russia would not be growing at 7%.”

-A Russian Businessman

A regulation is government imposes a limitation on the behavior of individuals or a business. The government imposes the limitation because it sees a problem in society and wants to correct it. The only way for government can determine if people are following a regulation is to expand a regulatory agency or create a new one that enforces the limitation. Not all regulations are bad! Some regulations have a purpose that makes society better off. Some examples of good regulations are:

The government established the U.S. Department of Agriculture to inspect food and to reduce contaminated foods from entering the food supply.
The U.S. Government established the Federal Aviation Administration to regulate airspace and inspect airplanes.
The government created the Federal Trade Commission to investigate monopolies and the federal government even has the power to regulate or breakup monopolies.

Why are monopolies bad? A monopoly is one firm controls a market or product and the monopolist reduces production, increases market price, and prevents market competition. Thus, monopolies can earn enormous profits. Monopolies tend to form in the petroleum, communications, electricity, and natural gas industries. Hence, government can step in and regulate the market, curbing a monopolist’s power. That is why corporate mergers require permission from government, because mergers allow companies to expand into larger ones as it acquires smaller companies.

The process of implementing regulations can be a complex process, involving politicians, interest groups, industries, and regulatory agencies. Furthermore, various groups in society strive for control or influence over regulatory agencies and politicians. Interest groups can form for any purpose or cause.

Consumer groups want low prices and safe products.
Stores want access to cheap Chinese imports.
Manufacturing wants to earn high stable profits, so they like restrictions on international trade and labor unions.
Labor unions strive for higher workers’ wages, thus lowering a business’s profit and increasing business costs.

Consequently, all groups strive to capture the regulatory agency. The quick way to capture the regulatory agency is to capture the politicians that control the law making process. The sure, quick, and easy method is campaign contributions. Politicians want to remain in office, but political campaigns cost millions of dollars. For example, in 2004 the campaign cost to win a house seat in Congress averaged $1 million while a Senate seat cost $7 million. Unfortunately, the person with the most money wins, and hence, politicians have to beg interest groups for funding, and solicit money by knocking on people’s doors or using the mail, internet, and telephone [1, 2].

How do we know campaign contributions influence politicians’ decisions? If a company contributes $1 million to a politician’s campaign and this company wants a special law, isn’t the politician going to help him? Even if the politician wins and gets into office, he always has his eyes on the next election or a higher position in government. If a politician loses, then he has to find a real job and work for wages. It is like that old joke, “Talking to politicians is fine, but with a little money, politicians hear you better.”

Another problem with campaign contributions is a large portion of campaign contributions flows to consultants. During the 2003-2004 federal elections, consultants earned almost $2 billion. Even President Bush paid $177 million to Maverick Media for his re-election commercials for 2004 [2]. The problem is the consultants inform politicians how to win the election, such as which issues to side, which interest groups to go for money and proposed laws and regulations. The goal for politicians and consultants is to win the campaign at any cost. Once in office, they have their eyes on the next election and the next round of fund raising. Thus, politicians are not passing laws and regulations to make society better off; their goal is to get into office, support any issues that get them there, help garner campaign contributions, and pass any laws that make their interest groups happy. Thus, politicians in the government are career politicians and have to cater to special interest groups.

Educated people also help and exacerbate the expansion of regulations. The reason is educated people have a stake to use regulations to generate business for their specialties, because complicated, convoluted regulations boosts demands for professionals. Some examples are:

Certified Public Accountants (CPAs) want a more complicated tax code. Thus, businesses and people have to hire them to ensure they are compliance with the tax rules and also ensure they pay the lowest amount of taxes. If the United States passed a simple, flat tax, the majority of CPAs would be in the unemployment line.
Counselors want everybody to get counseling. Any minor cases brought to the attention of a criminal court usually require counseling. Counselors aid truant kids, married couples, alcoholics, and drug addicts. Unfortunately, this counseling is not free and it is not clear if counseling actually helps people. With all the violence and wars that plagued humanity, we somehow still made it to the 20th century without psychologists and counselors. Remember, Sigmund Freud invented psychology and counseling in the 1880s.
Universities and colleges want an education to be a continuous process. Many occupational licenses from state governments like teaching certifications, CPA’s, etc. require people to continuous take courses for their annual re-certification. These courses are available through the internet and could cost several hundred dollars.

Politicians, consultants, and educated people help expand government regulations to the point where regulations are out of control. During the last 40 years, social regulations have exploded in the United States. A social regulation is government implements a new regulation that they believe makes society better off, which could be anything. For example, during the mid-1960s and 1970s, the U.S. Government created the following agencies:

Environmental Protection Agency (EPA) – the purpose is to decrease pollution and improve the environment.
Occupational Safety and Health Administration (OSHA) – the purpose is to improve worker safety standards. OSHA can dictate which machines and equipment employers can use to meet regulations.
Equal Employment Opportunity Commission (EEOC) – to ensure employers do not discriminate against minorities and women for job hiring, promotions, or working conditions.
Consumer Product Safety Commission (CPSC) – to ensure consumer products are safe. CPSC can force businesses to recall consumer products if CPSC believes they are not safe.
Federal Emergency Management Agency (FEMA) – a government agency to aid local communities that are devastated by a natural disaster like an earthquake or hurricane. FEMA helps provide food, medicine, and shelter to needy residents.

Government created these agencies to make society better off. For instance, the EPA’s goal is to reduce pollution, decreasing the harm of pollutants to the public. However, EPA dictates its goals and even tells industry which equipment to buy to reduce pollution. Businesses have no say about the costs. A better approach is a market approach, where government tells industry how much to lower pollution and the industry can decide how to meet these goals. The EPA has implemented some market approaches for pollution emissions from sulfur dioxide and mercury.

Another problem is the bureaucracies become incompetent, overly complex, or the regulations become silly and onerous. Some examples are:

OHSA specified the height of handrails and the spacing of posts in a workplace.
Churches, thrift stores, or people selling things at garage sales, flea markets, or through the internet have to keep track of the thousands of products that were recalled by the CPSC and make sure they do not sell them. The CPSC started Resale Roundup and is searching vigorously for violators through the internet. A new federal law allows enforcement officers to track down, arrest, and possibly jail anyone who re-sells an item that is on the CPSC recall list [3]. As you guessed, safety standards have no bounds, nor does stupidity.
FEMA tends to be slow, bureaucratic, and hampers rescue efforts. FEMA has show poor leadership for Hurricane Hugo in 1989, Hurricane Andrew in 1992, and Hurricane Katrina in 2005. In FEMA's defense, FEMA tends to be poorly funded and a dumping ground for politically connected appointees with no experience [4].
People can legally buy cigarettes in U.S., if he or she is 18 or older. However, state governments heavily tax cigarettes, won multimillion-dollar lawsuits against tobacco companies in 1990s, and passed many laws restricting tobacco use. Many states and city governments ban cigarette smoking in restaurants, bars, near building entrances, schools, near children, in cars, etc. Instead of having hundreds of these regulations, would it not be simpler to make tobacco illegal? Or better yet, why not let the voters decide? Of course, if tobacco was illegal, then government could not collect money from the lawsuits and cigarette taxes.
The criminal sentencing rules have become so complicated in Texas; judges, prosecutors, and prison officials cannot figure them out. Consequently, prisoners have to hire attorneys or sue the state, in order to figure how much time they have left. Then compound this problem with inmate overcrowding, budget problems, and parolee hearings (Marshall 2003). This is very foolish. Does not the jury or judge determine how long a convicted felon has to serve? What happened to the straight forward system of imprisoning convicted felons then allowing a parole board to release some of the nonviolent criminals early to relieve overcrowding? If the rules were simple and straight forward, then Texas would not have this problem. (Remember – complicated regulations create a demand for more professionals like attorneys).

Do these cases represent an alarming trend or are they exceptions? The Office of Advocacy estimated a small business spent $7,647 per employee in 2005 to comply with federal regulations, while a large business spent $5,282. A small business has less than 20 employees while a large business have more than 500. These estimates come from a small office in the U.S. Small Business Administration, which is part of the federal government (Office of Advocacy 2005). Although most of the job creation is from small businesses, they are burdened with a large share of the regulatory burden. Some claim large corporations love more regulations, because regulations reduce competition and prevent small businesses into growing into large ones.

Parkinson’s Laws

Parkinson’s Law is an observation by C. Northcote Parkinson. Parkinson’s Law is regulatory agencies expand in size each year without any relationship to amount of work the regulatory agency does. Northcote noticed that as the British Empire became smaller, the number of employees in the Colonial Office increased. The Colonial Office administered the British Empire and a smaller empire implies less work [7, 8]. Thus, the number of employees should decrease over time, and not increase!

Parkinson’s Law is universal to all government agencies. Government agencies over time increase their scope, mission, and influence. Parkinson observed that “the total of those employed inside a bureaucracy rose by 5-7% per year irrespective of any variation in the amount of work (if any) to be done” [7,8]. Northcote explained the regulatory agency’s growth using three statements.

“Expenditures rise to meet income.” No matter the amount of government funding for a regulatory agency, the agency always spends the money. If a government agency saved money, the legislature will notice and would lower future funding. Moreover, government bureaucrats are always in the habit of requesting more funding and then spending it [7, 8].
“Work expands so as to fill the time available for its completion.” If a bureaucrat needs 4 hours to complete a task and has an 8-hour workday, then the bureaucrat will expand the task into 8 hours. Thus, the bureaucrats have to create work [7, 8]. Whether creating new forms or causing citizens to jump through new hoops for permits, approvals, or other such documents.
Bureaucrats like “to multiply subordinates, not rivals.” If a bureaucrat hires a rival, then that rival also competes for the same promotions. However, a bureaucrat can elevate himself as manager by hiring subordinates. In order to hire subordinates, bureaucrats need to “create work for each other” [7, 8].

Bureaucrats may be more concern with maintaining their jobs and importance, and not necessarily helping people. Bureaucrats become good at justifying their programs and importance to legislators, because legislatures are a source of funding. Moreover, bureaucrats have self-interest to prolong their jobs and create job security. They may design programs that are long term, and continually expand the size, scope, and mission of government. Over time, regulatory agencies expand paperwork and broaden regulations, and regulations become more complex. Of course, educated bureaucrats like complex rules, because they can earn higher salaries and create a greater demand for their services. Thus, the size of bureaucracies continually expand and rarely contract.

Societal Cost of Regulations

Regulations create the need for bureaucracies and bureaucracies need financial resources. Bureaucracies depend on fees, fines, and taxes to finance their budgets. Thus, each time government creates a new bureaucracy or expands an old one, the government needs more funding. The total cost of a bureaucracy is the following:

Bureaucracies regulate and enforce the law. Continually expanding the law and regulating more can cause large enforcement costs and regulatory burdens on the private sector. Businesses may have to submit forms to government, invest in new equipment, and/or hire compliance specialists.
Bureaucrats’ salaries are paid through taxes, fines, and fees, shifting resources from the private sector to the public. Government diverts resources from the private sector to pay for a regulatory agency’s budget. The largest item in a regulatory agency’s budget cost is salaries. If government did not employ staff, then they would be working in the private markets.
Government finances regulatory agencies through taxes. Consequently, government expands the infamous tax authorities. The tax authorities are another bureaucracy that employs staff and consumes resources. Further, taxes always increase prices and decrease market quantities, because consumers buy fewer products when they become more expensive. Therefore, taxes and regulations lower economic activity, “destroying” the market.
Taxes and regulations create violators. When government creates regulations or imposes taxes, some people will violate these regulations or evade taxes. Consequently, government consumes resources to enforce and punish violators. Government also has to expand its courts and prison systems. Government agencies could also impose fines, which help offset government’s costs. However, a problem arises where government may artificially create violators in order to collect fines.

As government creates more bureaucracies and the bureaucracies become too large relative to the economy, the bureaucracies create drags on the economy and stifles free enterprise. A faltering economy generates less wealth and lowers the tax base. Thus, declining tax revenue could encourage government to create more bureaucracies and more taxes to help pay for the bureaucracies. Then we end up in a vicious cycle of increasing taxes, fines, regulations, which literally destroys the economy.

Problems of Regulations

Government regulations can create many problems for society. For instance, government and its bureaucrats tend to make poor investment decisions. For example, the U.S. government passed a law, Nuclear Waste Policy Act, to locate a spot for the disposal of the nation’s nuclear waste. The government found and developed a site in Yucca Mountain, Nevada. The government bored a 5-mile long U-shaped tunnel into the mountain. Moreover, this site is adjacent to the place where the U.S. government tests its nuclear weapons and is geographically stable. However, political opposition and lawsuits have delayed the opening of this facility for decades. Meanwhile, the U.S. military and nuclear electric power plants are stockpiling nuclear waste at their facilities, and as of 2008, the government has wasted approximately $9 billion into this project.

The Federal Emergency Management Agency (FEMA) has 10,770 trailers sitting vacant at a deserted military airport in rural Hope, Arkansas. FEMA stockpiled trailers as temporary housing for victims of natural disasters. Unfortunately, FEMA did not make the trailers available to Hurricane Katrina victims, because federal law prohibits trailers used in a flood plain. Instead, some victims were living in tents. These vacant trailers cost the government $431 million [9]. The problem is government is a unique institution. It can waste taxpayer money, and then turn around and raise taxes and fees to make up for any budget shortfalls. No other institution in our society can do that.

Regulations have another problem. They may produce the opposite than what the law intended. For example, the federal government passed laws and regulations to protect historic buildings and sites. On the surface, this appears to be a good law, because the government is protecting history. However, these regulations encourage the destruction of historic homes. If a non-profit or contractor is going to rehabilitate a historic home using government funds and sell it to a family, then here are the problems.

The nonprofit or contractor must apply for permits (or permission) from a historic government agency. Approval may take a long time and the project may be subjected to the whim of the historic bureaucrats. If the authority is a state government agency, then it can take six months or more to receive a response. Remember, historic preservation agencies are bureaucracies and they are in no hurry to get work done.
If the windows in the home need to be replaced, a contractor cannot simply ripped out the old windows and install new ones. This destroys the “historic integrity” of the home. Instead, the person has to repair each window, so it matches the original design. Restoring a historic home can easily cost twice as much as a non-historic home. It is easier to remove a window and replace it with a new one as compared to fixing the old window.
Home buyers may not be interested in buying historic homes. Homeowners need permission from a government agency like Historic Preservation, to paint, renovate, or install new equipment like an air conditioner.

Therefore, nonprofits and developers stay away from historic houses, because they have to deal with the historic preservation bureaucracy, more expensive to rehabilitate, and may be more difficult to sell. Therefore, these homes sit vacant and eventually government may bulldoze the home, if the home becomes a hazard to the community. Therefore, historic preservation regulations encouraged the destruction of historic homes.

Conclusion

The United States has three official growth spurts for the creation of a large number of regulatory institutions. The growth spurts are:

Regulation of Industry – From 1870 to 1910, government created a number of new institutions and expanded government’s power. The federal government started to inspect food, breakup monopolies, and regulated railroad rates. State governments imposed price controls and created public service commissions. The commissions regulated utility companies that were quickly growing as cities adopted electricity and water. The State of New York even regulated the price of milk.
Using Government to Expand the Economy – Franklin Roosevelt created a variety of new institutions during the Great Depression, which spanned from 1929 to 1940. Roosevelt tried to get the U.S. economy growing again by stabilizing the financial markets, imposing price and wage controls, and creating the first national pension fund, Social Security.
Growth of Social Regulations – From the 1970s to present, government at all levels impose their beliefs onto society. Thus, all governments increased their regulatory powers over everything, concerning private property, families, businesses, and industries.

The problem with creating new regulatory institutions is they never go away. Many of the regulatory institutions created in 1900s and Great Depression are still here. Even when the regulatory institution meets its objective, government never dissolves regulatory institutions. Instead, the regulatory institutions change their mission and increase their sphere of influence. Some examples are:

Roosevelt created the Tennessee Valley Authority (TVA) in 1933. The TVA helped modernize Tennessee and provide electricity to rural areas. TVA met their mission, but it is still here. Now, TVA helps subsidize electricity to households.
Two institutions that create fear among some are the International Monetary Fund (IMF) and World Bank. Developed countries developed these institutions after World War II under the Bretton Woods System. This system established the U.S. dollar as the international currency and nations could exchange U.S. dollars for gold. This is a convoluted gold standard, because only foreign governments could exchange U.S. dollars for gold. The people could not. President Nixon suspended this system in the early 1970s, preventing gold from leaving the United States. The Bretton Wood System no longer exists, but its progeny, IMF and World Bank, still live on.

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References

[1] Becker, Gary S. 1983. “A Theory of Competition among Pressure Groups for Political Influence.” The Quarterly Journal of Economics. 98(3): 371-400.

[2] Bergo, Sandy. September 26, 2006. “A Wealth of Advice - Nearly $2 billion flowed through consultants in 2003-2004 federal elections.” The Center of Public Integrity.

[3] Rosen, James. August 20, 2009. “Seller, beware: Feds cracking down on secondhand sales of some products.” Kansas City Star.

[4] McQuaid, John and Mark Schleifstein. 2006. Path of Destruction. New York: Little Brown and Company, pp. 112-114, pp. 308-344 .

[5] Marshall, Thom. November 16, 2003 “Figuring felon prison time growing business for firm.” Houston Chronicle.

[6]Office of Advocacy. September 19, 2005. “Small Business Hard Hit By Federal Regulatory Compliance Burden.” Washington, DC: U.S. Small Business Administration. Available at http://www.sba.gov/advo/press/05-43.html (Access date: 7/11/08).

[7] Parkinson, C. Northcote. 1957. Parkinson's Law. Cambridge and Massachusetts: The Riverside Press.

[8] Parkinson, C. Northcote. November 1955. "Parkinson's Law." The Economist.

[9] Neuman, Johanna. February 10, 2006. “The Land of 10,770 Empty FEMA Trailers.” The Los Angeles Times

[10] Palmer, Jay. November 27, 1978. “The Rising Risks of Regulation.” Time.