One Regulation Is Painless. A Million of Them Hurt.
By Megan McArdle
“In one year,” wrote Warren Meyer in 2015, “I literally spent more personal time on compliance with a single regulatory issue -- implementing increasingly detailed and draconian procedures so I could prove to the State of California that my employees were not working over their 30-minute lunch breaks -- than I did thinking about expanding the business or getting new contracts.”
Meyer is the owner of a company that runs campgrounds and other recreational facilities on public lands under contract from the government. It doesn’t seem like regulatory compliance should be eating up so much of his time; he is not producing toxic chemicals, operating a nuclear facility, or engaged in risky financial transactions that might have the side effect of sending our economy into a tailspin. He’s just renting people places to pitch a tent or park an RV, or selling them sundries. Nonetheless, the government keeps piling on the micromanagement lest some employee, somewhere, miss a lunch break.
I know what you’re going to say: Employees should have lunch breaks! My answer is “Yes, but.…” Yes, but putting the government in charge of ensuring that they get them, and forcing companies to document their compliance, has real costs. They add up.
An economy with but one regulation -- employees must be allowed a 30-minute lunch break, and each company has to document that it has been taken -- would probably not find this much of a drag on growth. But multiply those regulations by thousands, by millions, and you start to have a problem.
A new working paper from the Mercatus Center attempts to document the cumulative cost of all these regulations. It finds that the growth of regulation between 1977 and 2012 has shaved about 0.8 percent off the rate of growth, costing the nation a total of $4 trillion worth of GDP.
Stories like Meyer’s are the tangible face of the economic theory. As is the fact that in the annual small business survey by the National Federation of Independent Business, taxes and government red tape are far and away the biggest issues that business owners cite as their most important problems. Forty-three percent of those surveyed cited one of the two as their top issue.
That matters, and not just because of business owners’ headaches. The burden of regulation is not distributed symmetrically. It falls heaviest on firms that deal with dangerous substances, yes. But it also falls most heavily on smaller businesses, which cannot afford staffs of pricey compliance specialists to make sure that their desk chairs meet the new California workplace seating requirements. This may help explain why the number of firms is falling, and markets are consolidating.
Even within those businesses, the burden will tend to be disproportionately concentrated. Employment conditions are heavily regulated, so firms that employ a lot of workers to get a given level of output will have more regulatory overhead. And firms that employ a lot of low-wage labor get hit from every direction: Businesses like fast food and retail tend to have thin profit margins, so they don’t have a lot of room to absorb the extra cost, and they also can’t really cut wages to reflect the higher cost of labor, because they’re already operating at or close to the statutory minimums. A consulting firm that has five employees, on the other hand, will probably have a higher compliance cost per employee, but also much more room in pricing and profit margins to absorb that cost.
How much does this matter? Well, if you want to camp at Meyer’s rec sites, but can’t afford to pay Hilton prices to do so, it probably matters to you a lot. But it also matters to the rest of us, because when you add that burden up, it potentially has big effects:
- Regulations can knock the lowest-skilled workers out of the labor force, at which point they’ll struggle to get a better job. It’s fashionable to say that these are terrible jobs anyway: hard labor and they don’t pay enough, so who cares? But those jobs are where people learn the basics of work: showing up on time, being nice to the customer, attending to every detail, and so forth. The regulatory burden is effectively a cost wedge between the amount you pay your worker, and the amount it costs you to employ them; the bigger that wedge, the more likely it is that some people simply won’t be able to find employment. The result is a great human capital loss to the economy, and the devastation of unemployment.
- Small businesses are vital to the economy. They’re sort of like the engine oil that lubricates the economy, because a lot of things aren’t profitable at a larger scale. For example, a few years back, I interviewed the owner of a wire basket maker in Baltimore, who was making racks for a car manufacturer to store their parts in on the assembly line. These were a cog in a great industrial enterprise, but he was turning them out in tiny batches -- six at a time, or a dozen. That sort of job simply wouldn’t be profitable for a major manufacturer, because the cost of retooling a big assembly line, and the bureaucratic controls needed to run a large firm, would eat all the profit margin. An owner-operator of a smaller business has a lot more flexibility, and the cushion provided by that flexibility is absolutely necessary.
- Regulations can make it unprofitable for small businesses to grow. Let’s say your firm has room to scale, and might even become a big business someday. That’s great! But now we run into the problem of small business carveouts. A lot of laws, including Obamacare, have them, so that politicians can claim their policy won’t affect small firms. The problem is that when you hit one of the thresholds, there is an absurdly high marginal cost to hiring the next employee, or taking in the next dollar of revenue. That can retard growth, which is not something the U.S. can currently spare
All of these costs have to be carefully weighed against the benefits of regulations -- and not just on a regulation-by-regulation basis, as is currently done, if such cost-benefit analysis is done at all. Each hour of a firm’s time that is sucked up by compliance is an hour that is not spent growing the firm, improving the product, better serving the customer. And as the number of the hours so spent increases, and the number of precious hours spent on growth and operations shrinks, each added hour we take is more costly to both the business and to the rest of us. With labor markets lackluster and growth underwhelming, that’s a cost that none of us can well afford.
My grandfather, who owned a gas station, saw his regulatory burden mount steadily between the time he bought it in 1940, and the time he died in 2004, to the point where it consumed an outsize share of both his time and his emotional energy -- and occasionally dropped surprise six-figure bills on him for newly imposed compliance rules, which is not a sum that most small business owners tend to have lying around in their underground vault.
There’s a lot of talk about how many jobs are provided by small businesses. This is somewhat exaggerated. Small businesses have a lot of churn, for various reasons. Most net new jobs are provided by a small number of high-growth companies, a fact which I’ve heard interpreted as saying that we don’t really need to worry about small businesses, only high-growth startups. Except that small businesses are a vital part of the economy for reasons beyond quantity of jobs added.
bloombergview.com
Selected comments -
Skip to Clutch Cargo • 21 hours ago
Your basic economics are wrong. Growth in income comes from fewer people producing more goods and services. This makes incomes go up. If you take a pool of people and force them to all hire a guy to do their taxes there is no benefit. If one guy invents a new way to do a task, lays off the guy who did it, and now that guy does everyone's taxes because the new method jacks up production, then there is economic growth.
The key is producing more goods and services for less. This is why labor market flexibility is so important. Most economic-growth driving firms need to lay off a lot of people. If they cannot and employment stall, then the whole system breaks down (see Italy, Spain, France,...).
Haler44 to Clutch Cargo • a day ago
Quite a few people say that (mostly, liberals) and it is fundamentally flawed economics. By the same "logic," it would be possible to employ thousands of people digging tunnels to hell with teaspoons.
The goal should be to employ all willing workers PRODUCTIVELY. People in managerial and administrative positions serve productive functions up to a point, but in accordance with the principle of diminishing marginal returns, that point is exceeded when they are preoccupied with excessive regulations. And in my view, regulations become excessive when they address things like lunch breaks and minutia of the tax code that have nothing to do with the health and safety of workers or consumers.
mountaintraveler • a day ago
Amen. I am in the water quality business so regulations requiring good water quality must be my bread and butter, right? Nope. Sure its good to have the standards and criteria essential to maintain ecosystems like the Chesapeake Bay, but the way they are put together can boggle the mind. And then when it comes to actually implementing improvements, regulations are totally inefficient. Too many rules, all based on one size fits all mentality, with overlapping jurisdictions, byzantine application procedures etc. etc. As a result, the fees involved are 15% of the cost, the projects are not as cost-effective as they could be, and the delays are measured in years.
So I do most of my work in China. Our small team is developing the standards, approaches, and methods to improve water quality at a vast scale. We have to figure out how to spend $1billion in the next 3 years for one city alone. Only a few criteria, and no cookbook getting in the way. It is a welcome change.
BTW, it's not just the feds, it's the state and local governments as well. And a lot of the work rule types are designed to maintain monopolies. This is where both parties could get together to resolve this, but the schism between them is just too great these days. Shame
Fish Heads • a day ago
Wanna talk compliance? Go down to your locally owned community bank and ask them about it. A special thanks goes out to the big banks for such a sneaky way to eliminate competition.
enoriverbend Fish Heads • a day ago
One common logic error that the left often makes is to point to big companies that support more regulation, and say "Look, businesses support this, it must not be a burden." But in fact the bigger the company, the less of a burden it is relative to their size. So more regulation is just a way to throw more sand in the gears of their smaller competitors.
cubscap enoriverbend • a day ago
Bingo. A Huuuugggee barrier to entry.
Alsadius Fish Heads • a day ago
I work as a financial advisor, so I get the legal right to laugh at people who complain about an unregulated financial sector. Compliance is the fastest-growing part of the company, and we usually refer to it as the "Business Prevention Department".
I got a chance to do a media interview a while back, and compliance gave me a ridiculous list of requests(tl;dr, they wanted editorial control over the media outlet's output), because they didn't even know that they weren't the department that was supposed to govern what I did there. After a fair bit of digging on my part I found the right person, and got to do things properly, but for a while there compliance was telling me to basically scotch the chance at an interview with rules no self-respecting journalist could ever accept in case I said something wrong, Because not even the fscking compliance department knew what I had to do to keep compliant.
Alsadius • a day ago
Re footnote 2 - yes, small businesses don't add a lot of jobs, but killing them would sure take a lot of jobs away. I'd stay concerned, myself.
madanthony Alsadius • a day ago
Not to mention that some of those big businesses were small businesses at one point. Wal-Mart started out as a single Ben Franklin franchise store, until Sam Walton figured out that he could get stuff cheaper than Ben Franklin was charging him, and pass the savings onto the customer.
dacushing • a day ago
Sadly, both sides of the aisle contribute to this. After all, who wants to vote against the "Save Kathy's tailbone!" bill, and be accused of wanting to break women's tailbones.
Plus you get to have a nice ceremony, syrupy press articles and all the rest. And then NPR puts a tally its database, noting that Congress has passed a bill, and the more bills you pass, the less likely you are to be smacked with the "least productive Congress since X" moniker.
Everybody wins.
Well, except for every business that has to discard all its office chairs and replace them with conformant ones.
ath716 • a day ago
I recently dealt with a case of a government regulation which required us to send a text message to customers, in direct contravention of a different regulation which prohibits unsolicited text messages. We asked our lawyers if there was an exception for text messages which were required by law. Their answer was "no one knows."
DavidWalser Robert_Lee_Hotchkiss • a day ago
This dream of returining to the dynamic small business economy of the postwar period but with a post Reagan-Thatcher system in which workers have virutually no means of influencing the decisions made about their work conditions is a fantasy.
This is a thoughtful comment. Thank you for the contribution.
I quoted the part above because I think it exhibits a factual fallacy. I've never worked in a unionized shop. (I tried to join the iron workers union, but I was turned down.) My best friend from high school, with whom I worked construction, is a electrician and a union member. My best friend has had to put up with more grief on the job than I've ever had to.
That's not because I've always worked for wonderful people. It's because I'm highly skilled and it's far cheaper to keep me happy than it is for me to walk. Know what? That's also true for our receptionist. Not to the same extent as it is for someone with my 3 decades of experience, but true none the less. It takes weeks to find and hire a competent receptionist. In the mean time, the entire office is disrupted while we take turns covering for the person who left.
That means we cannot afford to mistreat our employees even if we wanted to. The same is true for virtually every other business. It is bad business to mistreat employees because reliable employees are hard to find, hire, and train to do their jobs. Losing one needlessly is an expensive proposition and is something smart business people avoid even if they are at bottom nothing but greedy scum who care nothing about their employees but the profits generated by them. (I'm sure that describes someone somewhere -- this is a large country -- but I've never met such a person.)
So, I don't buy your argument that most workers need these protections. Workers at a non-union employer have a lot to say about their working conditions. Most employers will listen to and address reasonable concerns. Not doing so is foolish. Successful businesses are not run by fools.
DavidWalser • a day ago
Dozens of concrete examples of the bad results of increase regulations are found in our tax code. Years ago, Congress wanted to raise more revenue without "raising taxes". So, it added the Uniform Capitalization Rules to the code. It cost one of my clients more than $15,000 comply with is law, which requires a portion of overhead expenses be added to inventory (which prevents the deduction of those expenses to the extent the inventory hasn't been sold).
$15,000 doesn't sound like much (and it ignores the additional costs of complying with the law each year), but the law change increased my client's tax burden by less than $500! I've seen thousands of tax law changes over the years. Most add far more complexity than their relatively modest revenue effects justify.
SgtFraggleRock Stock Soup • a day ago
There are about 180,000 pages in the Code of Federal Regulations.
And that is only federal.
We are well past the "middle ground". At one page per minute, it would take you 50 days non-stop without sleep to read them all (assuming you can read such text in a minute). That doesn't mean you can understand it, nor know it all well enough to obey all those rules.
ctobserver - SgtFraggleRock • a day ago
Actually, it's much worse than you say. Many regulations incorporate other material "by reference" - which means you have to read and understand the reference as well as the actual text of the regulation.
SgtFraggleRock - ctobserver • a day ago
Well, we do. The government regulators don't.
If a government enforcer punishes you for a law or regulation that doesn't actually exist, they have immunity. |
