Free Markets, Free People


The cost of the regulatory state

One of the claims President Obama made in his State of the Union address was that his administration was engaged in cutting the red tape and doing away with regulations that stood in the way of prosperity

There is no question that some regulations are outdated, unnecessary, or too costly. In fact, I’ve approved fewer regulations in the first three years of my presidency than my Republican predecessor did in his. I’ve ordered every federal agency to eliminate rules that don’t make sense. We’ve already announced over 500 reforms, and just a fraction of them will save business and citizens more than $10 billion over the next five years.

Of course, like many of his claims, the devil is in the details and upon closer scrutiny, the claim has no real foundation in fact.

His first claim is a carefully constructed lie as Free Enterprise points out:

The White House admits that its rules have so far cost $25 billion, which is much more than at the same point during the Clinton and George W. Bush administrations.

The claim is also couched in non-specifics for a reason.  The “500 reforms” are mostly regulations with little or no monetary impact on those who have to satisfy them.  However, the administration has added more rules that cross the magic 100 million dollar impact line than any other administration.  And, of course, those require, by law, that the monetary impact be assessed.  Here’s an example of one (PDF, pg 69):

Enforcement Fairness Act (5 U.S.C. 801 et seq.). This interim final rule:

a. Will have an annual effect on the economy of $100 million or more. This rule will affect every new well on the OCS, and every operator, both large and small must meet the same criteria for well construction regardless of company size. This rulemaking may have a significant economic effect on a substantial number of small entities and the impact on small businesses will be analyzed more thoroughly in an Initial Regulatory Flexibility Analysis. While large companies will bear the majority of these costs, small companies as both leaseholders and contractors supporting OCS drilling operations will be affected.

Considering the new requirements for redundant barriers and new tests, we estimate that this rulemaking will add an average of about $1.42 million to each new deepwater well drilled and completed with a MODU, $170 thousand for each new deepwater well drilled with a platform rig, and $90 thousand for each new shallow water well. While not an insignificant amount, we note this extra recurring cost is less than 2 percent of the cost of drilling a well in deepwater and around 1 percent for most shallow water wells.

b. Will not cause a major increase in costs or prices for consumers, individual industries, Federal, State, or local government agencies, or geographic regions. The impact on domestic deepwater hydrocarbon production as a result of these regulations is expected to be negative, but the size of the impact is not expected to materially impact the world oil markets. The deepwater GOM is an oil province and the domestic crude oil prices are set by the world oil markets. Currently there is sufficient spare capacity in OPEC to offset a decrease in GOM deepwater production that could occur as a result of this rule.

Therefore, the increase in the price of hydrocarbon products to consumers from the increased cost to drill and operate on the OCS is expected to be minimal. However, more of the oil for domestic consumption may be purchased from overseas markets because the cost of OCS oil and gas production will rise relative to other sources of supply. This shift would contribute negatively to our balance of trade.

These rules were proposed in the wake of the BP oil spill in the Gulf of Mexico (GOM).  They clearly identify the effect of the rules. Ironically they include increased cost to consumers, more dependence on foreign oil, and a negative increase in the balance of trade – all problems the administration and most economists identify is problems to be solved if the economy is to move forward.

Now, some may argue that these rules were necessary.  I’d argue that perhaps some new regulation was necessary, but it should have been a regulation which, to the best of its ability, mitigated the effects listed to the minimum, or eliminated them altogether.  Instead, the regulators airily note the effects and then blow them off.  In reality, regulators really don’t care if it costs consumers more, deepens our dependence on foreign oil or ups the balance of trade.

In the State of the Union address, Obama tried to grab the middle and pretend he is a friend to small business:

You see, an economy built to last is one where we encourage the talent and ingenuity of every person in this country.  That means women should earn equal pay for equal work.  (Applause.)  It means we should support everyone who’s willing to work, and every risk-taker and entrepreneur who aspires to become the next Steve Jobs. 

After all, innovation is what America has always been about.  Most new jobs are created in start-ups and small businesses.  So let’s pass an agenda that helps them succeed.  Tear down regulations that prevent aspiring entrepreneurs from getting the financing to grow.  (Applause.)  Expand tax relief to small businesses that are raising wages and creating good jobs.  Both parties agree on these ideas.  So put them in a bill, and get it on my desk this year.  (Applause.)

But again facts undermine the claim.  As the Small Business Association reports, regulations disproportionately effect small businesses:

In the face of yet higher costs of federal regulations, the research shows that small businesses continue to bear a disproportionate share of the federal regulatory burden. The findings are consistent with those in Hopkins (1995), Crain and Hopkins (2001), and Crain (2005).

The research finds that the total costs of federal regulations have further increased from the level established in the 2005 study, as have the costs per employee. More specifically, the total cost of federal regulations has increased to $1.75 trillion, while the updated cost per employee for firms with fewer than 20 employees is now $10,585 (a 36 percent difference between the costs incurred by small firms when compared with their larger counterparts).

Say one thing while doing the opposite.  Vintage Obama.  Tomorrow’s Steve Jobs would have a very expensive uphill climb in today’s regulatory climate.  The net effect? $1.75 trillion dollars of cost to small businesses, the place where “most jobs are created” per Obama.

The SBA also reports:

Environmental regulations appear to be the main cost drivers in determining the severity of the disproportionate impact on small firms. Compliance with environmental regulations costs 364 percent more in small firms than in large firms. The cost of tax compliance is 206 percent higher in small firms than the cost in large firms.

Those regulations are primarily driven by OSHA and EPA.  And there’s no secret  about the expansion of both regulators and regulation being pushed by Obama’s EPA focused on the environment.

The “good” news, however, this is one “shovel ready” project that seems to be creating jobs:

Large, small, global and regional — law firms are opening Washington offices at a rate not seen since before the recession, as they position themselves for work centered around the capital’s regulatory machinery.

Yes, I was being very facetious, however, when sharks smell blood in the water, they tend to gather in large numbers in anticipation of a feeding frenzy.  Despite Obama’s claims to the contrary, there’s a reason this is happening, and it isn’t because the administration is lessening or cutting regulations, it is because it is imposing more and needs additional legal enforcement help (there’s also the side that will concentrate on defense). 

Don’t forget, the $1.75 trillion dollar cost above applies to only small business.  That means that the total cost of regulation is much higher than that.  Also don’t forget, when Obama makes his claim about not passing as many regulations as previous administrations, that’s meaningless without an dollar effect numbers.  As noted, in regulatory cost to the economy, he’s passed many more costly regulations at this point in his presidency than did the previous administration.

The bottom line, of course, is that A) you can’t believe a thing the man says and B) contrary to his claims, he’s imposed more cost on the economy via regulation, not less. 

Finally, if you think it is bad now, wait until ObamaCare kicks in.  One of the reasons law firms are beefing up their Washington DC presence is in anticipation of that law going into effect.  If you think it’s a regulatory nightmare now, just wait.  It’s going to get worse.

Sean Hackbarth, commenting on the increase in lawyers:

Resources spent on paperwork and re-jiggering business plans is less money going to business investment and job creation, but at least we know someone is benefiting from the regulatory pile-on.

Shovel-ready – and not in the good sense.

~McQ

Twitter: @McQandO

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8 Responses to The cost of the regulatory state

  • “Large, small, global and regional — law firms are opening Washington offices…”

    Generally speaking, these are firms to HELP people deal with regulation. The government has legions of their own lawyers, and they aren’t in firms.

    • @Ragspierre The government also contracts with law firms for enforcement help. It’s cheaper than hiring. But regardless, the point is that the beefing up of law firms in DC anticipates a rather large increase in their need due to increased regulation coming from the guy’s administration who claims he’s involved in cutting red tape.

      • @McQandO Granted, McQ. BOTH legal and lobbying firms will predictably EXPLODE under the new Obama reality…as they have been doing.

        This is how you manage to live and “compete” in a fascist economy. That is what you are reduced to doing.

    • @Ragspierre “They aren’t in firms” – awww Rags, sure they are, they’re part of “Dewey, Obstruct and Howe”, formerly known as the Justice Department.

  • U.S. small-business owners who aren’t hiring — 85% of those surveyed — are most likely to say the reasons they are not doing so include not needing additional employees; worries about weak business conditions, including revenues; cash flow; and the overall U.S. economy. Additionally, nearly half of small-business owners point to potential healthcare costs (48%) and government regulations (46%) as reasons. One in four are not hiring because they worry they may not be in business in 12 months.
    –Gallup

    That tells the story in rather clear terms, does it not?

    • @Ragspierre All those people who answered the Gallup poll are Republican voting racist liars. The answers are simple, you just have to see them (and it’s easier if you squint real hard and look away from the problem).

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