Regulations: The Hidden Tax on Capital and Growth

I was passing through security at Reagan National Airport recently, when the TSA agents seized my tiny Swiss Army knife. This was puzzling to me because I have been flying with it for years–I even have “high-flying” status on my airline (I’m a frequent patron), so presumably lots of agents have “seen” my Swiss Army knife at one time or another. But never before had one attempted to take it. This was puzzling, also, because I was carrying a small pair of scissors as well which were larger than the knife but not confiscated. I pointed out this discrepancy to the TSA agent who simply responded, “We don’t make the rules…..”.  I guess I was to imply the rest of the declaration: “We just enforce them.” Although, apparently not with consistency.

Unfortunately, a lack of uniformity in enforcement is not reserved for the TSA. It’s one of the major problems that small-business owners face when it comes to most regulators and regulations. Couple this problem with the other major sins of the regulatory process–unmitigated costs, poorly written (with little or no input from business owners) and overly complicated rules, and enforcement by way of administrative procedures (i.e. – guilty until proven innocent)–and you have a recipe for economic stagnation and disaster.

Consider for a moment the magnitude of the regulatory machine in Washington. In 2005, an SBA-commissioned report put the cost of regulatory compliance at $1.1 trillion and more recent estimates are closer to $1.75 trillion. And it’s no secret that the regulatory burden falls almost squarely on the shoulders of those who struggle the most to turn a profit–the small-business sector. Based on the 2005 report, firms with fewer than 20 employees pay over $7,000 per employee each year just to comply with the rules on the books, and the number of rules–and their associated costs–have skyrocketed since then.

In spite of Presidential calls for alleged regulatory reform, costs continue to be disproportionately borne by small firms (in 2005 it was estimated to be 45% higher per employee at small than at large firms). And in spite of calls to eliminate unnecessary, duplicative or arcane regulations, rules have proliferated, setting a new record of 3,573 final rules in the 2010 Federal Register. Not to mention that new proposed rules were up by 20 percent. The icing on the cake: the President has suggested that, after he is re-elected, he won’t need Congress to pursue his policies, using instead the power granted to the regulators (such as in PPACA) and Executive Orders to accomplish what Congress will not do for him. In simple terms, voters will be cut out of the “management” loop, and administrators (some would say dictators) would run the country.

In spite of the uneven and unfair regulatory burden, small-business owners work hard to comply with government rules, often to the detriment of their business. You see, it is not only the cost of complying with regulations that burdens our entrepreneurs; it is the misallocation of their valuable time. The most valuable asset a firm has is the entrepreneur. The more time he or she must divert to compliance activities, the less time he or she has available to grow the firm and create wealth and jobs. It’s simple math, really. So much of compliance and enforcement fails to pass even a cursory cost-benefit test. And because regulators don’t have time to “coordinate” with their counterparts in conducting evaluations, each regulatory agency behaves (and fines) as if it is the only one dealing with the firm. It ignores the potential cumulative impact of regulations on the human and financial capital of the firm and the cost of compliance and enforcement vs. the “value” produced.

With so much to keep track of, it seems likely that every owner is in violation of some obscure regulation every day of the year. Even with a weak economy, 20 percent of NFIB owners cite unreasonable regulations and red tape as their #1 business problem, more than citing taxes (19 percent) or weak sales (18 percent). Instead of working to ease the burden on the private sector so that small businesses can hire, government is doubling down, increasing enforcement with a cadre of new regulatory employees, including more than 10,000 new IRS agents that government plans to hire to enforce new health-care regulations.

The more people we have making and enforcing rules, the fewer we have producing anything of value in the private sector. As entrepreneurs are deprived of the capital  that they need to grow their businesses, the deeper our economy sinks into the hole that the government is digging.

History suggests that the larger the share of a country’s resources in the government’s hands, the worse off the people will be. This is a history lesson we best not forget.