There is an ongoing debate both in the U.S. and globally as to the value of government regulations in the business world. Conservatives believe the legislators should stay out of the boardroom and allow market capitalism and free enterprise to play out, permitting the natural forces of competition to reign in poor business practices. Liberals, on the other hand, believe that if the government does not put regulations in place to protect consumers, employees and shareholders, no one will. While the reality may lie in some form of balance between the two, impassioned stakeholders believe there is only one solution — and the battle continues to rage over which one.
According to the Office of the Federal Register, the United States issues between 2,500 and 4,500 rules each year.(1) These regulations are created by federal agencies in compliance with their authority as granted by Congress. And while America traditionally has been recognized for business-friendly practices relative to the rest of the world, some metrics show that may be changing.
Over the past 12 years, the United States has dropped in the World Bank’s Ease of Doing Business index, falling from second in 2005 to eighth this year out of the 189 countries studied. The U.S. isn’t the only country to drop down the list, but it may be the only surprise. Other countries with the least reform include 15 small states, mostly island nations, and four failed states (Eritrea, Iraq, Libya and South Sudan). (2)
Ease of Doing Business: How U.S. Ranks Globally in 2017(3)
Recent Executive Action
However, a new trend toward deregulation is upon us. President Trump signed an executive order on Jan. 30 aiming to reduce regulation and control regulatory costs, also known as the “One-In Two-Out” order. This mandates that any new regulation proposed by an executive department or agency must be accompanied by the repeal of at least two existing regulations. Furthermore, the costs of the proposed rule must be offset by the elimination of existing costs from the two repealed regulations.(4)
Another step was taken Feb. 24, when Trump signed an executive order enforcing the regulatory reform agenda. This order states that it is the policy of the United States to alleviate unnecessary regulatory burdens placed on the American people. The order instructs federal government agencies to designate a regulatory reform officer and task force to evaluate existing regulations within their respective departments and make recommendations to repeal, replace or modify regulations that, among other stipulations:(5)
- Eliminate jobs or inhibit job creation
- Are outdated, unnecessary or ineffective
- Impose costs that exceed benefits
- Create a serious inconsistency or otherwise interfere with regulatory reform initiatives and policies
Unfortunately, much of the red tape in the U.S. resides at the state level. One issue is that many state rules run contrary to federal orders, creating the unintended consequence of more time and money spent trying to reconcile and comply with overlapping, redundant or contradictory regulations. While many consumers, business owners and lawmakers advocate deregulation to improve the regulatory environment, there is ongoing debate over which government agency should regulate various issues.
Starting a Business
One of the major drawbacks to excessive regulation is the complications it creates for starting a new business. According to a recent survey by the National Small Business Association, small business owners spend an average of $12,000 a year simply complying with regulations. The report found that more than half of SBOs say federal regulations are the most cumbersome.(6)
Some of the regulations required to open a new business include acquiring construction permits, purchasing electricity, registering property, local and state licensing and registration, and filing a business tax return.
Some of the most controversial regulations in recent years were instituted after the collapse of the banking, mortgage and real estate industries and the subsequent economic recession. Experts attributed the crisis to the failure of corporate governance and risk management and a distinct lack of financial regulation and supervision.
Regulation seems to have a life cycle, increasing when Democrats hold majority power and decreasing when Republicans are in charge. Some experts contend that financial deregulation in the 1980s and 1990s led to lax credit and lending standards. This in turn generated a subprime market for mortgages, which in turn bolstered the real-estate boom in the early 2000s that eventually went bust by 2008.
At that point, the Obama administration advocated increased legislation to help restore the financial markets and rescue some banks deemed “too big to fail.” The Dodd-Frank Wall Street Reform and Consumer Protection Act required banks to increase their financial reserves and prohibited proprietary trading. However, the Trump administration, which includes a handful of former Goldman Sachs executives, aims to roll back banking capital requirements to encourage them to issue more loans to consumers and small businesses.(7)
In February 2012, the U.S. Department of Labor (DOL) issued new regulations designed to improve transparency regarding the fees and expenses that employees pay for their 401(k) retirement plans at work.(8)
In 2016, the DOL issued a new regulation that affects the way financial consultants advise their clients. The rule states that all advisors who offer advice related to retirement plans and IRAs are obligated to make their clients’ best interest their only concern, which is referred to as the fiduciary standard. The purpose of the new regulation is to eliminate any conflicts of interest of financial advisors by ensuring clients understand any and all ways the advisor is paid for his or her advice, including sales commissions, fees based on a percentage of assets under management or a set annual fee.(9)
The fiduciary rule was scheduled to go into effect on April 10, 2017, but the DOL has requested a 60-day delay to evaluate if it is consistent with the new administration’s core principles for regulating the country’s financial system.
A Streamlined Approach to Deregulation . . .
“America needs a streamlined approach to cutting red tape. First, all important business regulations should be subjected to cost-benefit analysis by an independent agency … Second, all cost-heavy regulations should come with sunset clauses, so that they expire after 10 years unless Congress explicitly reauthorizes them.” (10)
On the surface, the practical assumption is that less regulation leads to higher productivity, lower costs and stronger economic growth. However, it’s not always that simple. The goal of businesses is to increase profit margins, yet the means that some choose to accomplish that goal can create problems that behoove regulation. For example, consider child labor laws that were instituted in the 1930s.
Unfortunately, there are often significant costs, excess administrative burdens and/or unintended consequences that result from government mandates. While regulations are generally designed to eliminate or mitigate specific issues related to a few bad apples, in some situations they end up doing more harm than good.