Thursday, February 23, 2012

Overhead-Producing Regulations

Regulatory overhead imposes costs on business and government – pin the tail on Congress and poorly written laws.

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Waste (noun): a useless expenditure; an activity without adequate return

A recent article in The Economist talked about how America is burdened by the costs and inefficiencies from excessive and poorly written regulatory legislation. This is an aspect different from the hackneyed typical criticism of regulation.

For instance in healthcare, every hour of patient care causes 30 minutes of paperwork.  As the Patient Protection and Affordable Care Act goes into effect, federally mandated hospital reimbursement categories increase to 140,000 from 18,000 -- all requiring research, coding, and validation. None of this has anything to do with delivering good healthcare. Nor does it have anything to do with effective, efficient government. For its part, the Dodd-Frank financial reform act was meant to to avoid another meltdown. But it's 848 pages long; a single two-page section results in a 192-page form that costs every company more than $100,000 each time the form must be completed.

The Economist argues that regulatory complexity comes from overreaching legislators and overachieving lobbyists. Complexity, in turn, creates compliance cost and risk. And the risk that a firm may not be in compliance creates further costs to mitigate and manage that risk.  Job-killing regulations? To the contrary. The legislation generating these regulations turn out to be a net job creator for compliance officers, administrative assistants, medical records clerks, and attorneys.

However, all the overhead cost resulting from poorly written and loophole-filled regulatory legislation is not a net gain to the economy. Instead it drags on the economy, taking money that could be used to hire revenue-producing employees and redirecting it into the production of deadweight, dust-collecting three-ring compliance binders.

We need well-conceived and concise legislation that results in easily understood and enforceable regulation to grant transparency for investors, level the playing field for all firms, support competitive markets, and provide enforceable anti-trust provisions. Too good to be true? Not if Congress can keep it simple, temper its tinkering, and admit that it does not possess the expertise to write effective, efficient regulations.

Regulation is meant to normalize markets so that they are competitive and fair, where all players have equal market access and bear all the costs of their own economic activity.  It is also meant to temper the excesses of anti-competitive behavior and other externalities.  If Congress can temper its tendencies to overlegislate, perhaps regulators can do their jobs while reducing the overhead costs that constrain our economy.