$38 Billion-Worth Of Red Tape Choking Businesses

About a year ago, I wrote about The Shocking Cost of Regulation and the unintended consequences new rules can have on our business system without proper cost-benefit analysis being done. A year later, it’s clear the swarm of red tape is choking companies and impeding growth.

U.S. businesses continue to deal with the unintended consequences of these regulations. According to Wayne Crews of the Competitive Enterprise Institute, there’s currently more than 4,000 new regulations in the pipeline and a record 81,405 pages of new rules were created in the Federal Register during 2010. As the economy continues to sputter, many thought-leaders’ voices have grown louder in protest against increased regulations.

In its semi-annual update of regulations, conservative think-tank The Heritage Foundation summarized how many more rules and regulations have gone into effect over the past few years, with “a higher number and larger cost of regulations” coming under the current administration than ever seen before. In the first half of 2011 alone, $38 billion in new costs were added, “more than any comparable period on record,” says The Heritage Foundation.

The terrorist attacks, the Enron/Worldcom scandals, the housing/banking crisis and the overhaul of the health care system have led to a considerable jump in regulations over the past decade. From 2001-2006, the number of economically significant regulations—those that cost $100 million or more—averaged 72 per year. Since then, the number of pending regulations doubled.

More Regulations Expected 081911

As I often say, it’s not the political party, it’s the political policies. Prior to President Obama taking office, President Bush put $60 billion in additional annual regulatory costs in place, says The Heritage Foundation.

Alabama Congressman Spencer Bachus, chairman of the House Financial Services Committee, said this onslaught of regulations—most recently Dodd-Frank—burdens the private sector by creating an “atmosphere of uncertainty” where businesses can’t put “ideas and capital to work.”

A 2010 report developed by the Small Business Administration pegged the cost of federal regulations at $1.75 trillion, nearly 12 per cent of America’s GDP. This cost is more than $8,000 per employee and up from only about 4 per cent of GDP in 1950.

Small businesses—which have historically created seven out of every 10 jobs, are especially hurt by these higher costs of regulation. Companies with fewer than 20 employees bear a disproportionate share of the federal regulatory burden with total costs per employee exceeding $21,000—36 per cent more per employee than larger companies, according to data from the Small Business Administration.

Unlike in the private sector, federal regulatory agency jobs have been growing at a much faster pace to enforce this onslaught of new regulations. Investor’s Business Daily compared the significant growth of jobs that have taken place in the federal regulatory agencies versus the lack of job growth in the private sector. Since March 2010, the cumulative change in federal jobs–which includes the Environmental Protection Agency (EPA), the Federal Communications Commission (FCC) and the Food and Drug Administration (FDA)–was just over 5 per cent. The cumulative change in private-sector jobs remains significantly lower at a little more than 1 per cent.

Regulator's Hiring Boom 081911

These federal numbers don’t include the Transportation Security Administration, which employs around 45,000 airport screeners, or the 5,000 federal workers needed for the Consumer Financial Protection Bureau to enforce regulations put in place by Dodd-Frank.

IBD highlighted startling statistics, “If the federal government’s regulatory operation were a business, it would be one of the 50 biggest in the country in terms of revenues, and the third largest in terms of employees, with more people working for it than McDonald’s, Ford, Disney and Boeing combined.”

To make sound decisions these days as a voter, taxpayer and investor, Americans need to gather and dissect all the economic data, the political environment, the international landscape and the opinions of businesses and thought-leaders. These regulations will continue to be enacted unless government leaders are persuaded to act differently.

Our team will continue to go where we see the best policies for growth, where jobs are created and where policies are more focused on social investing than social welfare.

None of U.S. Global Investors Funds held any of the securities mentioned as of 6/30/11.