The Business Effects of Regulatory Restrictions & Compliance

Instructor: Ubirathan Miranda

Dr. Ubirathan is an author, international business and risk management instructor.

Did you know that regulatory restrictions and compliance have direct effects on business? The effects can be positive or negative, and as is the case with anything related to government, it's often politicized.

Houston, Do We Have a Problem?

During most American election cycles candidates rail against the evils of government regulation. It's true that a complex tax code and an increasing number of federal regulations contribute to a challenging and costly business environment. Everyone agrees that regulatory reform is needed to address these issues. However, are we willing to have an unregulated stock market or unsafe conditions at nuclear power plants? Are we ready to trust that businesses will act responsibly 100% of the time? Also, we need to put politics and hearsay aside and look at cost-benefit analysis to determine if regulations and compliance is really detrimental to business.

Cost-Benefit Analysis

The 2015 Draft Report to Congress on the Benefits and Costs of Federal Regulations and Agency Compliance with the Unfunded Mandates Reform Act has some interesting facts about the benefits and costs of regulations. In most cases the benefits to society outweigh the costs of those regulations.

Estimates of the Total Annual Benefits and Costs of Major Federal Rules by Agency, October 1, 2004 - September 30, 2014 (billions of 2001 or 2010 dollars).

The Dark Side

If only the business regulatory scheme could be simple. But it's not. There's evidence that federal regulations and compliance add financial burdens to the U.S. economy. The following figures are taken from the Ten Thousand Commandments 2014, a publication from a non-for profit financial policy organization.

  1. In 2013, there were 72 new regulatory laws with 3,659 new rules. This translates into a new rule every 2 ½ hours.
  2. Cost of compliance has reached $1.863 trillion in 2013. This is more than the combined Gross Domestic Product (GDP) of Australia and Canada. If U.S. regulations were a country, it would be ranked the 10th largest economy.
  3. The cost of compliance to the average American household is approximately $14,974.

Additionally, regulations on the energy market, which includes the exploration, drilling, refining, transportation and sale of natural gas and petroleum, also contribute towards higher energy prices, loss of jobs, and an inflationary effect across the U.S. economy. The increase global demand on limited energy sources will continue to fuel the fierce regulatory debate in the face of market forces, environmental concerns and public perception.

The financial industry has also felt the economic burden of compliance. Since the 2008 Economic Crisis, banking, trading, lending, mortgage and financing companies had to absorb the increased costs of regulatory compliance. For example, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 enacted far-reaching federal authority into the private financial sector as a means of promoting financial stability. This was a direct result from the 2008 Crisis.

The health industry has also been affected by regulation. For example, the Affordable Care Act (ACA) has increased the tax burden on high earners and healthcare companies. Also, the individual health coverage mandate exacts a fee via taxation on individuals who can afford medical insurance but opt not to do so. Insurance premiums and deductibles have increased partly due because health companies must cover pre-existing conditions. Whether the ACA will at the end morph into a more efficient and egalitarian health care legislation or not is not the issue. The mandated regulations have impacted the health care industry.

The Kind and Gentler Side

By now you may be upset at the regulatory cost to businesses and ultimately -to the consumer -and calling for the abolition of the entire regulatory scheme. It's the French Revolution and the Boston Tea Party all over again! However, common-sense regulations have and will continue to benefit the environment, the consumer, and the economy. Let's take a look at a few.

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