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The Business Effects of Regulatory Restrictions & Compliance

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  • 0:04 The Regulation Questions
  • 0:44 Cost-Benefit Analysis
  • 1:04 The Costs of Regulation
  • 3:45 The Benefits of Regulation
  • 5:22 Lesson Summary
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Lesson Transcript
Instructor: Ubirathan Miranda

Dr. Miranda is an author and instructor of international business and risk management.

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.

The Regulation Questions

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 one hundred percent 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 2016 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.

The Cost of Regulation

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 were taken from the Ten Thousand Commandments 2016, a publication for the non-profit organization Citizens for Responsibility and Ethics in Washington (CREW).

  1. The federal regulatory cost reached $1.885 trillion in 2015.
  2. Federal regulations cost nearly $15,000 per U.S. household each year
  3. In 2015, 114 laws were enacted by Congress during the calendar year, while 3,410 rules were issued by agencies. Thus, 30 agency regulations were issued for every one congressional law enacted that year.
  4. Regulatory compliance costs were higher than the $1.82 trillion that the IRS expected to collect in both individual and corporate income taxes from 2015.

Additionally, regulations on the energy market, which include the exploration, drilling, refining, transportation, and sale of natural gas and petroleum, contribute towards higher energy prices, loss of jobs, and an inflationary effect across the U.S. economy. The increased 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 have had to absorb the increased costs of regulatory compliance. For example, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which enacted far-reaching federal authority into the private financial sector as a means of promoting financial stability, was a direct result from the 2008 Crisis.

The health industry has also been affected by regulation. 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 purchase it. Insurance premiums and deductibles have increased, in part because health companies must cover pre-existing conditions. The ACA may eventually become a more efficient and egalitarian health care legislation. In any case, the mandated regulations will have impacted the health care industry.

The Benefits Regulation

By now you may be upset at the regulatory cost to businesses and ultimately to the consumer and are 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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