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Cut the red tape

By Stephen Moughon
web posted November 22, 2010

It was the first time I spoke to a Frenchman. Staring at the exchange student, I couldn't wait to begin querying him about his culture. After a bit of small talk, we dove into an issue discussed universally: politics. He criticized his president. I grumbled about Congress. We debated foreign affairs and then moved to corporate policy. "Francois," I said, "the corporate tax rate in America is more than 60% the EU average. Why aren't companies flocking to Europe?" He looked at me as if the question were a joke. Realizing I was serious, Francois laboriously explained the numerous regulations Europe enjoys that the U.S. lacks. For the first time in my life, I was struck with some sense of the economic impact a ubiquitous regulatory environment can have on corporate decision-making.

Since the current recession began, getting the American economy moving has been a hot topic. Most recently, the buzz surrounds tax cuts that will soon expire unless legislative action is taken. Taxes are important. But will lowering them by itself reinvigorate the economy? Although the U.S. flaunts one of the highest corporate tax rates, due to many exemptions in the tax code, businesses are paying historically low dues. But don't forget the cost of regulation. According to a report released by the Small Business Administration, the annual cost of federal regulations is $1.75 trillion. To put this figure into perspective, the total revenue of the federal government last year was $2.1 trillion. The cost of federal regulations alone is over 10 percent of GDP.

Cofounder of Home Depot, Ken Langone, puts it this way, "It would be virtually impossible to start a Home Depot today for a variety of reasons: the regulations, the issue of angel money—where unless you have a certain net worth you can't invest in start ups. I dare say every original investor in home depot would not qualify today by virtue of the regulation." Regulation pervades every sector of the business world. As an employee at a doctor's office, I have witnessed firsthand the proliferation of rules. Just this past week our office began writing prescriptions on tamper resistant paper. Certainly the added expense is justifiable when prescribing narcotics, but is it truly necessary for every medication?

There is the argument that a lack of oversight can cause even more harm. However, Nobel laureate Milton Friedman analyzes the "fix" of regulation when he writes, "Government intervention in the marketplace is subject to laws of its own, not legislated laws, but scientific laws. Every act of intervention establishes positions of power. How that power will be used and for what purposes depends far more on the people who are in the best position to get control of that power and what their purposes are than on the aims and objectives of the initial sponsors of the intervention." In other words, government regulation will merely reflect the interests of those who enforce it. Take the Department of Agriculture. Although it has been commissioned to lead the fight against obesity, just last two weeks ago the New York Times reported that Dairy Management, an arm of the Department of Agriculture, has tried to "bolster farmers and rural economies" by encouraging the sale of cheese. Dairy Management "teamed up with Domino's Pizza to develop a new line of pizzas with 40 percent more cheese, and proceeded to devise and pay for a $12 million marketing campaign." The same department tasked with taking on obesity is pushing for Americans to consume more saturated fat.

Don't get me wrong. Rules are necessary. But every regulation has both advantages and disadvantages. It may be appealing to focus on benefits while neglecting costs, but reality demands better of us. For decades America has championed liberty in the market. That approach has made us the freest, richest, and most powerful nation on earth. We have a proud history to live up to. Let's not default on our responsibility. ESR

© 2010 Stephen Moughon




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