Feb 19, 2016 - 11:30am

The Cost of Regulations: Lies, Damned Lies and Statistics (Guest Column)

Chariman, Sageworks (Guest Columnist)



This column was provided by an outside group or company for publication on Above the Fold.

Regulations introduced over the most recent year are imposing costs that are far less than the benefits they provide, according to a new government report.  The White House Office of Management and Budget recently reported that federal regulations from fiscal 2014 generate annual costs of up to $4.4 billion. Meanwhile, the report says the regulations’ monetary and ancillary benefits – such as protection of the health, welfare and security of Americans – have a total value of as much as $22.8 billion in 2010 dollars. In essence, the report implies a significant net benefit from regulation.  This would be assuring, except that the report lacks a notable footnote: that is, that it is a government-produced report without a shred of objectivity. 

Most importantly, legislators are actually relying on it to make decisions and introduce legislation on even more regulation. The White House numbers will be used by Congress and federal agencies to justify decisions affecting wide areas of our economy and millions of businesses with millions of employees. The report is used to evaluate how effective regulations are. If the government report is wrong or misleading because of the way it is pulled together, it’s affecting the United States economy, so the scope of the report’s purpose alone should create a fair amount of anxiety.  

We know that business executives and small business owners tell us that regulatory requirements pose the top challenge to U.S. organizations – and have done so for years. The burden of complex and changing government regulations ranks higher than economic conditions, competitive pressures, hiring challenges and customer issues, according to the AICPA’s quarterly survey of CFOs and other financial executives.

Business owners complain again and again that government regulations create burdens on time and resources that often yield disastrous consequences. Take the example of a small day care center- the owner of this day care center must file tax returns, pay quarterly estimated taxes, figure out and pay Social Security and other payroll taxes, provide customers with tax-related documents and figure out how the Affordable Care Act affects them. They must comply with OSHA and other employment laws, environmental laws and licensing and standards requirements. In addition, it seems like finding out about new requirements is a routine part of running a business, year in and year out.

Businesses themselves have a tough time putting an exact number on the costs of these regulations. How can you measure the cost of having to fill out additional forms, consult lawyers and spend time studying regulations that might otherwise be spent on strengthening your product and services or serving your customers better?

Even without this consideration, however, this $4.4 billion number looks suspect.  There are several major problems with the 94-page analysis on which this number is based.

My biggest concern with this report is that the agencies that are being funded are the primary source of the information.  There is no incentive for these agencies to provide objective information that might convince others that the agency isn’t essential. A business validating the performance of an employee wouldn’t rely solely on that employee’s review of his or her own performance. It would be like having a company set its own price on the stock market or using students’ ratings of themselves as the sole basis for their GPAs.  Would you ever expect an agency to provide a report that indicates that it's providing less benefit than its cost of operation? 

Related: No Easy Street: How Regulations Curb the Success of America’s Street Vendors

There's more. The items being measured in the report are not objective – especially the benefits. The report reads that regulations provide up to $22.8 billion in benefits- but many of these benefits cannot be quantified. For example, obviously there’s a social good created if people live longer because they’re not taking in toxic chemicals, but how do you quantify that? “As discussed above, there is considerable uncertainty about how to value reductions in risk to life,” the report notes—no kidding. The report states that while agencies base their estimates on empirical research, they have widely different methodologies that show tremendously differing results.

In addition, the report’s cost estimates are significantly underestimated, because most regulations or rules aren’t included. The Federal Register counts nearly 3,600 rules issued in fiscal 2014, but the White House analysis ultimately counts costs and benefits for only 13.  All of the rules for independent agencies are excluded. Annual compliance costs for the community banking industry alone are $4.5 billion. Clearly, these independent agencies represent significant compliance costs.  

Perhaps most importantly, rules for which reviewers couldn’t estimate both costs and benefits are also excluded. One health regulation with an estimated cost of up to $6.4 billion was excluded from the totals because it lacked an estimate for benefits. This exclusion is based on the faulty assumption that all costs have benefits. It’s natural that costs might be more easily estimated than benefits in the case of many regulations; excluding rules that don’t have both estimates would skew the report beyond the limit of utility.

The question of how regulations impact costs is a worthy one to address. The impact on small businesses is especially important, considering these businesses created 2 million of the 3 million private-sector jobs generated in 2014. But the precise impact on small businesses is even less clear, based on the White House report and previous comments from the SBA.

In 2009, President Obama voiced a rightful concern about shielding scientific decisions from political agendas. He argued that it is important to make sure that “scientific data is never distorted or concealed to serve a political agenda – and that we make scientific decisions based on facts, not ideology.”  This reasoning should also be applied to his OMB report.  I would argue that the federal government’s current methods for estimating regulatory impact are so far off base that they are alarming; the current analysis may lead to harmful regulation without appropriate attention to burden and cost. 

If legislators rely even lightly on the report’s findings in setting policies, we’re headed into dangerous territory. 

Brian Hamilton is the chairman and co-founder of Sageworks, based in Raleigh, N.C., and the original architect of Sageworks’ artificial intelligence platform, FIND, a leading financial analysis technology for analyzing private companies. Hamilton regularly leads discussions on private company performance, the financial strength of companies preparing for an IPO and entrepreneurship in major business and financial news outlets. Mary Ellen Biery, Research Specialist at Sageworks, also contributed to this article.

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Chariman, Sageworks (Guest Columnist)