Government regulations and the effect on the economy

[JS80]

As an example SOX compliance estimates came in way under the original projections. Back in 2005 I billed triple the amount of budgeted hours and the company was billed 5x original estimates.

 

[Fern]

As an example SOX compliance estimates came in way under the original projections. Back in 2005 I billed triple the amount of budgeted hours and the company was billed 5x original estimates.

True.

And the unintended consequences were significant. It has cost the US (and by extension the US govt) a ton of money. It really killed our capital markets and the market for new and emerging companies. Almost everyone now goes to the markets in Europe to sell stock and raise capital.

Basically, it killed an entire industry. Or forced it to be 'outsourced' abroad.

Fern

 

[JS80]

True.

And the unintended consequences were significant. It has cost the US (and by extension the US govt) a ton of money. It really killed our capital markets and the market for new and emerging companies. Almost everyone now goes to the markets in Europe to sell stock and raise capital.

Basically, it killed an entire industry. Or forced it to be 'outsourced' abroad.

Fern

But hey it made people feel good while making us accountants rich(er).

 

[woolfe9999]

Why do people buy into the moronic paradigm that "regulations" as a whole have a specific kind of effect? The issue is what kind of regulations, not how much. The whole over/under-regulation discussion is a red herring designed to keep the public incapable of having any meaningful input to public policy.

The question ought to be what we want our regulations designed to do. Some people truly are anarchists and for them arguing against over-regulation might make sense. Most people aren't but have been hoodwinked into thinking that all regulations are an equal force for evil. Lots of people have a vague notion of what they call a "free market" which, they have heard off and on, delivers something that is efficient or optimal (although most people who use this term have no idea what that even means). These people especially are stooges in this whole discussion. Yes, some markets do achieve a reasonable approximation of a truly competitive market. Many others (large ones at that) do not. Where there are strong incentives to engage in price discrimination, hide information, profit from unpriced externalities, or deceive customers, there is a need for robust regulation in order to achieve a closer approximation to the "free market" that so many people extoll.

Now there are many other types of regulation, designed for many purposes other than efficient market function. They are less defensible from economic grounds, and more appropriately addressed in a purely political context. I've got an opinion about them, but it's not really the topic of this thread...

When a pundit talks in broad strokes about the need to "get rid of regulations", the evils of over-regulation, or on the other side, the need for more regulations to fight those evil anarchists, they are trying to get you to suspend your cerebrum and pick a side based on your gut instead. With so many intestinal appeals, is it any wonder this country is going to shit?

This is entirely correct.

 

[theeedude]

We see many claims here that govt regulation is burdening our businesses/economy, many argue it isn't so.

We see claims that companies are hoarding money and just being greedy, others have said they are holding off because of uncertainty.

Below is an example of burdensome and expensive new regulation that is contributing to the uncertainty. This new regulatory provision, not expected to be finalized until later this year, was stuck into the Dodd Frank bill which ostensibly about domestic banking reform. Why/how does stuff about the Congo and rebel groups belong in there?

For some reason it's hard to find this stuff in the mainstream media, it's been pretty mush ignored (except a few reports here and there about the unintended humanitarian problems this is causing - some will just stop doing business with them.)

It's a fairly long article, so I've only quoted part below.


http://www.cfo.com/article.cfm/14586443?f=search


So, we're running expensive foreign policy initiatives off the backs of our companies and we wonder why none want to come here, and those that are here keep leaving.

But never mind this stuff, let's keep painting schools and filing potholes' that'll fix our economy.

And nah, companies don't need to keep funds in reserve for complying with this new stuff, they can just blow their money now and borrow more if needed next year like the fed govt.

Fern

On the other hand, the compliance manager only has a job because of these rules. 🙂 $9-16B is a lot of compliance managers.

 

[nonlnear]

On the other hand, the compliance manager only has a job because of these rules. 🙂 $9-16B is a lot of compliance managers.

Are you saying that is a benefit?

 

[woolfe9999]

It isn't ideological at all.

In the case of this particular estimate I'm interest in the methodology they employed. It is an estimate and they do provide a range. While we can see in the case of the specific company they are taking it seriously and donating significant resources to it, but the regulations themselves have not yet been finalized, so no one knows if the estimate is close or not. But we could look at the methodology and see if it's BS. E.g., I have seen estimates where another org's number were used, but hit with a multiplier of, say, 5.5. Without a damn god reason for that, I'd say it's BS.

In any case the estimate is the least important thing here. The fairly detailed description of the work involved by this company, the uncertainty present, and the sheer number of industries/companies involved alone sufficiently demonstrates that this particular regulations is expensive and burdensome.

Fern

If you consider the cost not to be the most important issue, why did you underline and bold it in your OP? And if you're so interested in the methodology, it took you several posts after you had originally bolded and underlined it to make that inquiry. For the record, I think the cost issue is paramount with this reg and others. This particular reg is a disclosure reg, not a banning reg. It's purpose is to inform the consumer public so that they can make informed choices. I like the idea of those kinds of regs more than the banning kind, but they're not worth if it compliance costs too much.

Here's the critical issue so far as I'm concerned. Industrial lobby groups have but one function - to protect the bottom line of industry. That is what they are paid to do and they are incompetent if they fail to do so. The public interest is not on their radar. It isn't even theoretically an issue for consideration. This isn't about chastising corporations for being greedy. If I was a shareholder, I wouldn't want the corporation regulated either. It's the nature of the beast.

These cost estimates come from these groups time and time again and they are often tenfold the estimates of the regulatory agency. The people at these regulatory agencies performing these cost estimates aren't getting paid on a sliding scale depending on the result. They are not lining their pockets in conjunction with performing these estimates. Unless there is corruption of course, which usually means they are in bed with the industry they are regulating, like what happened with the gulf oil spill. Here is just the most recent discrepancy I recall:

http://www.businessinsider.com/president-obamas-90-billion-regulation-2011-8

This BTW was the huge new emission regulation which Obama recently decided to put on hold. The cost estimate coming from the Industrial Alliance, which is essentially the same type of lobby organization as the NAOM, was 1.1 trillion versus $90 billion estimated by the EPA. I'm sure the EPA estimate could be error prone in some random way because estimating future costs is inherently error prone. Maybe there's even a pro-regulation bias in there somewhere. But these kinds of discrepancies need to be explained.

Looking at the methodology is a good idea but that information is hard to come by and very difficult for the lay person to assess. If you had to guess at the industry group's methodology, the best guess would be that one or two member companies provided internal cost estimates, and they used a multiplier to generalize the result to the entire affected industry segment. Of course, whatever company or companies supplied cost estimates to the lobbyist knew exactly what the estimates were to be used for - as ammunition to shoot down the proposed regulation.

This particular cost estimate, BTW, is an extraordinary claim that requires extraordinary proof so far as I'm concerned. I linked the actual proposed reg for you. The actual compliance measures are entirely up to the affected companies. The only requirements are that of disclosure of the methodology and findings. Your lobbyist estimates likely assume, among other fallacies, that every company will make maximum compliance efforts when there is no fine or penalty for doing less.

I don't know what you're really trying to say here. You quote an article with a massive cost estimate coming from an industry lobby group and you want me to prove it isn't accurate? If I went around crediting statistics emanating from, say, union lobby groups, how much credibility would you give them? I think we both know the answer to that. It's all nonsense because those groups represent narrow interests and those interests are their only concern.

You seem concerned about knocking down the straw man of "all regulations are good and worthwhile" which frankly is an opinion I'm totally unfamilar with. The contra opinion, that regulations affecting business are per se bad, however, is another matter. It's become quite prevelant and is based on generalizing from total ignorance. Yet in one sense you're right. We should be made aware of more regulations and what their costs and benefits are. And not just ones selected to make a particular point. The interesting thing is you seem to think that people's ignorance about regulations blinds them only to their costs while not recognizing that it also may blind them to their benefits. Given the amount of anti-regulatory sentiment based on gross generalizations going around these days, I'd say there's considerably more of the latter than the former.

- wolf

 

[nonlnear]

These cost estimates come from these groups time and time again and they are often tenfold the estimates of the regulatory agency. The people at these regulatory agencies performing these cost estimates aren't getting paid on a sliding scale depending on the result. They are not lining their pockets in conjunction with performing these estimates. Unless there is corruption of course, which usually means they are in bed with the industry they are regulating, like what happened with the gulf oil spill. Here is just the most recent discrepancy I recall:

http://www.businessinsider.com/presi...ulation-2011-8

This BTW was the huge new emission regulation which Obama recently decided to put on hold. The cost estimate coming from the Industrial Alliance, which is essentially the same type of lobby organization as the NAOM, was 1.1 trillion versus $90 billion estimated by the EPA. I'm sure the EPA estimate could be error prone in some random way because estimating future costs is inherently error prone. Maybe there's even a pro-regulation bias in there somewhere. But these kinds of discrepancies need to be explained.

...

- wolf

There is a big difference between the nominal cost of compliance and the economic cost of compliance. Government agencies often don't try to estimate the total economic cost of a regulation (the CBO is generally prohibited from doing so), and when they do their estimates are often highly politicized. Consider how the DoJ would estimate the cost of criminalizing marijuana. How do you think they would consider the economic cost of so many felony records inhibiting perfectly decent citizens from finding gainful employment? That's not even touching on the perils of estimating non-politicized secondary economic effects which themselves introduce massive errors to such estimates.

Now it's my initial impression that the SEC's CBA doesn't attempt to estimate the economic impact at all. Not only that, it's pretty naive in its approach to the nominal costs too. Take this gem for instance:

Depending on the state of competition in the market for independent private sector audits, the additional cost stemming from the assumption of expert liability could be passed on to issuers furnishing Conflict Minerals Reporting in the form of higher audit fees, which in turn would increase these companies’ cost of compliance with the statute, although, as noted, issuers could avoid such costs by not incorporating the audit report into their Securities Act filings. In any event, since this audit market is still in its nascence, and issuers presumably would not choose to incorporate the report by reference, the above effects are difficult to assess but are likely insignificant.

Did you catch that? Essentially they are saying, "Because the market for compliance audits is not mature yet (duh!) we are going to ignore this piece of the projected cost." Pure gold. Maybe they are right, but it's silly to pretend that there is any sense in putting confidence in this estimate (or any other, to be fair, including from the other side).

Now to the question of where the SEC's numbers come from. They have a lot of footnotes and references, but one key number that REALLY ought to have a reference does not.

Although no entity has yet conducted due diligence for its conflict minerals supply chain or obtained an audit of this due diligence, we obtained estimates from one entity that works with NGOs and one industry group of possible costs associated with conducting the due diligence and the audit based on the preliminary information they currently have. The entity that works with NGOs has estimated that the annual cost of conducting the due diligence for the four conflict minerals ranges between $20 million and $25 million. An industry group provided a much lower range of between $8 million and $10 million to set up a mineral source validation scheme.

This "industry group" is conspicuously devoid of a footnote documenting who provided this conveniently lowball number, or what exactly they were estimating. Also, there is no description of how they solicited these estimates. How many did they solicit? How were they solicited? Were there other estimates received that aren't mentioned? Who knows? There are a couple other missing footnotes that seem a little odd - especially given how anal federal agencies [pre]tend to be about these things.

(All these quotes are from here.)

Let's return to the difference between estimating the nominal cost and the economic cost. The SEC's document purports to estimate the cost of compliance. Whether they are close or not, let's just say they are likely on the low side, even if they are within range. The larger systemic effect is that even though Congolese minerals are not prohibited by the regulations, they will effectively be banned due to the inordinately high cost of compliance associated with legitimately sourced Congolese minerals. For some minerals this could have significant impacts on the market price faced by manufacturers and retailers who are subject to these rules. We can debate whether or not that cost is worth it or not (that's a separate issue), but the undeniable fact is that these larger costs are not accounted for in the SEC's numbers.

 

[rchiu]

True.

And the unintended consequences were significant. It has cost the US (and by extension the US govt) a ton of money. It really killed our capital markets and the market for new and emerging companies. Almost everyone now goes to the markets in Europe to sell stock and raise capital.

Basically, it killed an entire industry. Or forced it to be 'outsourced' abroad.

Fern

Not just the capital markets, but also the IT industry. I work in IT industry and have seen how these SOX compliance requirement made IT so much more expensive and complicated that average business have hard time maintaining an IT department and forced those businesses to outsource.

You work on an IT project, the amount of documentation you need become tremendous, you spend almost more time documenting, explaining projects to auditors than doing the actual work. You run an IT operations, you have to hire more people so there is a "division of duty", and you have to secure and hide the data making technical work like DBA/Admin's work extremely difficult.

It is not a coincident that after SOX, more and more companies outsource their IT. All these regulation has added lots of cost to running the IT business, and make it not worth while for companies to spend the money to run such a complex and heavily regulated business process.

 

[UberNeuman]

to sum up: business tends to go where labor is cheap...

 

[DrPizza]

I did an internship at a particular manufacturing company - a fairly well known company with many locations. One of my job duties was testing all of the raw materials that came to the plant, right from the railroad car as it was shipped in. If someone wanted, they could have added "verify where the materials came from" and it wouldn't have added more than a couple hours to my week, if that when averaged out over a year. With plants all over the US for that manufacturer, I don't think any of the other plants would take much more time either. In other words, 2 million dollars per year per company to figure out where their raw materials came from seems a bit high to me.

 

[nonlnear]

I did an internship at a particular manufacturing company - a fairly well known company with many locations. One of my job duties was testing all of the raw materials that came to the plant, right from the railroad car as it was shipped in. If someone wanted, they could have added "verify where the materials came from" and it wouldn't have added more than a couple hours to my week, if that when averaged out over a year. With plants all over the US for that manufacturer, I don't think any of the other plants would take much more time either. In other words, 2 million dollars per year per company to figure out where their raw materials came from seems a bit high to me.

I don't think you appreciate what the issue is here. There are mines in the Congo shipping out rare minerals which are perfectly legal for anyone in the US to use - in theory. They become "conflict minerals" if any truck driver, shipper, or agent of said shipment ever paid a bribe or unofficial "taxes" to any member of a group on a magic blacklist. Now imagine you are the chief risk officer of a company that imports alloys from a mill that uses trace ingredients which are partially sourced from a Congolese mine that is officially legal, but your supply chain doesn't have its own private army. What are you going to do?

 

[Craig234]

It isn't ideological at all.

In the case of this particular estimate I'm interest in the methodology they employed. It is an estimate and they do provide a range. While we can see in the case of the specific company they are taking it seriously and donating significant resources to it, but the regulations themselves have not yet been finalized, so no one knows if the estimate is close or not. But we could look at the methodology and see if it's BS. E.g., I have seen estimates where another org's number were used, but hit with a multiplier of, say, 5.5. Without a damn god reason for that, I'd say it's BS.

In any case the estimate is the least important thing here. The fairly detailed description of the work involved by this company, the uncertainty present, and the sheer number of industries/companies involved alone sufficiently demonstrates that this particular regulations is expensive and burdensome.

Fern

That's a completely different post than the one I replied to, criticizing the allegation that the desire for 'credibility' would effectively prevent bad behavior.

 

[Craig234]

I don't think you appreciate what the issue is here. There are mines in the Congo shipping out rare minerals which are perfectly legal for anyone in the US to use - in theory. They become "conflict minerals" if any truck driver, shipper, or agent of said shipment ever paid a bribe or unofficial "taxes" to any member of a group on a magic blacklist. Now imagine you are the chief risk officer of a company that imports alloys from a mill that uses trace ingredients which are partially sourced from a Congolese mine that is officially legal, but your supply chain doesn't have its own private army. What are you going to do?

It's worthwhile to take steps against the terrible situation about resources in the Congo.

 

[nonlnear]

It's worthwhile to take steps against the terrible situation about resources in the Congo.

Yes. However that doesn't mean that any and all proposed steps are worthwhile just because somebody somewhere imagined that they might have an effect on the market for conflict minerals. At the very least I would like the CBA from whichever agency was drafting the regulations being put into effect to actually have complete references for their numbers. I don't think that's too much to ask.

 

[dmcowen674]

Tell you what, I'll pay attention to you in this thread if you can demonstrate how this regulation has any-damn-thing to do with the environment in the USA.

It's foreign policy, not environmental policy.

Fern

Foreign policy you say?

What has all this "free trade" crap gotten us?

110% pure crap is what.

 

[dmcowen674]

to sum up: business tends to go where labor is cheap...

and the U.S. was cheap when things like Love Canal existed.

The OP is trying to dismiss it but it is 100% related.

Yes, common sense regulation increases cost of labor but without it you get Love Canal.

 

[shira]

The first goal of a business is to ensure its profitability. The first goal of a politician is to ensure his own re-election. The first goal of government is to justify its own existence. Agencies and bureaucrats who produce studies showing that the shiny new legislation is so much yak caca will not long linger.

EDIT: As far as being relevant to your point: You indicated your distrust in the numbers generated by the people who have to bear the cost. I pointed out that the CBO is not a disinterested party, nor a party whose existence is based on its accuracy. The CBO's existence is predicated on its usefulness to whomever is on power. A long career is not crafted by telling the public that your bosses' new plan is stupid. (With one slight caveat; the bureaucrats do have some incentive to favor the Dems, since the Pubbies at least pretend to want to downsize government. It's entirely possible that some bureaucrats in the CBO actually still believe them.)

Why don't you provide us with links to impartial, specific, well-documented case studies of instances where the CBO slanted it's conclusions to appease those in power? Or is this yet another of your baseless, moronic claims that you assume to be true?

 

[nonlnear]

Why don't you provide us with links to impartial, specific, well-documented case studies of instances where the CBO slanted it's conclusions to appease those in power? Or is this yet another of your baseless, moronic claims that you assume to be true?

I wouldn't say that the CBO deliberately slants its conclusions to appease those in power. Rather, their prescribed methodology is very easy to game. For example, an easy way to get a bill's cost to come in low is include some future cuts or tax hikes before the end of the ten year window that are guaranteed (practically speaking) to be cancelled. The CBO is prohibited from considering whether anything being legislated is, in fact, likely to happen.

I don't know that there is a good solution to this other than lots of transparency (which it pretty much has right now). I shudder to think how a CBO-like body would operate if it were given more discretion over its estimates. I think it would then become much more politicized. As it is now I think the CBO does a very good job of doing what it is told to do: which is produce estimates based on deeply flawed assumptions that they are not allowed to second guess.

 

[bfdd]

Why do people buy into the moronic paradigm that "regulations" as a whole have a specific kind of effect? The issue is what kind of regulations, not how much. The whole over/under-regulation discussion is a red herring designed to keep the public incapable of having any meaningful input to public policy.

The question ought to be what we want our regulations designed to do. Some people truly are anarchists and for them arguing against over-regulation might make sense. Most people aren't but have been hoodwinked into thinking that all regulations are an equal force for evil. Lots of people have a vague notion of what they call a "free market" which, they have heard off and on, delivers something that is efficient or optimal (although most people who use this term have no idea what that even means). These people especially are stooges in this whole discussion. Yes, some markets do achieve a reasonable approximation of a truly competitive market. Many others (large ones at that) do not. Where there are strong incentives to engage in price discrimination, hide information, profit from unpriced externalities, or deceive customers, there is a need for robust regulation in order to achieve a closer approximation to the "free market" that so many people extoll.

Now there are many other types of regulation, designed for many purposes other than efficient market function. They are less defensible from economic grounds, and more appropriately addressed in a purely political context. I've got an opinion about them, but it's not really the topic of this thread...

When a pundit talks in broad strokes about the need to "get rid of regulations", the evils of over-regulation, or on the other side, the need for more regulations to fight those evil anarchists, they are trying to get you to suspend your cerebrum and pick a side based on your gut instead. With so many intestinal appeals, is it any wonder this country is going to shit?

this is true, i think to many people assume i mean get rid of all. which is retarded because i have never said that ever, not a single fucking time. i just demonize idiotic regulation, in which most environmental shit happens to fall under imo.


see woolfe, we agree when he says it.

 

[BoberFett]

to sum up: business tends to go where labor is cheap...

Do you intentionally buy gasoline at the most expensive station in town just to help them remain profitable?

 

[her209]

to sum up: business tends to go where labor is cheap...

And workers have little to no rights.

 

[DucatiMonster696]

to sum up: business tends to go where labor is cheap...

The reality is slightly more complicated then you seem to imply. If your assertion were completely true the continent of Africa (especially the Congo which has the lowest GDP in the world according to several sources) would be a hub of businesses (both high tech and low tech) and jobs that would rival Asia in size and scope.

 

[Craig234]

The reality is slightly more complicated then you seem to imply. If your assertion were completely true the continent of Africa (especially the Congo which has the lowest GDP in the world according to several sources) would be a hub of businesses (both high tech and low tech) and jobs that would rival Asia in size and scope.

The cost to business to build the infrastructure needed in Africa makes that not 'cheap'.

There are two basic things nations are exploited for: natural resources and labor.

With Africa, it's resources. With parts of south America - like Chile's copper or Venezuela's oil - it has been as well.

Sometimes, they're mixed. Also in Chile, under Pinochet, there were American corporate factories, with barbed wire keeping workers in, patrolled by armed security forces, where people suspects of labor organizing or other subversion were hauled off the work line outside the building and tortured where screams could be heard by the workers.

Elsewhere, there have been things like the major fruit companies who have cheap labor that delivers the resource of fruit - with a lot of violence and repression involved, these companies paying security forces, partly to combat criminals and others who attack them, partly to prevent any labor organization.

The Congo has its people in utter poverty send their children into extremely dangerous labor collecting natural resources, which everyone else profits from, starting with the black markets that smuggle the resources out of the Congo to avoid paying the taxes. It's a terrible tragedy and injustice.

'Free trade agreements' are largely about helping corporations of high-wage nations more easily outsource the labor they can.

Sometimes it can actually bring some money to the poorer labor; it has an overall downward pressure on global labor prices.

 

[Craig234]

Yes. However that doesn't mean that any and all proposed steps are worthwhile just because somebody somewhere imagined that they might have an effect on the market for conflict minerals.

I agree.

At the very least I would like the CBA from whichever agency was drafting the regulations being put into effect to actually have complete references for their numbers. I don't think that's too much to ask.

Not really. I support improving regulations; I oppose corrupt opposition to them.