Why Federal Regulation is Bad for Business

By Kevin Kimberlin, Chairman, Spencer Trask & Co.

Federal agencies and other factions of our government have been busy and quite efficient for some time in their efforts to control what people and businesses can and can’t do. They’ve done so by issuing an overwhelming range of regulations — often to the detriment of the citizens and business they purportedly serve.

Fortunately, there’s been recent movement that points to a potential reversal of this trend, which I find encouraging. This includes the just enacted Two-for-One Executive Action issued by President Trump, and legislative movement on the Regulations from the Executive in Need of Scrutiny (REINS) Act. Could it be that the regulatory tide is finally ready to turn?

Balancing Act Gone Awry

We all agree some amount of regulation is vital for the protection of our general well-being, especially when it comes to health and safety. As with anything in life though, balance is key.

Unfortunately, balance has been thrown by the wayside in this instance, as the regulatory framework underpinning our socio-economic system has grown decidedly imbalanced over recent decades.

Regulations Come at a Cost — Both Visible and Invisible

Quantifying the burden of federal regulations on the U.S. economy is not easy to do given that some costs are readily visible while many others are invisible.

The visible cost emanating from 178,277 pages in the Federal Register illustrates a major drag on growth and prosperity. This is evidenced in the following:

• $1.9 trillion is the annual cost to U.S. taxpayers and businesses due to Federal regulations. This equates to $15,000 per household annually, according to the Competitive Enterprise Institute (CEI).
• 191,304 rules were added to the Federal Register from 1976 to 2015, according to the Office of the Federal Register.
• 1,340 “Major” rules were added to the Federal Register between 1997 and 2015, which are categorized as regulations that have a minimum annual impact on the economy of $100 million.
• 223 to 1 is the average number of “final” rules issued by federal agencies, commissions and departments, compared to laws enacted by Congress, according to Harvard senior fellow, Niall Ferguson.
• 390 separate rules were created by regulatory agencies, spawned by the Congressionally-approved Dodd-Frank Act.
• 12% of U.S. GDP is syphoned off by regulations, according to the Small Business Administration.
• Trillions of GDP dollars are lost annually, taking into account the long-term growth reduction caused by decades of costly economic regulation, according to a report by economists John W. Dawson of Appalachian State University and John J. Seater of North Carolina State University.

The invisible costs are just as burdensome, imposing a toll that adds up to, or should I say ‘subtracts from’ the average U.S. household — equating to approximately 26% of their annual budget. And while not all people pay income taxes, we all pay regulatory taxes. This stealth tax is especially costly and burdensome to the 43 million at-risk Americans who are living in poverty.

Opportunity Lost

I witnessed this very scenario first hand through a cellular company I helped found some years back — Millicom, a five-man startup that was a pioneer of the cellular industry. At that time, the FCC enacted their one-rival-per-market rule that actually protected the AT&T copper-landline monopoly from the threat of mobile. Millicom attempted to fight this, but the FCC ignored its own general counsel, the Department of Justice, a Congressional mandate and President Reagan’s directive to deregulate telecom.

As a result of effectively being locked out of the U.S. market, the company was forced to look offshore, where countries and their regulators were more accommodative. Prime Minister Margaret Thatcher sensed an opportunity and took steps which gave rise to the eventual British dominance of cellular. Millicom played an important role in this by establishing Racal-Millicom, a joint-venture later renamed Vodafone.

As a final insult, Vodafone eventually grew to be the world’s seventh most valuable public company, peaking at a market cap of $404 billion. The tragedy is, most of this value went overseas, due directly to FCC regulation.

Seeing the Invisible

Thanks in large part to Vodafone, England went on to lead the mobile industry for a quarter-century. Not only did the U.S. forfeit economic value, we also lost the social benefits too. In 1999, only 25% of Americans owned a mobile phone compared to 46% of Brits.

How do you value the loss of this ‘Made-in-America’ miracle? While it’s hard to see and shed light on the invisible, these facts give shape to the magnitude of the lost opportunity:

• Mobile telephony is the fastest diffusion of any technology ever — faster than TV, radio, the PC or the Internet.
• Mobile generates more cash than all these combined, with revenues to equipment makers and service providers of $1.75 trillion in 2016. For context, this amount represents more than half of the entire U.S. GDP when the FCC made its ill-advised ‘set-aside’ regulation in 1982.

The Millicom story represents an unprecedented forfeiture of value, and a loss of benefits to this country, begging the question, “How would things have been different had regulators not overplayed their hand?”

Going Forward…

REIN in the Beast

In my view, to avoid losing out on the next big thing, we need to tame the regulatory beast by putting lawmaking squarely in the hands of elected representatives. Positive strides have been or can be undertaken by the new Administration and Congress that should begin to curb the regulatory burden. For example:

1. President Trump issued the aforementioned “Two–for–One” Executive Order requiring regulators to sacrifice two rules for every new one added.
2. The last months of the Obama Administration were filled with a slew of new rules, many of which will likely add to the existing burden borne by taxpayers and businesses. Utilizing provisions of the Congressional Review Act (CRA), passed during the Clinton administration, Congress can review and reject any of those rules within six months of issuance.
3. The CRA may also provide Congress with the added ability to set aside regulations dating much further back. Under the provisions of the Act, reports must be made to Congress prior to new regulations going into effect.
4. According to the CEI, if Congress were to make good on its promise to take action to simplify tax regulations, the estimated $316 billion yearly compliance burden could be significantly reduced.
5. Despite previous failed attempts, the REINS Act looks set to finally pass. It would require Congressional and Presidential approval of any “Major” rule within 70 days of issuance.

Regulatory Balance — The Rising Tide

The necessity of reasoned, well-crafted rules is beyond dispute. But they should serve — not hinder or repress. It’s time we band together to encourage the Federal government to clear out the thicket. Rulemaking should be carried out transparently by elected lawmakers operating under the glare of a watchful public eye.

Finally, it’s imperative that we never again cede major innovations developed in America to others before citizens of this country. Congress needs to ensure and promote an environment that fosters and actually helps honest innovators — like our cell phone pioneers — as they endeavor to create jobs and add value to the economy right here at home.

Kevin Kimberlin is the Chairman of Spencer Trask & Co., a privately owned advanced technology investment firm. Mr. Kimberlin is an investor in private deals with outside investors and manages Spencer Trask & Co. to bring capital at the seed stage and organize subsequent private rounds of investment. Mr. Kimberlin has founded or first funded new ventures that have transformed global communications and changed the world — including Ciena, which first commercialized a breakthrough that serves as a foundation of the internet, which he launched at Spencer Trask & Co. Mr. Kimberlin received his undergraduate degree from Indiana University, and earned his Masters degree from Harvard. twitter.com/kbkimberlin (@kbkimberlin)