How to Grow Your Startup: Kill Regs

Consumer choice is the best regulator. When people have several options for goods and services from competing firms, they are able to select the choice that serves them best. In theory, the best firms survive not because regulations protect consumers but because consumers protect themselves.

The problem is that this type of free market only occurs when it is allowed to work. Excessive regulations create a labyrinth where the firms with the best legal teams win, not the firms with the best goods and services. Like parasitic turtles feeding off of defenseless consumers, large corporations with over-sized legal resources and well-paid lobbyists pack on ever-thickening layers of regulations around themselves to protect their positions of power in the markets, allowing them to stomp out competitors that attempt to offer superior products with better prices. Recently, startups have found it increasingly difficult to overcome Goliath.

Health insurance companies and the Affordable Care Act are perfect examples where health companies spent $556 million on lobbying in 2009, a year prior to the enactment of the ACA.

2009 Spending on lobbying by industry. Center for Responsive Politics.

The most impressive part of the magic act is that corporations can hide their wolves in sheep’s clothing. Sometimes it’s the Congressional lawmakers, the most educated of all, who are most easily deceived. Part of this is simply the result of Washington, D.C.’s isolation from the rest of the country. American workers don’t have the money and connections to fly into D.C. whenever they wish, so lawmakers never hear the full American story. Lobbyists and special interests groups working on behalf of corporations, however, certainly have the resources to make their voices heard in Congressional halls and mainstream news publications that lawmakers read regularly.

Corporate influence has permeated through nearly every pore of Capitol Hill, distorting the fabric of capitalism and hurting healthy competition. Yet some lawmaking may simply be the effect of poor decision-making and misguided strategy. A small sampling of laws and legal themes shows the regulatory burden inadvertently imposed by Congress on startups, small businesses, and consumers.

1. Employee Benefits: job benefits are meant to help employees, but they often have an inverse effect. With increased employment requirements, companies hire fewer workers due to the increased amount of benefits required for each additional employee, so the workload is concentrated on fewer people who must work harder and longer. There has also been a trend toward hiring more independent contractors instead of employees to skirt these requirements.
2. Elkins Act of 1903: railroads offered bulk discounts to heavy rail users, and Congress enacted a law that prohibited these discounts. Since livestock and oil producers were the largest customers, their shipping costs became higher than the market equilibrium price, and people buying beef and gasoline paid the price. Other companies, in effect, were subsidized by the people buying these common products. The Hepburn Act further impaired the growth of railroad construction by dampening price increases which would have influenced competing railroad companies to enter the market. This lack of effective railroad regulations is reflected in the lack of effective U.S. rail transportation networks today.
3. Fannie Mae: the provider of mortgage-backed securities was established in 1938 during the Great Depression and fell apart in the Great Recession. Federal regulators assumed that the government enterprise could serve the people better than private companies, but it failed miserably, wasting federal resources and occupying space in the financial industry that could have been filled by functional companies. The firm should be completely liquidated to avoid prolonging its problems and allow hardier competitors to takes its spot.
4. Controlled Substances Act: the law primarily targets naturally-occurring compounds that cannot be patented since they are derived from nature. Meanwhile, artificial analogs to these natural compounds are totally acceptable under U.S. law. Pharmaceutical companies’ profits are threatened by herbal supplements, which are often safer and cheaper than their pharmaceutical counterparts. Legal opioid manufacturers, for example, have long feared the legalization of marijuana. Many other Schedule I drugs also have medical benefits long suppressed by pharmaceutical companies looking to protect demand for their own drugs.
5. Obamacare: the requirements of the Affordable Care Act prevent innovation in the health insurance and healthcare services markets. Healthcare compliance is now so difficult and time-consuming that only large companies are able to provide most services, and they must waste significant resources on compliance. A deeper discussion of healthcare regulation and reform explores the downsides of over-regulation.
6. Dodd-Frank Act: these financial regulations were meant to wrangle banks into acting in a way regulators thought would improve the economy, but it backfired in a major way. 1,341 commercial banks disappeared from 2010 to mid-2015, reducing competitive pressures on the largest banks. Significant hiring took place among small community banks to comply with new Dodd-Frank regulations. Furthermore, regulatory agencies now have enormous flexibility to enforce their own rules on banks. The flexibility has totally eliminated regulatory certainty, an important ingredient for economic growth.
7. 2015 Federal Budget: hidden provisions are sneaked into critical budget bills in order to get unpopular laws passed, and 2015 was no exception. For starters, Harry Reid added a provision that directly benefited a private equity CEO who happened to be his campaign donor. Others found a way to insert the full text of the Cybersecurity Information Sharing Act, a highly controversial government surveillance bill, into the budget deal.
8. Compliance Estimates: the Small Business Administration estimates that in 2008, the costs of business compliance with federal regulations had reached $1.75 trillion. Of this amount, an unequally large burden is carried by companies with fewer than 20 employees, which spent $10,600 per employee in 2008 on regulatory compliance.

Like a company following Lean Six Sigma practices, the United States can rise up by taking advantage of a leaner government, not only at the federal level, but also at the municipal, county, and state levels. New businesses deserve a fighting chance.

It’s time for the American people to take back the Hill.

Many regulations can be stifling, but this article is certainly not a call for anarchy. Many regulations are helpful and protect the common good, which is precisely what every law should be designed to do. Take for example, ozone depletion and the resulting rise in UV radiation due to the use of CFC refrigerants. The free market and individual self-interest couldn’t correct the problem quickly, so regulations were valuable in mitigating the health impacts on Earth’s residents. The same is true with other EPA rules.

Proposed Litmus Test for Lawmaking

Federal agencies, Congress, and other lawmaking bodies should use a simple litmus test to decide whether they should enact a new law or rule, although many politicians are currently only applying the first half of this test at most. When in doubt, they should err toward simplicity.

1. Is the law expected to have a net positive impact on U.S. citizens over an eternal time horizon? Does it serve the common good? If the answer’s no to either question, don’t pass the law. If yes to both, continue to step 2.
2. Can consumer choice serve the same function as the law? Are consumers able to make informed decisions in the free market? Is the topic of regulation not associated with the tragedy of the commons? If the answer’s no to any of these questions, consider enacting the law.

When the free market can correct a problem, let the invisible hand do its work. When the common good is at stake, let there be laws.