Red tape rising in ‘Land of the Free’

When talking to youngsters, I find some want India to become more like the US, and some less so. However, both groups are under the illusion that the US is a bastion of free enterprise. Alas, the supposed Land of the Free is actually the land of rising red tape.

The Wall Street Journal last year cited data compiled by the Mercatus Centre of George Mason University and Weidenbaum Centre of Washington University on the number of federal regulators, and number of pages devoted to regulation in the Federal Register. The figures are startling (see accompanying table).

Between 1970 and 2006, the number of pages in the Federal Register (which lists all regulations) shot up from 20,036 to 78,000. The number of regulators in the service of the federal government rose from 90,000 to 241,000. In the first six years of the George W Bush era (2000-2006), the number of pages of regulations increased by over 10,000, and regulators by over 65,000. So much for the criticism that Bush has ushered in neo-liberal rule.

A study by the Small Business Administration estimates that the cost of complying with federal regulations is around a trillion dollars in lost output. However, many (though not all) regulations also have social benefits in the form of increased safety for consumers and workers, and a cleaner environment.

The biggest increases in regulatory personnel since 2000 have occurred in agencies dealing with Wall Street, drug and food multinationals, income tax, cartel-busting, and the Bureau of Tobacco, Alcohol and Firearms. So, the rising number of regulations and regulators are aimed specifically at the biggest, most influential corporate sectors.

This leads us to a puzzle. Giant US corporations spend ever-larger sums on lobbyists to wine, dine and influence legislators. In India, we worry that spending in parliamentary elections is now a few crores per seat. But in 2008, spending in the US presidential and congressional elections is estimated at a whopping $6 billion (Rs 24,000 crore).

Some of this will come from individual contributions, but a big chunk will come from giant corporations. Charles Lewis has written best-sellers with titles that need no explanation – The Buying of the President 2000 , The Buying of the President 2004 . These document how candidates raising the most money are most likely to get nominated by their parties as candidates. Some critics claim that the US is not a democracy at all, since corporations have bought legislators.

But if so, why do legislators keep increasing the regulations and regulators that hurt corporations? Again, why do corporations spend ever more sums on a strategy that seems to fail?

One explanation could be that, despite rising regulation, the buying of legislators nevertheless assures huge, monopoly profits for MNCs. However, their balance sheets show otherwise. The net profits of the Fortune 500 (the 500 largest US corporations) have varied from 1% to 6% of sales in the last six years, very modest margins. Every year, dozens of Fortune 500 companies lose money, even as some enjoy skyrocketing profits. This is competition, not monopoly.

Why do corporations not have legislators in their pockets, despite spending ever-larger sums on lobbying? Because corporations are engaged in a fight without end against civil society groups demanding regulatory changes to check perceived shortcomings, improve quality and safety, and protect consumers, jobs and the environment. No matter how much standards and quality are improved in one year, demands soon arise to improve them still further.

All corporate successes create some losers, who lobby legislators to change the rules. Corporations find themselves on a treadmill, spending huge sums on lobbying to change regulations in their favour, and then finding that public pressures or rivals manage to create fresh regulations that hurt them.

Some pressures for regulation are brought by incumbents to create entry barriers for newcomers, ostensibly to ensure higher standards. A bizarre consequence is a rising licence-permit raj. More than 20% of US workers now need a permit to practise their occupation, up from 4.5% in the 1950s. Some occupations have always needed credential certification to ensure that practitioners have the requisite skills – doctors, lawyers, and architects. But now entry barriers have risen in over 1,000 occupations. In Michigan, you now need a licence to catch reptiles. In Arizona, you need state certification to be a tribal rainmaker. In Maryland, you need a licence to be a fortune-teller, supposedly to ensure better forecasts!

The saving grace of these anomalies is that, despite appearances, legislators are not in the pockets of corporations. They seek the dollars of corporations but this is not an end in itself – it is a means to win elections. That means wooing a wide range of voters, many of whom have anti-corporate interests, and some of whom see licensing as a way to limit entry into their professions.

The net result is what optimists might call a desirable and democratic balancing of interests. The side-effect, ironically, is ever more regulations. Even as India edges towards the US model, the US is edging towards ours.

What do you think?