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A Hidden Opportunity Cost of Regulatory Compliance: Management Time

by Patrick McLaughlin on June 21, 2013

in Entrepreneurship, Regulation

At the federal level, regulators in many agencies attempt to estimate the impacts that new regulations would have on businesses, even if the average quality of these analyses is typically poor.  But these impact analyses rarely consider a conceivably major cost: the opportunity cost of business owners or managers who have to spend their time dealing with regulations.

One of the simplest costs that regulators consider, for example, is paperwork: how much more paperwork will be imposed on businesses as a result of a new regulation?  Indeed, the paperwork burden is sometimes the primary cost considered in these analyses, as was the case in this rule proposed by the Department of Labor towards the end of 2011.  This proposal addresses requirements for affirmative action and non-discrimination that apply to federal contractors, proposing, among other things, to “strengthen the affirmative action provisions, detailing specific actions a contractor must take to satisfy its obligations. [The proposal] would also increase the contractor’s data collection obligations, and establish a utilization goal for individuals with disabilities to assist in measuring the effectiveness of the contractor’s affirmative action efforts.”

Just consider one part of the summary of that proposed rule: “increase the contractor’s data collection obligations.” If you read on in the Federal Register notice (search for the term “12866” to get to the analysis section), you’ll find that the Dept. of Labor assumed that contractors have people in place to perform the increased data collection obligations. So for the analysis, the Dept. of Labor simply added some paperwork time to each contractor, and calculated how much the extra employee time would cost each contractor.

But here’s the catch.  What if the contractor has to hire a new employee to handle this?  The costs of searching for a new employee can be substantial.  A recent post in the St. Louis Business Journal featured Steve Baden, president of Royal Banks of Missouri, discussing the difficulties in finding and hiring a compliance officer – an employee whose job it is to oversee regulatory compliance, which certainly includes vast amounts of paperwork.  Baden said that the process of hiring a compliance officer took him “a year of interviews to find someone qualified and cost [him] six figures.”

Management time is expensive.  Business owners are the entrepreneurs that help create economic growth through innovation.  When they have to spend their time searching for compliance officers or filling out paper work, they are not spending their time finding new ways to improve their businesses or starting new ones.  This is a real cost of regulation, and one of the reasons that the accumulation of regulations can stifle an economy.

Furthermore, any employee’s time—whether it’s a new employee or one who already worked for the contractor—is also valuable time.  When Steve Baden has to hire a full-time compliance officer in order to navigate the paperwork maze created by regulations, that individual hired to ensure compliance will not do some other productive activity with her time.  How valuable is it to society to have highly skilled individuals spending their time collecting data or filling out paperwork to show compliance with regulations?  Time used on regulatory compliance is necessarily not time used elsewhere. Without the million-plus restrictions created by federal regulations, countless compliance officers would be gainfully employed in roles that create better value in the economy.

One of my mentors once stated that he could create jobs by hiring people to trim his lawn with toenail clippers (warning: links to a Penn & Teller episode, and they do not refrain from using vulgar language).  But that’s probably not the most productive use of their time.  The fact that an action creates jobs does not mean the skills and efforts of individuals are used in the best possible way, nor does it mean that there is necessarily a net gain in jobs.  The creation of a regulatory compliance job may be offset by elimination of one or more jobs elsewhere because of increased operating costs.

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