Regulatory reform and the U.S. manufacturing sector: the focus is on improving efficiency

Business Economics, Jan, 2006 by Thomas A. Hemphill

Recent American business (including manufacturers) concerns with the burden of regulatory paperwork have centered on the cost of complying with the Sarbanes-Oxley Act of 2002 and New York Stock Exchange/NASDAQ listing requirements, specifically provisions in Section 404 of Sarbanes-Oxley, which focus on internal controls and enhanced financial disclosures. The Business Roundtable "Third Annual Survey of Corporate Governance Practices" asked its corporate members about the costs incurred in connection with the Sarbanes-Oxley Act and New York Stock Exchange/NASDAQ listing requirements (Business Roundtable, 2005). Survey respondents gave these projections:

* 47 percent estimated costs of more than $10 million (up from 22 percent in 2004).

* 29 percent estimated costs between $6 and $10 million.

* 23 percent estimated costs between $1 million and $5 million.

Even if Hopkins and Crain (2001) are guilty of overstating regulatory costs on the U.S. manufacturing sector, the ratios of these costs to other sectors of the U.S. economy (6:1 versus the average firm, and 2:1 adjusted for employment), paint a stark economic landscape for U.S. manufacturers attempting to compete in a global economy where many other countries' manufacturing sectors have lower total costs of production. (1) Thus, it comes as no surprise that U.S. manufacturers, representing a broad spectrum of companies and industry associations, provided valuable input into regulatory reform policy recommendations for the Bush administration's manufacturing initiative.

The Manufacturing Initiative and the Regulatory Reform Agenda

In January 2004, the U.S. Department of Commerce publicly released Manufacturing in America: A Comprehensive Strategy to Address the Challenges to U.S. Manufacturers. Of the six areas that manufacturers attending the Commerce Department's 20 nationwide roundtables identified as needing immediate attention, reducing the regulatory costs that government imposes on manufacturing made the list. To address this issue of reducing the rising costs of regulatory compliance, Manufacturing in America recommended that OMB should lead the following three-step process to reduce the burden of regulation on the U.S. manufacturing sector:

* Establish an inventory of potential regulatory reforms that would lower the cost of manufacturing. OMB should seek public comment on existing rules and afford the opportunity to propose particular reforms. The request for public comment and the nomination of reforms should address existing regulations, guidance documents, and paperwork requirements.

* Conduct an analysis of the inventory. OMB should, in consultation with the Council of Economic Advisers, the Commerce Department, and other agencies, evaluate the proposed reforms and, where appropriate, implement those reforms on a priority basis. This evaluation should include an assessment of the cost of compliance and the economic impact of current rules, particularly on small and medium-sized businesses, as well as the cost to the taxpayer and to the consumer of administering those regulations. The objective of the review should be to determine whether there is a less costly means of achieving the benefits Congress intended by authorizing such regulations. That analysis should extend to the agencies that implement the rules as well. This effort could involve broadening the analysis done under section 610 of the Regulatory Flexibility Act, which currently applies to small business.