Regulation's staggering costs - federal regulation of business

Nation's Business, June, 1992 by David Warner

Rowena Fullinwider's "Wonderful Almond Pound Cake,' lemon curd, and carrot jam are not diet foods. In fact, the Norfolk, Va., businesswoman doesn't claim any of her specialty gourmet food items are anything but "good eatin'." New federal regulations, however, will require Rowena's Inc. to spend at least $100,000, she estimates, to tell consumers the amounts of certain nutrients in each of the company's 30 products.

It's a cost that Fullinwider and other small food makers may be hard-pressed to handle, says Marsha Echols, Washington counsel for the National Association for the Specialty Food Trade. "They have fairly narrow profit margins," Echols explains. Fullinwider, for example, says her 16-person company makes from 0.5 to 5 percent profit on about $1 million in annual sales. In the best year, that's just $50,000 net profit.

The specialty-food association and other food-industry organizations estimate that the cost of complying with the Nutrition Labeling and Education Act of 1990, which resulted in the new rules, will be $4,000 to $6,000 per product. The law requires most food products to have labels listing specified nutrients and the amounts contained in each product.

The estimated per-product cost of compliance includes an analysis of the product to determine the amounts of various nutrients, design and production of printing plates for new labels, and printing and application of the labels. If the nutrient content of a product changes over time, reanalysis and new labels are required.

The labeling law is just oneof thousands of federal rules governing various businesses and contained in the Code of Federal Regulations. In addition, about 65,000 pages of new and modified regulations are published each year in the Federal Register, says Brink Lindsey, director of regulatory studies for the Cato Institute, a public-policy research organization in Washington, D.C.

Fifty-two federal agencies employ more than 122,000 workers to administer the nearly 5,000 regulations in effect. The fiscal 1992 federal regulatory budget for these agencies is $13 billion, according to the Center for the Study of American Business, at Washington University, in St. Louis.

The cost of regulations to business is staggering, not just monetarily but also in the degree to which they stifle economic growth and innovation, especially for small companies, according to various public-policy analysts who study regulation. Says the Cato Institute's Lindsey: "The current level regulation is so high, and so complicated, and so intrusive that it's strangling business and suppressing productivity."

Lindsey cites the lengthy Food and Drug Administration (FDA) process for approving new biotechnology, which, he says, has stymied advances in agriculture. He also notes regulatory restrictions on the telecommunications industry, which he says have resulted in the U.S. lagging behind Japan in the development of fiber optics and high-definition television.

According to Fullinwider, the labeling law will discourage her from developing new products or improving existing ones. "I'm not going to put new products out," she says, adding that "in the gourmet food industry, we are always improving our recipes. I want to [make improvements], but I can't afford to if I'm all bound up by regulations."

Federal regulations cost the U.S. economy more than $400 billion in 1991, equal to more than $4,200 per household, according to Thomas D. Hopkins, an economics professor at the Rochester Institute of Technology (RIT), in Rochester, N.Y. Recent, well-publicized examples of such regulations include the Clean Air Act Amendments and the Americans with Disabilities Act, both enacted in 1990. (For more on the regulatory impact of the disabilities law, see "Disability Rules Target Job Bias," on Page 29.)

The new clean-air law will cost business an estimated $25 billion a year in addition to the $32 billion that companies already have been spending yearly to comply with the law before it was amended, according to the Environmental Protection Agency. Moreover, the disabilities law will likely cost firms more then $20 billion a year, estimates Robert Genetski, a Chicago economist and business consultant.

Certainly, there are benefits to having clean air, making accommodations to employ and serve people with disabilities, and giving consumers nutrition information, but business groups and many policy experts are questioning just how far lawmakers and regulators should go in trying to reach those objectives. It's not a question of no regulation vs. some regulation, say critics of federal red tape, but rather regulation vs. overregulation.

"Government regulation is a delicate balancing act between real costs and expected benefits," says Lawrence A. Hunter, vice president and chief economist of the U.S. Chamber of Commerce. "Unfortunately, the scale today has become tipped against business--particularly small business--and economic growth."

The Chamber is serving as a clearing-house for information on regulations that are particularly burdensome to business. (For details, see "How Do Federal Rules Affect Your Business?" in the May issue of Nation's Business.)