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The Impact of Obama’s Regulatory Environment on Business

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From a friend who helps businesses work their way through the regulatory thicket:

Dear Hugh:

I have noted with interest the recent meme on your show about government policy severely hurting the business environment. My ears especially perked up last Thursday when Brian Westbury discussed how regulatory policy was keeping the pool of money available for lending very low. There are vast areas of regulatory policy that have a similar effect so I thought I’d write you and tell you about the particular one I deal with.

By way of introduction, I am in the business of “environmental compliance consulting.” Specifically, I work with manufacturers to help them comply with the myriad and labyrinthine environmental regulations that control how they operate. I have been doing this for about 20 years. Most of my clients are businesses with 50 or fewer employees and do less than 10 million a year in business – businesses too small to afford the kind of expertise I offer on their own staff.[# More #]

When people think of environmental regulation they think of refineries, chemical plants, and the Gulf oil spill. But the regulations apply to mom & pop too. Family-owned dry cleaners would be a huge example of such. Though not dry cleaners, most of my clients are family-owned operations, people just looking to provide for their families and a few employees, often of decades. They work very hard to be good citizens, which includes compliance with environmental regulation. However, they are not lawyers, or regulatory scholars, chemists or engineers – “decoding” and applying regulation. assuming they even know a particular reg exists, is simply outside of their capability.

This is why, typically, when the particular government agency in charge of enforcing a regulation visits such a company and finds an out of compliance situation, the company is given an opportunity to come into compliance. Provided they do so is a prudent and rapid manner, the greater good is served. Out of compliance situations typically arise when a company was either unaware of a regulation or had a different interpretation than the specific agency might – such things are a matter of constant debate and somewhat of a moving target anyway.

I get a lot of my clients this way. An agency visits, finds a problem, I get a phone call. For years I have been able to satisfy both the agency by assisting the company into compliance, and the company by doing so in a productive and cost-efficient manner. Everybody wins.

But lately I have noted a big change. I have seen a marked and large spike in administrative enforcement action from agencies on all levels of government, even after a company has rapidly and completely achieved compliance. Not only are there more such cases – many more – but the fines sought have risen dramatically. Prior to the last six months, when such enforcement action was taken – if the company had been cooperative and achieved compliance – fines sought would be of the nuisance variety. That is to say a few thousand dollars. But since the beginning of 2010 I have seen the fines sought rise, in more than one case, to levels of 20-25% of the gross annual sales of the company in question.

The methods by which such exorbitant fines are extracted are certainly unpleasant, to say the least. What are supposed to be negotiations are generally exercises in intimidation by the agency in question – often accompanied by the prosecutorial department of their particular branch of government. People that have clearly acted in good faith are treated to accusations and characterizations that I have seen bring grown men to tears, or worse physical manifestations.

Obviously there has been a policy change within the governmental agencies. They no longer seek to bring the regulated community into compliance, rather they seek to punish the community for being out of compliance. What is very sad is that they can do so with virtually unchecked power. All they need do is decide to interpret a specific regulation differently, and instantly, even the majority of the community that was in compliance no longer is, and is subject to fine.

One must wonder why such a dramatic and seemingly counterproductive change in policy? The answer, of course, stares us in the face – they need to generate revenue since most governments are currently broke or well on the road to it.

What’s so sad about this is that they fail to realize that in choosing to generate revenue in this fashion they erode the very economic health that can provide those revenues. Needless to say, when I encounter new interpretations, as I have been in the last several months, I have to tell all my prior clients about it, forcing them to go make capital expenditure to come into compliance – capital that could be used for expansion and new hiring. I know some businesses, teetering on the edge because of the economic climate since 2008, that are choosing to close the doors rather than comply (they just don’t have the money), resulting in lay-offs.

So this policy of revenue generation by punitive regulatory action results in continued or increased unemployment, turning tax payers into tax takers in the form of unemployment insurance – the cycle heads down.

The other effect has to do with new business. Towards the end of last year, I started to get some calls from people wanting to start new businesses and wanting my help with permits, etc. That all dried up once this policy shift became evident. Who is going to risk opening a business when the rules for doing so are shifting often and dramatically?

All people want is a set of rules that they can understand and rely upon – once the rules are clear they’ll find a way to make a buck within them. But in this environment that is just impossible – it appears as if the government is waiting to pounce at the first undotted “i” or uncrossed “t.” This is a massive disincentive to growth for it would seem that the growth is there not to benefit the risk taker, but the government.

A truly sad state of affairs indeed.


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