Economics of Business Regulations
This article focuses on the economics of business regulation in the United States as well as the impact of national business regulations on the global economy. The economics of federal business regulations and compliance are described and analyzed. The regulatory burden of different sized businesses is summarized. The economic issues associated with differences in international business regulations are also addressed. The regulatory impact of international trade agreements, such as the North American Free Trade Agreement, and environmental pacts, such as the Kyoto Protocol, are discussed.
Keywords Business Regulations; Compliance; Global Economy; Kyoto Protocol; North American Free Trade Agreement; Regulatory Burden
Economics: Economics of Business Regulations
In the United States and around the world, governments actively regulate business and industry. Business regulations refer to the use of laws or rules by a government regulatory agency to protect consumers and investors as well as to provide orderly and predictable business procedures. Government regulations, in general, refer to statutes established by federal departments or agencies that are enforceable by law. The U.S. government, as represented by approximately 160 different federal agencies, issues more than 8,000 rules and regulations each year. Due to the impact of business operations on the lives of citizens, health of the environment, and the strength of the national economy, business regulations comprise a significant portion of regulatory activities. In the United States, local, state, and federal governments regulate business structures, intellectual property, reporting, hiring, retirement, fair and equitable treatment of employees, working conditions, wages, waste disposal, product advertising and distribution, trade, environmental impact, taxes, employee savings plans, benefits, business safety, and business accounting. Governments develop business regulations to protect the general public from business abuses, preserve the natural environment and ecosystems and, in some cases, control anti-competitive practices between businesses.
Business regulations impact both the economics of businesses themselves and national economies as a whole. First, compliance with business regulations is a massive expense for most businesses. Second, the specifics of national business regulations make nations more or less competitive in the global marketplace. For example, business regulations effect a business' ability to legally hire foreign workers, import and export goods, manufacture products in foreign countries, sell business interests to foreign investors, use foreign-made products in manufacturing, and advertise foreign and domestic products.
Business regulations are highly responsive to events and trends in the private sector as well as to demands expressed by the electorate. The U.S. government created the following laws and accompanying business regulations in response to perceived public problems:
- Clean Water Act. In 1972, the Environmental Protection Agency developed and passed the Clean Water Act in response to increasing public awareness and concern over water pollution. The Clean Water Act established the regulations concerning the discharge of pollutants, by individuals and business, into the waters of the United States.
- Emergency Planning and Community Right-to-Know Act. In 1986, the Environmental Protection Agency developed and passed the Emergency Planning and Community Right-to-Know Act (EPCRA) as concerns about the environmental and safety hazards created by the storage and handling of toxic chemicals increased. The EPCRA establishes regulations for businesses, as well as the federal, state, and local governments and Indian tribes, regarding emergency planning and “Community Right-to-Know” reporting on hazardous and toxic chemicals.
- U.S. Patriot Act. In 2001, the federal government passed the U.S. Patriot Act, which includes a host of new business regulations, in response to the September 11, 2001 attack on the World Trade Center. The Patriot Act, which includes the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act and the International Money Laundering Abatement and Financial Anti-Terrorism Act, empowers federal regulators to obtain information from a wide range of businesses (Van Cleef, 2003).
- The Sarbanes-Oxley Act. In 2002, The Sarbanes-Oxley Act, which includes numerous new business accounting and reporting regulations, was passed in response to the Enron Corporation’s accounting scandal. The Sarbanes-Oxley Act was actualized to help investors defend against corporate accounting fraud. The Sarbanes-Oxley Act requires that corporations engage in risk assessment and risk auditing to monitor its financial reporting and auditing processes. Section 404 of the Sarbanes-Oxley Act, which focuses on management’s assessment of internal control over financial reporting, instructs corporations to conduct a top-down market risk assessment to evaluate the corporation’s internal controls systems.
- Securities & Exchange Commission Regulations. In 2005, the Securities and Exchange Commission issued new corporate risk reporting and disclosure regulations. The SEC requires business reporting on risk factors in three main categories of market behavior including industry risks, company risks, and investment risks. The SEC's new corporate risk reporting requirements, as represented by changes to annual report requirements on Form 10-K and quarterly reports on Form 10-Q, further the SEC's commitment to integrating corporate disclosure and processes first described in the Securities Act of 1933 and the Securities Exchange Act of 1934. Corporations must now disclose risk factors in their annual reports and describe changes in previously disclosed risk factors in their quarterly reports. Risk factors are believed to present a summary of the risks facing the company and identify factors that investors should consider when making an investment. The SEC’s new corporate risk disclosure requirement, as described in Item 503(c) of Regulation S-K, instructs that, when appropriate, a company, has to engage in a discussion identifying the major factors that may negatively affect the issuer’s business, operations, industry, financial position or its future financial performance. The SEC argues that the new reporting requirements and regulations should not be burdensome as the SEC noted that companies should already be in a position to recognize new or changing material risks affecting their businesses. The SEC argues that disclosure of risk factors will alert investors to risks specific to the company or its industry that make an offering speculative or high risk (Banham, 2004).
Business regulations, while usually supported by society at large, are often opposed by business interests on grounds that complying with a business regulation is unduly burdensome to the business or that the business regulation is unwarranted or based on inaccurate assumptions. The business sector is generally in favor of deregulation. For example, Ronald Reagan was elected president in part owing to his promises to provide regulatory relief to businesses (Levine, 1989). In the twenty-first century, businesses wishing to change or challenge business regulations have two options. First, businesses may lobby and petition Congress for a change. Second, businesses may bring a lawsuit against government. As business regulations continue to grow in number and scope rather than shrink, lawsuits against regulators are increasingly common. For example, in 1998, the National Mining Association had over 40 pending court cases challenging federal regulations for air and water quality standards. Ultimately, national governments weigh the economic impact of business regulations with the well-being of citizens, environmental goals, and the socio-political climate when making business regulations. In many instances, businesses chafe at the expense of compliance and the limitations that business regulations impose (Andelman, 1998).
This article will describe the economics of business regulation in the United States as well as the impact of national business regulations on the global economy. The following sections provide an overview of the economics of federal business regulations. This section serves as the foundation for later discussion of the economic issues associated with differences in international business regulations.
Economics of Federal Business Regulations
The U.S. federal government develops business regulations in a highly transparent and participatory process. The federal government publicizes proposed business regulations, and government regulations in general, in the Federal Register. The Federal Register is the government’s official daily publication which delineates all the current rules, proposed rules,...
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