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Why it’s hard to write simple regulations

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Companies fighting government regulation frequently complain that complying with the rules drains businesses of time, energy, and money. So why not just make regulations simpler? But there are a couple of major obstacles to writing simple rules and regulations--some of which come from industry itself.


Industry lobbyists themselves are partly responsible for making government regulations so complex and byzantine by demanding special-interest exemptions. That’s what happened with the Volcker rule in Dodd-Frank, for instance, as I explained Wednesday. And this deep-pocketed lobbying process can put a disproportionate burden on smaller businesses that don’t have the funds to push for their own exemptions or to hire accountants, lawyers and others to comply with them, as the Washington Examiner’s Tim Carney points out. So there are businesses that can afford to make the regulatory system more complex to their own benefit, and other, smaller businesses pay the price. Much the same could be said for our enormously complex tax code.

Problem is, even if legislators decided to push back against special-interest lobbying, there could still be significant obstacles to implementing much simpler regulations. The alternative to complex “rule-based” regulations, which up the page count with various caveats and exemptions, is “principle-based” regulation, which often leaves it to the regulators to judge whether it’s appropriate to apply the regulation in a given scenario. This can lead to two problems.

First, and most significantly, it gives regulators greater power and discretion that’s likely to raise the hackles of the business community (and anti-regulatory conservatives). So “simpler” regulations often mean more powerful regulators. Secondly, a principle-based regulatory system could also “require enormous time and enormous oversight,” as regulators could be required to survey a much bigger swath of the industry to find the offenders, as William Hambrecht, a San Francisco-based investment banker, said at a Capitol Hill event on the Volcker rule last week. Such difficulties could multiply in the financial sector, for instance, where implementing regulations like the Volcker rule will require not-insignificant quantities of data.

Given this reality, it’s perhaps not surprising that industry lobbyists frequently push for two seemingly contradictory outcomes: they’d love to junk burdensome regulations, but if they’re going to stay in place, they’ll fight for their own exemptions, contributing to regulatory complexity that could ultimately help persuade legislators to repeal them.

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