The Regulator: Why Business Loves Rules (Really)
The rolls of red tape spilling from landmark food safety legislation approved by Congress before Christmas represent precisely the sort of governmental intrusiveness that business detests. Mandatory reports. Nosy federal inspectors. Expansive government powers. So what do those affected say about Washington's latest brainstorm? "It's a present under the tree," says Scott Faber, vice-president for federal affairs at the Grocery Manufacturers Assn., which represents companies such as Coca-Cola and Del Monte Foods.
Foodmakers have reason to cheer. Following serial episodes of contaminated eggs, peanut butter, and spinach, sales slumped even for companies whose products weren't making people sick. To reassure consumers, manufacturers swallowed hard and sought the feds' seal of approval. All the government headaches will be worth the trouble if they calm shoppers and prevent costly recalls.
The food industry's embrace of government oversight illustrates an unacknowledged truth about the wary interaction between the public and private sectors. Executives complain about unelected bureaucrats complicating their lives and siphoning profits. Yet most large corporations long ago learned to live with regulation. Sometimes they even demand it. "Everyone thinks the business community hates regulations. Not only is that not true, it couldn't be further from the truth," says R. Bruce Josten, the U.S. Chamber of Commerce's top lobbyist.
For Dover's OPW Fueling Components division in Hamilton, Ohio, new regulations requiring service stations to minimize vapors from underground storage tanks have spurred millions of dollars in sales of specialized containers and valves since the rules were announced in 2008. OPW's domestic sales, which Dover does not disclose, rose 7 percent last year. Environmental regulations "can create, really, years of opportunity," says David Crouse, OPW's president.
Companies such as Archer Daniels Midland and Cargill are asking regulators to rename as "corn sugar" the oft-maligned sweetener known as "high-fructose corn syrup." Industrial consumers of electricity such as ExxonMobil, Dow Chemical, and Alcoa want Washington to re-regulate power markets. And utilities Duke Energy and PG&E last year backed climate change legislation to dispel the uncertainty complicating multibillion-dollar investments in new plants.
Says Tyson Slocum, energy director of the Washington (D.C.)-based advocacy group Public Citizen: "The kind of simplistic analysis you often see where it's business saying regulation is bad, vs. liberals or Democrats saying regulation is good, is not entirely accurate. Plenty of times, businesses are calling for regulation if it suits their business model."
President Barack Obama took office decrying his predecessor's deregulatory impulses, seeing in the financial crisis evidence that laissez-faire had failed. On Jan. 18 the President recalibrated, ordering government agencies to eliminate regulations that place "an unreasonable burden on business."
In theory, regulation protects the public and ethical businesses from companies that underpay workers, operate hazardous factories, pollute, and sell unsafe products.
In a Bloomberg poll in December, 70 percent said government regulation is needed "in most cases to protect the public interest" vs. just 25 percent who said it wasn't. And 53 percent of respondents agreed that "most American businesses" cannot be trusted to act in the public interest, vs. 41 percent who disagreed. Yet those surveyed also favored, by 52 percent to 38 percent, decreasing the amount of federal regulation.
On Obama's watch, regulators have been more aggressive. The Occupational Safety and Health Administration issued citations over the past two years for "willful violations" of federal workplace rules at a pace roughly six times that during the final year of George W. Bush's Administration, according to the nonprofit OMB Watch.
This is where the business community's desire for beneficial regulation ends and its allergy to decrees begins. In 2011, following last year's passage of major financial and health-care legislation, detailed rules affecting perhaps one-quarter of the nation's economy will be written. Making major investments amid so much uncertainty strikes apprehensive executives as excessively risky. The U.S. Chamber's Josten warns of an approaching "regulatory tsunami."
Writing new financial regulations will preoccupy at least three agencies. At the Federal Reserve, a 300-person team will produce roughly 100 rules, including those specifying how much capital banks must hold in reserve. Across town, officials at the Health and Human Services Dept. are drafting more than 40 regulations required to implement health-care reform. That work, the Congressional Research Service said in April, will go on "for years, or even decades to come."
With the Democrats no longer in control of the House of Representatives, the Administration is pursuing some policy aims via regulation rather than legislation. That foreshadows a clash with newly empowered Republicans, who vowed in their campaign "Pledge to America" to "rein in the red tape factory in Washington, D.C." by requiring a congressional vote on major new regulations.
One early flash point: the Environmental Protection Agency's plans to regulate utilities' greenhouse gas emissions. Coming after the Senate failed to act on climate change, the move has provoked Republican ire. "This Administration has perfected the art of governing by fiat through the regulatory process, which I think is an absolute abuse of power," Representative Tom Price (R-Ga.) told a December gathering at the American Enterprise Institute.
Executives at Babcock & Wilcox, the Charlotte-based maker of emissions-control systems for power plants, don't share the gloom. The company sees a $10 billion to $12 billion market for scrubbers that strip sulfur dioxide, nitrogen oxide, and mercury from coal-fired plants. "We're starting to see some of that move forward," Chief Executive Officer Brandon C. Bethards told analysts on Nov. 9.
Republicans nonetheless will keep hammering away at regulations' cost. Exhibit A is a 2010 study by Mark and Nicole Crain, a husband-and-wife team of economists from Lafayette College in Easton, Pa., which pegged regulations' annual costs to business at $1.75 trillion—an amount larger than the Canadian economy. A narrower study by the Office of Management and Budget concluded that regulations' benefits far outweigh their costs.
Representative Darrell Issa (R-Calif.), the new chairman of the House Oversight and Government Reform Committee, worries that the "regulatory state" is strangling job growth. Issa last month solicited examples of job-killing rules from more than 150 companies, trade associations, and research groups ahead of planned hearings. Representative Jack Kingston (R-Ga.), who chairs the House subcommittee that monitors the Food and Drug Administration, derides "nanny-state politicians" and told Bloomberg News he would seek to trim the $1.4 billion needed to implement the food safety bill.
One man's nanny is another man's benefactor. Autoliv, the Stockholm-based maker of seat belts and air bags, said sales of its side-curtain air bags "will be driven" by stiffer U.S. safety regulations, which take effect in 2013. In the third quarter of 2010, Autoliv sold 7.3 million side-curtain air bags, up 40 percent from the same period in 2009.
The regulatory process offers business other opportunities. "There are two principal ways to make a better mousetrap: Make a better product or get the government to pass a regulation that hurts your competitor more than it hurts you," says Richard Williams, who spent 27 years writing regulations for the FDA.
After a 2004 academic journal article speculated that high-fructose corn syrup might be more fattening than sugar in products such as soft drinks and baked goods, some consumers began shunning the substance. Many scientists, including Michael Jacobson of the Center for Science in the Public Interest, say the processed sweetener is nutritionally no better or worse than sugar. Yet for the fiscal year that ended on Sept. 30, consumption of high-fructose corn syrup was down 13.3 percent from just four years earlier, says the Agriculture Dept. Among those switching some products to sugar were Kraft Foods, Starbucks, and PepsiCo. In May, ConAgra Foods' Hunt's brand said it changed its ketchup "in direct response to consumer demand."
A two-year "Sweet Surprise" ad campaign failed to arrest the slide. The Corn Refiners Assn. in September petitioned the FDA to give "high-fructose corn syrup" the more consumer-friendly moniker "corn sugar." CRA President Audrae Erickson says the request is aimed at clearing up confusion and is unrelated to declining sales. Jacobson notes that the industry "was perfectly happy with the term high-fructose corn syrup" until the obesity controversy erupted.
Some government rules also spawn unlikely alliances of self-interest, a phenomenon former Federal Trade Commission Executive Director Bruce Yandle once dubbed "bootleggers and Baptists," a reference to the polar opposites who backed Prohibition. In 2009, Duke Energy and PG&E joined their traditional foes in the environmental movement to support a proposed cap-and-trade program designed to limit greenhouse gas emissions. For utilities mulling multibillion-dollar investments in new plants, a uniform national standard beats the alternative: a mélange of state policies and EPA edicts.
Climate-change legislation died in mid-2010, leaving utilities to face EPA rules expected in July. Duke Energy is proceeding with two coal-fired plants while delaying a planned nuclear unit. "We have to move forward even though we don't know what the rules of the road are going to be," says John Stowell, Duke Energy's vice-president for environmental policy. "It's just maddening."
That's especially true for small businesses, which lack the resources to stay abreast of regulatory changes. Companies with fewer than 20 employees spend an average of $10,585 per worker complying with rules, compared with $7,755 for companies with 500 or more workers, says the Crain study.
Costs that larger companies take in stride can bankrupt smaller rivals. After a spate of unsafe-toy recalls, Congress in 2008 established new testing requirements. Large manufacturers can spread the cost over tens of thousands of units, so their prices are little affected. But Jill Chuckas, 40, owner of home-based Crafty Baby in Stamford, Conn., worries that the new tests may force her to stop selling handmade toys and children's blankets as soon as next month. "I don't know what we're going to do," she says. "We hope and pray every day."
One of Chuckas' best-selling products is a quilted fabric "clutch ball" that retails for $16.99. "Safe for eating, grabbing, throwing at siblings and furniture," the Crafty Baby website promises. The new law requires Chuckas to prove that claim with costly tests that she says would almost triple the price of each ball.
Amid complaints from small companies, the Consumer Product Safety Commission last year decided to delay the new rule until Feb. 10. The Handmade Toy Alliance, representing Chuckas and other small producers, has proposed testing only once every 10,000 units. "We have no idea how that's going to play out," says Chuckas.
Big business doesn't always get its way in the regulatory wars. In December 2007, a group representing industrial power users facing soaring electric bills petitioned federal regulators for an investigation of deregulated electric markets. Steelmaker ArcelorMittal told state regulators in Pennsylvania last year that deregulated electric prices were roughly 50 percent higher than in regulated markets. In neighboring Maryland, soaring electric bills prompted Alcoa's 2005 closure of its 600-worker Eastalco aluminum smelting works.
Industrial users asked for changes, including more say in transmission networks' operations. "Typically, these are folks who would want less regulation," says Joe Nipper, vice-president for government relations at the American Public Power Assn., which joined the petition. Federal regulators responded that competition in deregulated states is working. So some of the nation's largest corporations now are asking Congress for something that business is supposed to abhor: regulation.
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