The Dangers of Over-Regulation

Statement

Regulation has been a subject of some discussion this election, but it hasn't had the full discourse that the American people deserve. Our approach to regulation - of everything from healthcare to banking - fundamentally affects economic growth and job creation, and therefore is a matter of importance to all Americans.

"The law of unintended consequences" is an economic principle that describes the effects of policy that were either unforeseen or ignored. Over-regulation of any industry is almost always responsible for a host of unintended consequences, often exacerbating the original problem or creating new problems that are bigger than the ones it was meant to correct.

A classic example was the aftermath of the Exxon Valdez spill. To prevent such a catastrophe from happening again, regulators implemented a policy of unlimited liability on tanker operators. But that posed too high a risk for oil companies and reputable operators. Instead of using their own fleets and risking fines that could debilitate the company, they were forced to contract out to the only companies willing to take on the risk: ones that were less capable - and less legitimate. The result was an increased risk of another spill and a decreased probability that damages could be collected if a spill did occur. Exactly the opposite of what was intended. Not to mention that post-Valdez regulation is one of the reasons that U.S.-flag tankers have all but disappeared.

Another example would be the President's healthcare law. In last week's Wall Street Journal, David Gamage - a law professor and supporter of the law - points out the costs to lower-middle class families: given the choice of a part-time job for $36,000 a year versus a full-time, $42,000-a-year position, someone supporting a family of four could actually lose more than $10,000 a year in health-care subsidies if he or she were to choose the higher-paying job.

Today, Washington is attempting to over-regulate a number of industries, stifling those sectors as we try to get the American economy firing on all cylinders again. Part of the problem is levying one-size-fits-all regulation on industries that are diverse - which most are. Even major sectors like energy, finance and agriculture are made up of everything from small local businesses employing a handful of people to major corporations. To expect that regulations for Bank of America can be equally applied to Town and Country Bank in Stephenville, Texas is absurd.

I recently spoke to a group of community bankers who are in danger of just such over-regulation. Community banking is vital to any community: it supports local families and businesses, encourages entrepreneurship and, because it has local roots, has a stake in the good of the community. It is a strong supporter of the high school teams, little league baseball and community projects. In short, community banking is both a business supporting the local economy and a public service.

But they are now facing requirements that make sense only for large corporate banks. I recently joined 52 of my colleagues from both sides of the aisle in signing a letter to Federal Reserve Chairman Ben Bernanke, asking him to consider the effects of one-size-fits-all regulation on these important local institutions.

No one is asking that we abolish all regulation. But over-regulation is one of the reasons our economy is stagnant. It creates red tape, ignores the day-to-day realities of running a business and places tremendous burdens on small businesses at a time when we need them most.

Regulators and lawmakers in Washington must acknowledge that every industry has a range of institutions of varying sizes that operate in different ways. They must also remember that no company expects government regulators to mitigate all their risk - which means businesses have every incentive to take individual responsibility. Regulation should be flexible enough to let them do so.

What we need is smart regulation that protects the public while allowing American businesses to get on with the business of creating jobs. Our economy needs it now more than ever.

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