Hidden Cost of Bureaucracy

Chidem Kurdas

What is the real cost of the regulatory state? Monetary costs we can measure—the money paid to compliance officers and lawyers, the expense of keeping extensive records, penalties paid for violating some rule.

Those visible costs are large – Bank of America recorded $6 billion in legal expenses for the first quarter of this year – but the invisible burden is likely greater.

Trying to understand intricate regulatory requirements takes time and energy that otherwise could be used to find business opportunities. The bureaucracies built to comply with the requirements are not just expensive but displace productive work and slow down the business.

Compliance officers are hired while other employees lose their jobs. To comply with the rules, money is spent on elaborate record-keeping systems instead of on new projects.

In other words, the regulatory state has opportunity costs – alternative uses for the resources consumed in myriad regulation-related activities – of unknown magnitude. What has been given up tends to get ignored, but even a brief consideration suggests it is significant.

This thought hit me as I read a column by George Leef on the effects of decades of government economic meddling—since the Calvin Coolidge administration. “The federal government’s increasing diversion of limited resources away from market-driven uses and into politically-driven ones over the last 85 years…has greatly diminished the prosperity we would otherwise have,” Mr. Leef argues.

Especially worrisome is the current trend. The meddling has substantially increased.

This is notably so in the financial industry. Since the crisis, large banks have been evolving into semi-governmental entities, with almost every move they make scrutinized by regulators. Other entities like hedge funds, once lightly regulated, are now subject to registration and reporting rules.

But finance is not unique in having acquired an additional regulatory carapace. Think of the new environmental rules the Obama administration is issuing, on top of numerous existing ones.

Ergo, the hidden cost of the regulatory state, whether you measure it in lost jobs and incomes or slower growth and lower productivity, continues to rise.

Freewheeling American civil society fueled the most dynamic economy the world had ever seen. Much of that remains, no doubt. But it is eroded by politically-driven bureaucratization that has reached new levels in the past five years.


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