Regulations, Big Business and the Poor

Government regulation is a topic of frequent debate between liberals and conservatives. Conservatives say regulations often come at too high of a price, while liberals say that they are vital to protect us and our fellow citizens and that conservatives don’t care. So let’s break down a couple of recent examples.

First of all, almost everyone would agree that some degree of regulation is necessary and even vital. Food quality, drinking water quality and similar regulations are pretty much universally viewed as important. But how much regulation?   And who decides when it goes too far? Unfortunately, we have put a lot of power in unelected government bureaucrats that often sit in ivory towers and only feel productive when they are doing something, so we get some things that just don’t make sense. We could share a multitude of anecdotal stories about things such as the EPA trying to regulate bodies of water, and some genius deciding that could include water on your farm that ponds when it rains or similar such nonsense. But let’s talk in real terms and leave such anecdotal stories aside, hoping that all would agree they are silly (with the possible exception of those who promulgate them).

At the height of the banking crisis of last decade, we heard a lot about the problems of banks being ‘too big to fail’ and so the government had to bail them out with our tax money because to do otherwise would cause too big of an impact on the US economy. So once we were past the crisis, what did we do? (For a moment, let’s set aside the fact that the Bush and Obama Administrations asked larger banks to buy up struggling banks that were smaller and thereby making banks that were already big even bigger). Though clearly we needed to do something to keep banks from taking on risks so big that they endangered our whole economy, we only made the problem worse. If banks ‘too big to fail’ were the problem, then we needed to break up some of the big banks. If they were too big to fail, they were simply too big and interfered with the free market and the root of the problem was not pursuing anti-trust legal cases. But unfortunately, both parties have now demonstrated how beholden they are to big business. So instead, we put huge sets of regulations on banks that set up a whole multitude of requirements and reporting from both the Treasury Dept., the Consumer Financial Protection Bureau and new laws such as the well-publicized Dodd-Frank. Without getting into a lot of detail, we know that the cost of complying with all of these regulations is huge. Standard and Poor’s estimates that for the top eight banks alone, the cost is $34 billion a year. A year. Small banks increasingly can’t afford the cost of compliance and only larger banks are able to absorb that kind of financial hit and still remain afloat. So we have seen smaller banks get bought out causing acceleration of consolidation in the banking industry. So the effect of ‘the fix’ has created more banks that are ‘too big to fail’.

And banks don’t bear those costs alone. Consumers bear the ultimate cost of these increased regulations. And unfortunately, primarily poor and low income consumers. As banks tightened underwriting standards, boosted required credit ratios and underwent government ‘stress tests’, they reduced available credit to borrowers by $80 billion in the three years after Dodd-Frank. As a result, roughly 40% of low income borrowers had credit cards cancelled, credit limits lowered, or were denied new credit in that same period.

One more example illustrates this point, the healthcare industry. The Affordable Care Act, or Obamacare as it is more popularly known, was to provide ‘affordable’ healthcare options to millions of people. Now, let’s admit that healthcare may be even more complex than banking, so there are many issues involved. So let’s just look at the very big picture.

The law was thousands of pages which also delegated authority to make hundreds of rules to implement the law to the federal bureaucracy. It created new compliance requirements for doctors, hospitals, insurance companies and even medical device and drug manufacturers. And, not coincidently, some of the results have been the same as in the banking industry.

Obamacare regulations mandated certain coverage for everyone; many would argue (including Thinking Man) that the mandates became social policy statements rather than simply provide basic coverage to everyone.   This has contributed to higher deductibles and rapidly increasing costs of even ‘affordable’ plans. This year, for example, costs of plans on the healthcare exchange in Minnesota rose over 50%. In Tennessee, with the highest or second highest increases in the country, the average premium rose 63% for the single, 27-year-old enrollee. Even more significantly, major insurers started dropping out of the business and withdrew their plans from the Obamacare exchanges. In Alabama, BCBS of AL was the only plan offered through the Obamacare program and in several other states there were many areas with just a couple of plans offered. And, as we all know, decreased competition just means more costs.

On the larger scale, healthcare providers were scrambling to deal with the implications of the law.  Obamacare provided financial incentives to encourage affiliation of doctors with hospitals, and so a significant consolidation in the industry occurred as more independent doctor practices are now owned by hospitals, again decreasing competition.

And as we have seen in the banking industry, the cost of compliance is high enough that only the bigger companies can absorb the costs. This led to proposed mergers among several large insurance companies, as companies realized that only through ‘scale’ can they survive the long-term cost spiral. We have seen the second largest insurer in the country, Anthem, propose to buy Cigna; Aetna to purchase Humana, and Centene purchased HealthNet. If these healthcare giants consolidate, it would almost totally eliminate competition in many markets and by doing so, would drive up costs to consumers in the long term. To date, the government has approved the merger of Centene and HealthNet but denied the mergers of Anthem/Cigna and Aetna/Humana on anti-trust and anti-competition grounds, which may be a good thing, but much of the impetus for the mergers is the onerous burden of federal regulation.

And on top of all of that, small companies who employ about 40% of the US workforce (depending on what figures you use) have cut back on providing health insurance or have cut workers’ hours from full-time to part-time so they don’t have to provide insurance because of the rapidly rising costs.

These two examples serve to dramatically illustrate the point. Government regulation, when overdone, has the opposite effect of helping the US people. And in a cruel irony, it affects those who are usually least able to afford it, the low income among us. In the case of banks, the availability of credit has been cut significantly, especially to lower income individuals. Healthcare regulations have reached tens of thousands of pages, causing prices to rise explosively at the same time that the average deductible for health insurance is in the thousands of dollars for an individual and tens of thousands of dollars for a family, while access to care has decreased dramatically.

Just in these two examples, we have instances where the US economy absorbs about $100 billion a year just in cost to comply with new regulations. And that does not count the cost of providing healthcare coverage for the uninsured, etc.. And it illustrates that the cost of regulations actually tend to decrease competition, and drive out smaller business.  Government regulation is the enemy of small business and becomes a barrier to the small, local, often more consumer friendly business that many who promote massive regulations say they favor.

Imagine the economic effect of putting $100 billion back into the economy every year, and then imagine if that were targeted toward those at the lower end of the income ladder.   Every year. And those are just 2 examples of the financial impact of federal regulations. Multiply that several times and it’s easy to see why every federal regulation that increases costs should be looked at with a very critical eye.

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