Regulatory Redundancy Hurts Consumers

by Odysseas Papadimitriou on October 8, 2009

RedundancyAs we all know, the competitiveness of U.S. companies is measured by their ability to innovate and also by their operating costs.  Operating costs can come in the forms of labor and overhead, but they are also the result of less tangible forces like those produced by a nation’s laws, regulatory bureaucracies and taxes.  As a nation, we need to recognize that we are unlikely to meet competitive equality with China or India as far as labor costs are concerned.  Instead, we should focus our attention on reducing the other elements that contribute to the cost of doing business in the United States.  A large part of that can be traced to complying with the various regulatory bodies.

The insurance industry, which is regulated at the state level rather than the federal level, provides a prime example of how over-regulation can significantly increase the operating costs of a business.  If insurance were regulated at the federal level, the number of regulatory bodies would be reduced from 50 to 1.  This would allow insurance providers to both lower their cost structure and more easily compete on a national level.  Moreover, a single regulatory body for the U.S. insurance industry would monitor the industry more efficiently than would 50 such bodies working independently of one another.  The reduced bureaucracy, the increased efficiency in regulation and the resultant increase in market competition would pass savings on to American consumers.

While these are the facts, lawmakers seem determined to bring these same regulatory inefficiencies that exist in the insurance industry into the banking industry.  The Obama administration and some members of Congress (a faction spearheaded by Massachusetts Democratic Rep. Barney Frank) have introduced a plan that calls not only for the creation of the Consumer Financial Protection Agency to regulate at the federal level, but will also force national banks to comply with the consumer protection laws of 50 different States.

This redundancy in regulation will increase the cost of doing business across state borders for a large number of our U.S. banks.  Moreover, as these regulations make it more difficult for state banks to grow into national companies, it decreases the ability for smaller local companies to compete with larger name-brand banks.  The end result will be reduced competition and increased overhead for American banks, which will only translate to increased costs for the American consumer.

Ultimately, the problem stems from lawmakers mis-prioritizing their efforts to solve our country’s financial problems.  As a nation, we face global competition.  Perhaps we don’t see the importance of competing with China or India when we think about banking regulation, but the cost of regulatory redundancies makes things more expensive for American consumers and also affects the competitiveness of American businesses.

Laws are being shaped by both the White House and Capitol Hill in response to the public’s cry for better consumer protection.  However as this agenda continues to be pushed forward, the adverse economic effects of an enormously redundant regulatory system are ignored.  It’s clear that a solution that favors efficiency, would both better protect and bring down costs for consumers.  As we’ve previously proposed, reducing the number of regulatory agencies (with each agency focused on a different financial product) would not only cut down bureaucracy, but also create regulatory bodies with better insight on the operations of the industry they regulate.  In this way, a more streamlined regulatory system could better monitor the needs and excesses of both the American financial industry and its consumers.

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