Why Corporations Love Regulations and You Should Hate Them

Someone recently pointed out to me that without the USDA all of our meat-packing plants would be run like they were in "The Jungle" by Upton Sinclair.  Outside of the cries for socialism and government reform, was the very real story about the deplorable conditions in American meat-packing plants.  Processes that were neither sanitary nor safe.  The book's popularity led to boycotts and protests and major reforms in the meat packing industry.  It also led to greatly enhanced government regulation of the industry and a system of grading.  But, let's take a look at the time in between.  What were businesses doing? 

In order to win back the confidence of the consumer, businesses were quickly enacting safety measures and heavily marketing their steps to the public.  Competition actually developed as to who had the safest meats.  That ended as soon as the Govenment stepped in.  Suddenly there was a minimum standard level of behavior.  Instead of being the floor, however, these standards suddenly became dual purposed as floor and ceiling.  Businesses no longer felt a need to compete on safety, instead they competed to see who could meet the minimum standards at the lowest possible cost.  You see, the Government provided something better than their marketing could and that was a "Stamp of Approval." 

Sometimes businesses use government regulations to distract from bad behavior while at the same time, blocking new competition from forming in the market.  Sarbanes-Oxley, drafted after the company Enron engaged in activity that was a crime by existing laws was held up as the necessary steps to make sure this didn't happen again.  This was a gift to many companies.  Yes, it would costs them money in compliance costs, but it also prevented young ventures from seeking to go public, forcing them to turn to existing businesses for financing and merger.  Companies could still go public, but the cost of compliance was just as high for a new firm as it would be for an exisitng firm.  This is what is known in the realm of anti-trust law as a barrier to entry.  Thank you Congress!

Recently Dodd-Frank regulations have been enacted.  These too require huge compliance costs.  For major banks, such as JPMorgan, BAC, Wells Fargo and Citi, these regulations are rough.  For smaller, regional banks, these compliance costs are unbearable.  The high costs can be absorbed when there is a large margin, spread out amongst the many customers of the large banks.  Smaller banks with smaller pools of customers will be forced into the ever-growing list of failed and merged banks.  All this to prevent activity that has been illegal since this nation's founding.  The bigger banks are loving this because local competition in smaller markets has kept them from expanding to these smaller markets.  Now, instead of having to compete with the loyalty of the locally owned bank, they can just buy up these now profitless banks, absorb their margins and make more money.

Who else likes Dodd Frank?  Wal Mart.  Target.  Senator Dick Durbin was heavily lobbied by representatives of the retailers industry to regulate the amount of money banks could charge retailers for use of their networks to process payments.  This has been a large stream of income for the banks and a big cost for retailers.  Not to worry.  Now the retailer fees are capped at half the going rate (price fixing, anyone?) and banks are set to recoup these losses and more through adding fees for use of debit cards.  Everyone wins.

One day we're going to wake up and discover that the only way to stop from allowing the rich to rule our lives is to refuse to allow anyone to rule our lives.