How Government is Good for Business

Conservatives routinely exaggerate the costs of regulations for business and turn a blind eye to the many significant ways that government aids the business community.

The Doge’s Palace is a popular tourist destination in Venice. It was the seat of government when Venice was one of the most powerful and wealthy city-states in the world. In the 16th century, the rooms where the various councils of the “Serene Republic” met were decorated with paintings by the leading Italian Renaissance artists – works now considered masterpieces. In one room, the paintings on the ceiling are by Paolo Veronese and they are intended to represent the virtues of the Republic’s government. On one panel are figures of women representing “Peace” (with an olive branch) and “Justice” (carrying a sword and scales). Another contains the figure of “La Prosperita” – prosperity. She is dressed elegantly and is surrounded by mounds of fruit. She is clearly meant to celebrate the idea that the various activities of the city’s government – managing trade, conducting foreign policy, and defending against the armies of rival city states – played a large role in creating the incredible financial success of Venice.

What a difference five hundred years makes. These days, in the United States, many people see the government as the enemy of business and economic prosperity – a notion that is relentlessly promoted by anti-government conservatives. Their complaints and those of the business community are familiar ones: environmental and workplace regulations raise the cost of doing business and hamper corporate expansion; minimum wage laws raise costs for employers; and consumer protection laws raise the prices of goods and discourage innovation.

Crying Wolf: Exaggerating the Costs of Regulation

There is no denying that some government policies – particularly regulations – do raise the cost of doing business for some firms. This is true. But advocates of active government argue that companies and conservatives often “cry wolf” about regulations and that they are often not as economically damaging as claimed. For example, a report by Public Citizen called “Not Too Costly After All,” found that businesses routinely exaggerate tremendously the potential costs of regulations and usually end up adapting to them with much less cost than they predicted. Public Citizen also found that government critics typically ignore the fact that environmental regulations that impose costs on the companies that must comply with them often also generate large economic gains for companies that make pollution control technologies, like catalytic converters.1

A current example of crying wolf is the corporate complaints about the Sarbanes–Oxley Act. Though not perfect, these regulations go a long ways toward preventing the kinds of massive corporate frauds perpetuated by Enron and WorldCom. But many in the business community have been warning that these rules are stifling business. In particular, Wall Street firms have been arguing that these regulations are discouraging foreign investment in the U.S. and are threatening to dethrone New York and its stock markets as the financial capital of the world. But New Yorker writer James Surowiecki looked into these concerns and found no evidence of the economic harms alleged by critics. It is, he concluded, just one more example of how Wall Street has consistently claimed impending dire effects from any attempts at regulation:

Wall Street … has greeted practically every important market regulation introduced in this century with howls of dismay and predictions of disasters. In 1934, the head of the New York Stock Exchange told Congress that if the Securities Exchange Act, which became the foundation of market regulation in the U.S., was made law there was a chance that stock trading in the U.S. would be “entirely destroyed.” Needless to say, it wasn’t. In 1975, when the S.E.C. abolished fixed commissions, the Street claimed that its business would be demolished. Instead, after transaction costs fell, trading volume shot up. And in 2000, when the S.E.C. required companies to disclose material information to all investors, rather than just to insiders, we were told that this would strangle the flow of information to the market and make stock prices swing wildly. But, as numerous academic studies have found, it has actually done the opposite.2

Examples like these make it clear that we cannot trust the business community to tell us whether it is being harmed by regulations. In many cases, the reality is that the costs to business of complying with regulations are often not that onerous.

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