The Red Tape Conundrum (Fortune Magazine, Nov. 2016)

Concern about regulation is soaring among executives. In a recent survey by Deloitte, North American chief financial officers named new, burdensome regulation as the No. 2 threat to their business, behind only the possibility of a recession. When the National Federation of Independent Business, which represents 325,000 small U.S. companies, conducted its quadrennial survey earlier this year, its members identified “unreasonable government regulations” as the second-biggest threat, after rising health care costs. And for a fourth year in a row, the CEOs surveyed by the Business Roundtable for its annual economic outlook cited regulation as the top cost pressure facing their companies.

Red tape has emerged as a major talking point in the presidential campaign—with each candidate approaching the topic in characteristic fashion. Hillary Clinton has promised to be the “small-business President” and has wonkishly outlined plans to cut red tape by streamlining the startup process for entrepreneurs and expanding access to credit through community banks and credit unions.

For learn more about red tape, watch this Fortune video:
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Donald Trump, meanwhile, has taken a more shoot-from-the-hip approach. The Republican nominee has vowed to roll back many of the new regulations enacted under President Obama, including environmental standards designed to address climate change. Trump’s campaign has proposed a 10% overall reduction in regulations. But the candidate himself has at times suggested a more sweeping overhaul. On the same day that a videotape from 2005 surfaced showing Trump bragging about his aggressive sexual behavior—a revelation that sent his poll numbers crashing—the nominee cavalierly told a crowd at a town hall in New Hampshire that he would eliminate the majority of federal agency regulations if elected. “I would say 70% of regulations can go,” Trump said. “It’s just stopping businesses from growing.”

For more on where the Hillary Clinton and Donald Trump stand on regulation, click here.

Red tape is clearly a major source of friction—but is it really strangling business? The answer is less obvious than it may seem. For a phenomenon that’s seemingly ever present, red tape can be harder to pinpoint than you might think. Weighing the costs of regulations against their benefits is not always a straightforward task. How do you tweak your model, for example, to account for slowing down a global-warming Armageddon? Or fully account for the stability—and transparency—that keep your financial markets healthy?

Red tape regulations

Even economists who believe that the system is flawed have a hard time quantifying the issue. “I do think that our economy loses resilience and adaptability because the regulatory structure is so rigid,” says Michael Mandel, chief economic strategist at the center-left Progressive Policy Institute and one of Washington’s top thinkers on regulatory reform. “I would say that our sluggish growth is partly connected with regulation. But it’s hard for me to put a number on it. And God knows I’ve tried.”

We can certainly intuit the drag of bureaucracy—in the increasingly long and expensive process of developing new medications, for instance. And there are endless examples of how, in isolation, red tape appears to cost us plenty. Infrastructure projects that get delayed for years—with tens of thousands of pages of environmental reviews and permits—resulting in millions in extra costs.

The U.S. remains a friendly market relative to most countries, but there are signs of slippage. In its “Doing Business 2016” report, which assesses economies around the globe by regulatory efficiency, the World Bank ranked the U.S. at No. 7, down from No. 4 five years ago. America came in below Hong Kong and the United Kingdom (No. 5 and No. 6 respectively) but ahead of Germany (No. 15).

In a bigger sense, a growing number of observers worry that our 20th-century regulatory system may be unfit for an increasingly complex and fast-changing world. How can we be sure that our regulatory framework promotes innovation and fosters growth while at the same time protecting workers and consumers? Can we fix the current system or do we need to start over? And how much is business at fault for the very excesses that companies themselves bemoan? Heck, where does red tape even come from, and how is it gumming up the works? And, finally, is there anything anybody can do to stop it?

Fortune set out to explore those questions and more in recent weeks—through dozens of interviews with CEOs, investors, researchers, academics, economists, and policy experts—and tried not to get knotted up in the process.

Lately, much of that grumbling has been directed toward President Obama. There is growing frustration in the business community about the amount and ambitious scope of new federal regulations being produced by his administration. In the first installment of a six-part look back at his presidency, the New York Times, hardly a stalwart of conservatism, called Obama “the Regulator in Chief” and asserted that he will leave office as “one of the most prolific authors of major regulations in presidential history.”

The numbers bear that out. A total of 560 major regulations—those having an economic impact of $100 million or more—were published in the first seven years of the Obama administration, according the George Washington University Regulatory Studies Center, compared with 494 for his predecessor, George W. Bush. And the number of new rules passed typically spikes in a President’s final year in office.

Two major new sources of regulations under Obama were the landmark laws enacted in 2010: the Dodd-Frank bill, a massive response to the financial crisis of 2008, and Obama’s signature Affordable Care Act, the contentious law that brought health care to millions of uninsured Americans. (The law firm Davis Polk calculated last year that the more than 22,000 pages of rule releases related to Dodd-Frank added up to more than 34 copies of Moby Dick.) But with Congress unable to pass much of anything in recent years, the President has empowered his executive branch to pursue policy goals ranging from the battle against climate change to improving workplace safety.

Ask Big Business whether these are rules or red tape and you’ll get a full-throated answer: “The CEOs of the Roundtable absolutely would say that one of the reasons that GDP is limping along where it is, in the 1% or 2% range, is the oppressive regulations that have been unrelenting in the past several years,” says John Engler, a former Republican governor of Michigan and the president of the Business Roundtable. “I just think that people have almost thrown up their hands. What we have is an equal opportunity offender here, because in pretty much every agency something is going on.”

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To others, that kind of complaining is par for the course from the business community. “You can go back to really 100 years now of Chicken Little claims from business about regulation,” says Robert Weissman, president of Public Citizen, the nonprofit consumer-rights advocacy group founded by Ralph Nader in the early 1970s. “Every time business has said, ‘The sky is going to fall,’ and amazingly it never does.” He cites a litany of examples—from the first rules to eliminate child labor through the New Deal to the beginning of modern environmental regulation in the 1970s and up to the adoption of smoke-free restaurants and bars.

Obama took office vowing to cut red tape rather than add to it. He installed his friend Cass Sunstein, a law professor and an author, as the administrator of the Office of Information and Regulatory Affairs (OIRA), a division of the Office of Management and Budget tasked with assessing the validity of new regulations issued by cabinet agencies. During his tenure from 2009 through 2012, Sunstein instituted a program of “retrospective review” to examine existing regulations for effectiveness. But despite much fanfare, a relatively small portion of rules have faced scrutiny under the process. Meanwhile, the rulemaking machine has continued apace.

In that way, Obama continued a long tradition of Presidents attempting—and largely failing—to control proliferation of regulations. Jimmy Carter, for instance, signed the Paperwork Reduction Act into law in 1980, creating OIRA. A year later, Ronald Reagan signed an executive order compelling cost-benefit analysis of all major regulations. Bill Clinton built on that in 1993 when he issued executive order 12866, which required every “significant regulatory action” be submitted to OIRA for review. George W. Bush then added new requirements for review with his own executive order in 2007. And still, inevitably, the total volume of rules has continued to increase.

Read about four industries where technology is racing ahead of regulation here.

Mandel of the Progressive Policy Institute has introduced a metaphor—one that was often repeated to me by others—to describe the effects of regulatory accumulation. It’s like throwing pebbles in a stream, the economist says. Toss one in, or even two or three, and there’s no obvious effect. But once you throw in a hundred you may start to block the flow of water. “It’s really about taking degrees of freedom away from businesses,” he says.

This is compounded by the fact that the rulemaking machinery—just like the law-making system—is geared toward pushing out new regulations, not removing them. And once new rules are on the books, they usually just stay there. Mandel points out that there is no central place in the federal government where you can report problems with regulations. And because there’s no database of complaints, there’s no way to analyze the patterns and identify overlaps that need addressing.

“I kind of think of the regulatory issue as people basically saying in their own varying ways, ‘Who’s in charge here?’ ” says Mandel. “Is there anybody who’s really steering the ship? If you point out to somebody that there’s a problem, is there anybody that can respond?”

Business leaders complain about the specter of new, onerous regulations. But when pressed, executives often have a hard time coming up with existing rules they would like to have repealed. In part, that’s because big companies are quick to adjust, and regulations that are in place become a barrier to entry for competitors.

Indeed, government intervention can be a welcome protection at times. Sprint CEO Marcelo Claure praises the Obama administration for helping his company negotiate reasonable roaming rates with Verizon and AT&T in areas where Sprint doesn’t have cell towers, and says that consumers have been the winners. “In this case we welcome regulation that doesn’t allow Verizon and AT&T to use their market power to basically drive us out of business,” Claure told Fortune in September.

To read more on how one small business owner is dealing with regulation, click here.

It’s a phenomenon that Lee Drutman has seen again and again. A senior fellow at the nonpartisan think tank New America and the author of The Business of America Is Lobbying, Drutman says that complicated regulations provide cover for the powers that be. “Once you get a benefit, you pay a lobbyist to keep that benefit,” says Drutman. “That’s why it’s so hard to simplify anything.”

Even the process of churning out the rules themselves is becoming more challenging. In June, Public Citizen published a report called Unsafe Delays that found the time it takes to complete a rule has risen sharply over the past few years. Economically significant rules completed in the first half of 2016, the nonprofit’s research found, took an average of 3.8 years, or 58% longer than the historical average. In other words, there’s a record amount of red tape in making the red tape. “You’re basically talking about an entire presidential term to get a rule through,” says Public Citizen CEO Weissman, “which makes it pretty hard to administer these things.”

The friction in the system only adds to the left-right divide on solutions. Where conservatives see a bloated regulatory state that has run amok, progressives perceive a broken system that has been hijacked by corporate interests who shape and delay regulations as much as possible.

“It’s sort of weird,” says Sam Batkins, the director of regulator policy at the center-right non-profit American Action Forum. “You’ll go to a meeting on regulation from the right and you’ll hear about a broken process. And you go to a regulatory meeting on the left and you also hear about a problematic process. So in that sense there is some unanimity.”

Want to start a taco truck in NYC? Here are all the rules you’ll have to know.

Washington has already addressed the issue of infrastructure delays—in a very Washington way. In December 2015, President Obama signed into law the Fixing America’s Surface Transportation Act, or FAST Act, which will create a new federal agency, a unit of the Transportation Department called the National Surface Transportation and Innovative Finance Bureau. The DOT’s recent “mile markers” report on the FAST Act doesn’t show that any funding projects have been accomplished yet, but it does list 69 new regulations, memoranda, and guidelines documents that have been issued. “It’s like something out of Gilbert and Sullivan,” says Howard.

In Howard’s mind, it’s time to go to a clean sheet of paper and rethink our entire approach. He looks to the examples of the Byzantine emperor Justinian and Napoleon, who rewrote the laws when they became too convoluted. “You can’t reform this system,” says Howard. “You have to rewrite it. That’s the lesson of history.”