Business Slips in Regulatory Mire

Regulation sometimes produces litigation as companies get bogged down with new laws

WARLIER this month, the United States Labor Department proposed a $1.3 million penalty against a Pennsylvania painting contractor for ``failing to provide even the most basic protections for its workers.''

The Manganas Painting Company, based in Canonsburg, Pa., was cited for exposing its employees to unacceptable levels of lead as they sandblasted lead-based paint from a bridge over the Little Miami River near Ohio. Congress mandated new lead standards in 1992 that bring the maximum allowable exposure to lead for construction workers to the same level as all other workers. Invoking these new standards, which went into effect last August, Labor Department officials slapped multiple citations on Manganas.

This episode demonstrates the Clinton administration's resolve to strictly enforce health and safety regulations for the work force. Labor Department officials say it is a harbinger of things to come in their broad overview of workers' rights. But it is also a window into the cumbersome regulatory process, in which the government can impose severe charges on employers for not playing by an increasingly complex set of rules.

While business studies measure the toll of regulation on economic growth, they fail to show the quality-of-life improvements.

The Labor Department's Occupational Safety and Health Administration (OSHA), the entity that clamped down on Manganas, is just one of dozens of regulatory agencies and sub-agencies that monitor compliance with laws ranging from environmental protection to product safety.

While these watchdogs are credited with noble efforts to improve the American quality of life, their laws have incurred resentment in the private sector.

Keeping up with regulations

Most businesses pay handsomely to keep up with the rules. Many must hire lawyers to remain within the law and protect themselves from the law. Some either ignore the laws because they are unaware of them or intentionally break the laws because they are too costly to abide by. They often find themselves in even pricier litigation that can wipe out their businesses or severely curb profits.

The nation's regulatory process has developed a new breed of analysts, who measure the impact on economic growth and how the regulatory environment affects the nation's ability to meet its most pressing challenges - ranging from job creation to urban development to corporate competitiveness.

One study last year by Convenant Investment Management Inc., a Chicago-based investment advisory firm, examined the legal and regulatory track record of 500 Standard and Poor's companies. It looked at corporations with regulatory troubles, including the failure to comply with OSHA, Environmental Protection Agency (EPA), or Equal Employment Opportunity Commission mandates, and companies involved in commercial litigation with customers, suppliers, and competitors.

``Greater legal and regulatory involvement almost universally resulted in lower returns,'' the report found. From 1988 through 1992, it asserts, run-ins with regulatory authorities and litigators lowered shareholder returns by 5.7 percent a year. By comparison, shareholders of the 100 companies with the least regulatory and legal involvement averaged returns of 21.6 percent; the average return was 15.9 percent for the Standard and Poor's 500.

Michael Boskin, chairman of the President's Council of Economic Advisers (CEA) during the Bush administration, wrote in a recent issue of ``Regulation: The Cato Review of Business and Government,'' that the ``cumulative effect of overregulation is hundreds of billions of dollars added to the cost of doing business, dragging down productivity and innovation, and raising prices to consumers through a kind of giant covert tax.''

One measure of regulations' impact on business is to look at job creation, say advocates of small and mid-sized business. While large corporations continue to downsize, small and medium-sized firms have been the biggest job generators in recent years.

The National Federation of Independent Business, a Washington-based lobbying group for more than 600,000 members (many small and mid-sized firms), calls the federal regulatory environment most damaging to job creation. Weighted down with federal mandates, employers are burdened by compliance costs that they could otherwise channel into expansion, NFIB economists say.

``Environmentalism is the largest, most costly, most burdensome part of government regulation on the economy,'' says Murray Weidenbaum, director of the Center for the Study of American Business at Washington University in St. Louis.

The EPA's budget accounts for roughly one-third of the overall federal regulatory budget, according to a study by economists Wayne Gray of Clark University and Ronald Shadbegian of the Center for Economic Studies at the US Bureau of the Census. They calculate that manufacturers spent $17 billion in operating costs and $6 billion in capital outlays for pollution abatement in 1990.

The study, done for the National Bureau of Economic Research, finds that the toll on productivity is increasing. Examining output at pulp and paper mills, oil refineries, and steel mills, the economists found that pollution abatement costs cut into productivity in all three sectors: by 5.3 percent for paper, 3.1 percent for oil, and 7.6 percent for steel.

Entrepreneurs hardest hit

Fledgling companies suffer the most, says Jonathan Adler, an environmental policy analyst with the Competitive Enterprise Institute in Washington. By way of example, he details the plight of the dry-cleaning industry.

That industry, Mr. Adler says, must fill out up to 100 forms, pay exhorbitant start-up fees, acquire burdensome permits, and follow laborious reporting requirements. Here is how the average mom and pop dry-cleaning shop is affected:

r It is subject to OSHA requirements governing worker exposure to cleaning chemicals.

r It must follow new mandates on emissions under the Clean Air Act Amendments of 1990.

r It is liable for Superfund violations concerning groundwater contamination.

r It must follow proper handling procedures for garments in order to avoid exposure to AIDS.

The net effect, Adler says, is that ``more dry cleaners close their doors and fewer are established to take their place.''

US Treasury Secretary Lloyd Bentsen says the Clinton administration is offering relief to small entrepreneurs and boosting economic activity by easing banking regulations.

``The administration's targets,'' Mr. Bentsen says, ``were the ridiculous reporting requirements that prevented bankers from making loans to small businesses and that required expensive appraisals on small pieces of real estate.'' The federal government is streamlining regulatory bodies ``to cut down on excessive, wasteful, and contradictory regulations [and increasing] the expensing allotment for small business, to help them buy new equipment and create more jobs....''

But even the most affordable, accessible credit does not mitigate the damage from prohibitive regulations, Adler says.

Mr. Boskin laments that the bush is thick with regulatory growth. ``At the CEA we felt like we were wielding a machete in a jungle, chopping down dozens of bad regulatory proposals every week,'' he says. The ``executive branch needs an effective set of organizations, and more importantly, people in positions of power and influence who have the intellectual capability, political skills, and guts to stand up to the nonsensical regulations that percolate up from the agencies, down from Capitol Hill, and - even in a Republican administration - from Cabinet level or above.''

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