Government Regulations: Do They Help Businesses?

Many sectors of the business world have long complained about government regulation, denouncing rules as impediments to profits, economic efficiency, and job creation. Many firms have sought loopholes, moved operations abroad, or violated antitrust laws as they attempted to skirt regulations.

In reality, American businesses have both prospered and suffered due to rules and the complicated tax code. The relationship between a firm and the government can be either collaborative or adversarial, depending on specific circumstances. Importantly, rules have also protected consumers from exploitative practices. Below, we'll look at some important government regulations to understand their impacts on businesses.

Understanding Business Regulations

Congress passed the first antitrust law in 1890 and followed that with periodic changes in corporate tax rates and increasingly complex regulations governing business. The business community has generally opposed laws, regulations, or tax levies that it thinks impede operations and profitability. A common argument against overregulation and excessive taxation is that they impose a net cost on society in the long run. According to critics, government regulations slow disruptive innovations and fail to adapt to changes in society. Businesses complain about many of these rules while also lobbying to have other rules changed in their favor.

Others argue that there are good reasons for regulation. In pursuit of profit, businesses have damaged the environment, abused workers, violated immigration laws, and defrauded consumers. Proponents say that is why publicly accountable elected officials are in charge of regulation in the first place. Furthermore, some rules are essential for civilized competitive businesses to flourish.

We now have many entities and regulations to limit the alleged excesses of the free market.

Regulations Restraining Businesses

Sarbanes-Oxley

In the wake of major corporate fraud at several companies, including Enron, Tyco, and WorldCom, Congress passed the Sarbanes-Oxley Act in 2002. The act governs accounting, auditing, and corporate responsibility. Many in the business world opposed the bill, claiming that compliance would be difficult, time-consuming, and ineffective. Furthermore, they predicted that the law would not protect shareholders from fraud. This position gained some support when numerous financial frauds, such as Bernie Madoff, were exposed during the 2008 financial crisis.

The Environmental Protection Agency (EPA)

President Richard Nixon created the EPA by executive order in 1970. The agency regulates the disposal of waste materials, restrictions on greenhouse emissions, and controls on other pollutants. Companies required to comply with these rules have complained that the restrictions are costly and compromise profits.

The Federal Trade Commission (FTC)

The FTC was created in 1914 to protect consumers from deceptive or anti-competitive business practices. These can include price-fixing, the formation of monopolies, and fraudulent advertising. Some firms regard the agency as a foe of business.

The Securities and Exchange Commission (SEC)

Congress created the Securities and Exchange Commission (SEC) in 1934. It regulates initial public offerings (IPOs), ensures full disclosure, and enforces rules governing stock trading.

The Food and Drug Administration (FDA)

The FDA was first created to enforce the Pure Food and Drug Act of 1906. Since then, the agency has been tasked with overseeing public health through oversight of food and medical products.

Pharmaceutical companies often complain that the FDA needlessly delays the approval and marketing of certain drugs. The high barriers to getting drugs approved may deter small firms from entering the market. Furthermore, the FDA has been criticized for delaying approval and human trials of drugs for people facing life-threatening conditions.

Regulatory Capture

Perhaps the most substantial criticism of government regulations is that they create the potential for regulatory capture. When that happens, the agencies supposedly responsible for protecting consumers come under the control of the industries they are supposed to regulate. The regulator may actively create barriers to entry and divert public funds for bailouts to benefit favored firms.

Regulations Supporting Businesses

Hundreds of assistance programs from the government—in the form of money, information, and services—are available to businesses and entrepreneurs. The Small Business Administration (SBA) arranges loans for startups. It also provides grants, advice, training, and management counseling. The Commerce Department helps small and medium-sized businesses increase overseas sales of their products.

An often overlooked service that the government provides all businesses is the rule of law. The U.S. Patent and Trademark Office offers protection of inventions and specific products from illegal infringement by competitors, thus encouraging innovation and creativity. Patent and trademark violations are punishable by hefty fines and subject to civil actions that can be costly if the defendant loses.

On top of all of this, the government occasionally takes extraordinary steps to protect businesses in dire economic conditions. Some economists claim that the Troubled Asset Relief Program (TARP) and the economic stimulus plans that followed averted a repeat of the Great Depression. Similarly, the Coronavirus Aid, Relief, and Economic Security (CARES) Act may have prevented many firms from going out of business in 2020.

Other economists insist that the government should rarely intervene and that free markets should be permitted to weed out business failures. No matter which side you agree with, there is little doubt that the corporate world would look very different without government programs.

The Bottom Line

The government can be a friend of business, providing it with financial, advisory, and other services. It can also be a friend of the public, creating and enforcing laws related to consumer protection, worker safety, and more.

This tension persists as long as various stakeholders view the utility of regulations differently. As technological breakthroughs continue, the dual nature of the government's relationship to businesses may increase, becoming both more regulatory and more collaborative at the same time.