Regulation Has A Huge and Unseen Cost

The way president-elect Trump dealt with the Carrier proposed migration to Mexico is interesting.  Not because the cost is significant or the reulst material, but because of the format.

Politicians like to give incentives to businesses to do things.  Why? Because it gives power and prestige to their position. Both of those feelings have a cost to all the citizens.

I hope that Mr. Trump sees the error of this approach.  There is a far better way to deal with the problem, but at the cost of political power and prestige. Therefore, highly unlikely to happen.  We can hope for new and better.

People need to see the meaning of incentives. Something is wrong and the cost to be here is too high.

The better way is to not incentivize businesses, but instead avoid de-incentivizing them. Labour rates are often the excuse for moving, but not the reason. Hourly rates in Mexico are much lower but costs to train, supervise and maintain quality are much higher.  The work ethic is different too. Labour rates are the excuse, but not the reason.

What about regulations?  In the U.S. there are hundreds of them that add tiny, if any, value and high costs.  What is the corporate tax rate? Can management hire and fire at will based on performance alone? What about safety standards? Years ago a major chemical company replaced 42″ safety railings around vats with 36″ railings because the regulation said 36″.  Foolish rules and regulations have replaced common sense amongst bureaucrats.

It is like the Laffer Curve for taxation.  Once you pass optimal regulation, you start to have negative outcomes.  You end up paying twice. Once to create, maintain and enforce the regulations and again to pay people to stay and be subject to them.

So the easy fix. Make the business environment such that businesses want to be here. Then you will not need incentives to keep them. You get more of what you reward and less of what you punish. 

Who knew that could work?

Hard times though for regulators and politicians who like to be bossy while also being generous with other people’s money.

Don Shaughnessy arranges life insurance for people who understand the value of a life insured estate. He can be reached at The Protectors Group, a large insurance, employee benefits, and investment agency in Peterborough, Ontario.  In previous careers, he has been a partner in a large international public accounting firm, CEO of a software start-up, a partner in an energy management system importer, and briefly in the restaurant business.

Please be in touch if I can help you.  866-285-7772

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