Why Regulation Is Bad For Business

American businesses are currently sitting on $3 trillion as they wait for new regulations to be implemented.
  • Transcript


Question: How is the regulatory climate in Washington affecting businesses and Wall Street?

Ken Mehlman: I think that certainly today I think there’s a lot of folks in business that are sitting on cash, this has gotten a tremendous amount of attention—$3 trillion sitting on corporate balance sheets. Why is that?  I think one of the reasons is regulation.  One of the reasons is, if you’re the CEO of a company and you know that in the future, the cost of employing people is going to go up because of health care legislation, you know that, you’ve heard that your taxes are likely to go up, you know that the cost of capital is likely to increase for lots of reasons—Basel III is one of them, fin reg [financial regulation] potentially has that impact as well, the fact that there’s a wall of debt coming due also—for all those reasons, you’re certainly thinking: "I want to put some cash aside."

Otherwise, look, I think the different rules, different regulations, have an impact on different industries.  Certainly fin reg, a lot of the regulations are still being thought about and have not yet been implemented.  That’ll be key for the next several years.  But that clearly will have an impact on operations that used to be, for example, at banks, you know, that’ll now become independent or go into other institutions.  And clearly health care will have an impact.  There was an interesting article in the New York Times yesterday about the mergers that are occurring in the health care space, in part because health care reform was designed to encourage more collaboration within the health care industry and part of that collaboration is occurring through merger.  So, I definitely think that the recent legislative changes will produce significant regulatory impacts, which will then produce a business impact. 

Question: Do you see these impacts as mostly negative?

Ken Mehlman: Certainly I think that today, if your goal is maximum employment, the possibility that there will be a significant tax increase and the fact that the cost of capital could increase, and the fact that employing workers could be more expensive because of health care reform, all those things are likely to make a number of companies less likely to hire workers.

On the other hand, others might argue that there are societal benefits from all three.  That’s a fine argument to make, it’s just important to understand the realities from both perspectives. 

Question: Do you expect more regulation coming down the pipeline?

Ken Mehlman: I think that the reality is because of the legislation that’s already been passed, there’s likely to be a fair bit of regulation implementing that legislation, and that’ll happen going forward. You know, one of the things that often you see in government is, when you can’t legislate, you regulate.  And so I think that you might see in other areas too, increased regulation.

What I hope, though, and I think you’re seeing some of it, and you saw it in the last election, is that policy leaders will stop and think about the fact that they really do want jobs created in this country, which I believe they do. And they’ll think about what is the impact of uncertainty?  What is the impact of changing rules on people’s willingness to invest, versus leaving cash sitting on their corporate balance sheets.  And that’s something that I hope then could hopefully make that regulation, some of which we know is coming, more flexible, and more reasonable and less likely to have a negative impact on the economy.

Recorded November 22, 2010
Interviewed by Max Miller