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The Proper Way To View Laws and Regulations

Government rules (laws and regulations) grow as if on hormone treatment. Some say that is bad therapy, some say it’s a necessary dose of medicine. The truth is, if anyone is harmed by this treatment, it’s customers, not business owners. To see my point, you have to look at government rules as compulsory insurance. Let me build my case.

It used to be, a long time ago, that the law merely punished people who did wrong. Now laws are designed to “protect” people. Politicians who argue for new laws tell us that they were elected to protect all of us. And what is the fundamental feature of “protection?” It is risk mitigating.

Risk mitigation does not remove risk of bad things happening, it merely spreads the effects of those risks. All the previous laws and regulations imposed on the finance industry did not prevent the debacles created by the Enron implosion, Bernard Maddoff’s Ponzi scheme, or the collapse of the financial markets. And while all the reactive legislation passed since those events occurred will not prevent future bad things from happening in the financial markets, politicians will tell us that the new rules minimize the risk of those specific kinds of evils. Of course there is a price to be paid for minimizing risk. That price is an increased cost of doing business, for everyone.

So in effect, politicians are selling insurance policies when they impose new rules. By forcing businesses to pay the increased cost of complying with the rules, we all enjoy a lower risk of bad things happening to us at the hands of evil business people. (It is a completely different topic to ask who protects us from the evil politicians.)

In my last post I indicated that the Small Business Administration has given us a laundry list of rules that even the smallest companies must pay attention to. Most startup entrepreneurs look at that list and do one of two things: Give up before starting, or ignore it all. But if you see all those regulations for what they are, namely forced insurance policies, then another alternative presents itself.

You have insurance policies for various things: health, business liability, protection against loss of valuable assets by fire or theft. Paying the premiums on those policies does not prevent bad things from happening, but the premiums spread effects of the risk of those bad things to a large pool of people. No doubt your budget treats insurance premiums as an expense, added into all your other expenses that must be covered by the prices you charge your customers.

So forced insurance, in the form of government-imposed rules, is merely another expense that you should add to your budget and adjust your prices accordingly. “But,” you exclaim, “I can’t pass those compliance costs on to my customers, They won’t pay higher prices for that!”

But your exclamation would be wrong. And to see why, read my next blog post. . . .

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