The inherent danger of complex laws and regulations

| November 11, 2011 | 6 Replies

We often hear big businesses complaining about regulations, but if those regulations are complex enough, they turn into giant opportunities for big business. All you need is a smart team of lawyers in order to drive a big truck through a tiny loophole or exemption, as explained by Kevin Drum of Mother Jones:

[N]o one should take too seriously Republican complaints about burdensome regulations strangling the economy. The truth is that most reformers prefer fairly simple rules. In the tax world, they’d prefer to simply tax all income. In the environmental world, they’d prefer to set firm limits for pollutants. In the financial world, they’d prefer blunt rules that cut off risky activity at its knees.

But businesses don’t like simple rules, because simple rules are hard to evade. So they lobby endlessly for exemptions both big and small. This is why we end up with tax subsidies for bow-and-arrow makers. It’s why we end up with environmental rules that treat a hundred different industries a hundred different ways. It’s why financial regulators don’t enact simple leverage rules or place firm asset caps on firm size. Those would be hard to get around and might genuinely eat into bank profits. Complex rules, conversely, are the meat and drink of $500-per-hour lawyers and whiz kid engineers. If the rules are complicated enough, smart lawyers can always find ways around them. And American corporations employ lots of smart lawyers.

Image by Firina at Dreamstime.com (with permission)

In an earlier post, I had cited this quote: “One can make money only if there is real risk based on actual uncertainty, and without uncertainty there is no risk.’ To the extent that we have simple and understandable rules, it is harder to hide unfair business practices.

There is great value to uncertainty–to unwieldy and vague legislation–to those who have teams of savvy lawyers and accountants whose job it is to navigate and circumvent the purported intent of the legislation. That’s because most of us don’t have the time, attention, energy or political clout to rein in those who create these legislative monstrosities. We’re too busy working 8 or more hours per day at the office, then trying to be good parents, trying to fix the house or car, and maybe relaxing for an hour or two per night. How many of us are interested or able of plowing through 2,000 page legislative packages or regulations in our “free time,” or trying to make sense of complex court decisions that also struggle with these legislative morasses?

As Kevin Drum writes:

We could probably cut the size of agency regulations by 10 times if we wanted to. But business don’t want to. Sure, they’d prefer no regulation at all, but they know that’s not in the cards. So in public they bemoan complexity, but in private they fight endlessly for more of it. To their lawyers, every single extra page is an extra opportunity to make more money.

It makes one think that we need a law to outlaw complex laws.  We need a law that all laws should be written in plain English and that they must be understandable by high school graduates.  Those who insist that they need something that is not reasonably understandable should be presumed to benefit a special interest and presumed to be opposed to the public good.  Complex laws are huge red flags, regardless of the title of the law or the way politicians assure us that these laws will benefit the public.

Indigestibly complex laws almost always signal that ordinary Americans are getting screwed.

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Category: Communication, Corporatocracy, Language, Law, Orwellian

About the Author ()

Erich Vieth is an attorney focusing on consumer law litigation and appellate practice. He is also a working musician and a writer, having founded Dangerous Intersection in 2006. Erich lives in the Shaw Neighborhood of St. Louis, Missouri, where he lives half-time with his two extraordinary daughters.

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  1. The limits of disclosure : Dangerous Intersection | July 20, 2012
  1. Dan Klarmann says:

    In Philip K. Howard’s 1994 book The Death of Common Sense: How Law Is Suffocating America he points out how, in the 20th century the regulatory goal was to write such a complete set of rules that there was no chance of arbitrary, unequal, or unfair enforcement on the part of agents such as inspectors or police.

    The result was a set of laws and regulations so cumbersome, complex, and often self-contradictory that inspectors and other executives pretty much have a free hand as to choosing when and what to enforce.

    It is up to hired experts to decide what rules may or must be followed and which can be evaded (much like as in the law or tax codes). Therefore, those with the most money not only hire those who make the rules, they can choose which existing rules have to be observed.

    • Erich Vieth says:

      How many people in the entire world who are not paid to do so, have actually completely A) read or B) understood either A) the Health Care Reform Act or B) the Wall Street Reform? I’d bet it would be an extremely small number, which is odd considering that this is supposed to be a country run by the People.

  2. Erich Vieth says:

    The 2012 National Defense Authorization Act (NDAA) illustrates the power of drafting complex/vague legislation. This new law will enable the government to illegally and indefinitely detain people who will then be required to hire expensive lawyers to assert their constitutional rights. Of course, most people cannot afford to pay lawyers huge amounts of money to take on complex constitutional issues.

    Instead of drafting a bill that clearly excludes Americans from this abhorrent process, Congress enacted the a vague/complex bill that allows the U.S. military to do the opposite of what the President’s apologists are now proclaiming. http://www.salon.com/2011/12/16/three_myths_about_the_detention_bill/

  3. Erich Vieth says:

    A perfect example of unnecessary complexity as a malicious tactic:

    Financial regulatory officials, at the behest of Wall Street, have turned a simple bright line into a convoluted monstrosity. The questionnaire alone, inviting comments, runs 530 pages.

    The bankers and their allies in government have succeeded once again in making their financial engineering too complex to regulate. The Volcker Rule, in the spirit of the 1933 Glass-Steagall Act, was supposed to simplify matters. But the regulators are helping Wall Street by adding to the complexity. See Jesse Eisenger’s analysis from Propublica.

    The capacity of Wall Street to create new mutations of derivatives that are not quite explicitly covered by this or that sub-sub-sub rule is of course endless. In the absence of a clear line, Wall Street can always field more lawyers than the government can spare regulators, and what an awful waste of taxpayer money.

    And check out Kuttner’s follow-up:

    There is no good reason to allow a commercial bank to trade for its own account. The bank is likely to trade on inside information, creating a blatant conflict of interest between the bank and its customers, as well as a moral hazard that the bank’s extreme leverage will put the larger economic system at risk — in just the way creation and trading of opaque derivatives caused the collapse.

    How, after all, did the banking system function without these innovations, which only date to the 1990s? Answer: with a lot more efficiency, more modest profits for bankers, and far less potential to wreck the rest of the economy.

    http://www.huffingtonpost.com/robert-kuttner/volcker-rule_b_1303005.html

  4. Erich Vieth says:

    “The inner workings of the 401(k) system are shrouded in secrecy and mired in complexity, which is exactly the way the securities industry wants to keep it. There has been little scrutiny of how investment options are actually selected for inclusion in the plan.”

    Dan Solin, at Huffpo. http://www.huffingtonpost.com/dan-solin/the-401k-ripoff_b_1425444.html?utm_source=Alert-blogger&utm_medium=email&utm_campaign=Email%2BNotifications

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