For Small Businesses, ‘Midnight’ Regulatory Power Must Be Checked

If there is one thing small-business owners have become conditioned to expect, it’s uncertainty – in the struggle to stay competitive in a tough economy, maintain top talent, meet monthly revenue goals, access needed capital and credit, or any number of challenges that arise in the course of day-to-day business. One thing that shouldn’t contribute to the uncertainty is government regulation, along with the murky process for developing rules that small businesses must ultimately comply with.

Unfortunately, many small-business owners find themselves completely cut out of the rulemaking process, learning of new (and often costly) regulations that will impact their business only after the rules have been stamped “FINAL.” However, small business owners are hopeful that a new administration propelled by the regulatory agenda that President-elect Donald Trump campaigned on will change this dynamic. That is, result in a federal regulatory process that is more fair and rational.

But for now, we are still dealing with a problem called “midnight regulations” — the period in the final months of a presidency in which an onslaught of unfinished federal regulations are pushed through and finalized as the administration hurries to tie up loose ends. In the rushed and politicized mad dash to the finish line, rules don’t always receive the needed and required level of analysis and review. Ultimately, small-business owners are shortchanged.

This phenomenon isn’t new. In fact, every administration since the 1970s has shown an uptick in 11th-hour rulemaking. Over the last 70 years, the Federal Register, which documents new rules, has contained roughly 17 percent more pages for the months between presidential elections and inaugurations (the tail-end of the midnight period). Unfortunately in the current era, the midnight regulatory madness is shattering new records. According to the American Action Forum, the current output of midnight rules is up 42 percent over 2008, and 48 percent over 2000.

These last-ditch, opportunistic policies will have an enormous impact on the economy and industries they target. Federal regulations alone cost small businesses roughly $11,000 per employee each year, according to the National Association of Manufacturers. The NAM also estimates that the annual regulatory cost burden for an average U.S. firm amounts to 21 percent of average payroll. That is significant capital for a small business.

It’s not breaking news that small business owners cite regulations as one of their primary concerns. In the Dec. 9 Gallup Small Business Index, regulation was cited as a top issue of importance, along with taxes and regulation. The unprecedented volume of rules coming out of Washington has driven uncertainty and higher costs, which in turn affects the competitiveness and sustainability of Main Street businesses and has restrained entrepreneurship in America.

An analysis by George Mason University’s Mercatus Center found that midnight regulations often suffer from flawed analyses, less transparency and other shortcuts. Specifically, they concluded that, “During the [midnight] surge, the agencies’ regulatory analysis quality drops and regulatory oversight by the Office of Information and Regulatory Affairs (OIRA) weakens. As a result, federal agencies produce ineffective regulation and waste public resources.”

The study also found that these midnight regulations “are more likely to be ineffective and excessively costly.”

The fact that midnight regulations in recent administrations have been on the rise – and that the overall volume of federal rules being churned out is increasing – points to a rulemaking process that is in dire need of reform. In the absence of legislative action and in a rushed timeframe, transparency, inclusiveness and sound analysis are being abandoned to secure political and policy legacies.

The midnight regulatory season, with the lower quality and poorly vetted rules it churns out, represents a flawed system in general, one that can easily betray fairness and public trust. As the clock ticks towards midnight, it remains to be seen how many total rules President Barack Obama and his administration will finalize before Inauguration Day. It’s not too late to put the brakes on unnecessary rulemaking and to keep in mind that though their time in office ends in January, the impact and expense of new regulations will continue to weigh on small businesses long into the future.


Karen Kerrigan is president and CEO of the Small Business and Entrepreneurship Council, a founding member of the Rethink Red Tape campaign aimed at empowering small businesses and reforming the regulatory process.

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