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Cutting the Tape on


i. V




Remarks by
Frederick H. Scnultz

Vice Chairman, Board of Governors of the



Federal Reserve System

before the

Joint Luncheon of the Directors of the
Federal Reserve Bank of Kansas City and its Branches

Denver, Colorado


i t

September 20, 1979
f •!»

•., •


fly object today is to concentrate attention on
the problem of over-regulation which threatens to have
as serious an effect on our economic well-being as almost
any factor 1 can think of, and to bring you up to date on
progress at the Federal Reserve in grappling with this
problem in our areas of jurisdiction.
1 must stress first that I am not about to encourage
a revolt against all regulation.

Who in his right mind would

oppose a cleaner environment, better working conditions,
purer food, safer drugs, nondiscrimination in employment,
and a variety of other socially desirable goals?

Many im-

provements have come about from government regulation over
the years, and, naturally, I'm for them.
But government regulation has become pervasive
and in many cases oppressive to many sectors of our society.
Without doubt, the problem of over-regulation demands attention and quickly.
of the problem:

Let me give you some idea of the dimensions

* Government: regulation drastically affects
nearly every important sector of the economy — employment,
productivity, inflation, profits and capital formation,
among others.
* In the end, the public pays the costs, which are
often hidden or, at the least, difficult to see;
* Regulation is now and has been for several years
one of the most rapidly growing sectors of government;
* Understanding .government regulations, always
difficult for lawyers, accountants and other professional
technicians hired by business, often is virtually


for the public.

Excessive government interference in the public
sector prevents employers from creating more jobs; hinders
economic growth and productivity by forcing business to set
aside a rising share of new capital to cover regulatory costs;
slows technological innovation; and increases inflation through
higher consumer prices.

In essence, over-regulation diverts

private sector attention from its traditional roles of product
development, production and marketing.

As you might expect, the public is the eventual
loser in this process because it is the public who must pay.

attempts to recover higher costs generated by

government rules in the traditional way--by passing them on
to the customer in higher product prices.

Also, the public--

taxpayers--must bear the costs of operating the federal
regulatory apparatus.

Motorists, home buyers, investors and

others come in for extra shares of the burden caused by overregulation.
The emergence of government regulation as a growth
industry is easy to document.

The Center for the Study of

American Business at Washington University has done extensive
work in this area.

The Center's figures show more government

regulatory agencies--20--have been organized during the '70s
than in any other decade in American history.

In the same

period, budgeted expenditures of federal agencies have expanded
by a multiple of almost six and now approach the $6 billion

Staffing of these agencies has nearly tripled in the

same span.
Statistics such as these represent only part of the
story--the federal portion.

Regulation by other governmental

units, on the state and local levels, also is burgeoning, although
expenditures by these bodies are not readily estimated.

Although no one knows how many regulations are
on the books today there are several indirect clues.


Code of Federal Regulations has 38 volumes totaling some
65,000 pages.

Placed side by side, the volumes are 15 feet

The Federal Register, where proposed federal regulatory

changes are first published, now prints about 70,000 pages a
year, for a cumulative total of over 800,000 pages.


1970 and 1975 the annual number of pages in the Register
increased about 25 percent a year, some five times the growth
rate between 1955 and 1970.
It is important to remember that every regulation
has its source in some law passed by a legislative body.
Several years ago it was estimated that federal, state and
local governments enact 150,000 laws a year.


ach new law does not require a regulation, enough of them



create a morass of legality and technicality that can

ciive even the most competent legal staffs a massive headache.
Look at one example bankers are familiar with.
In 1968 Congress passed a law to protect the rights of
borrowers by requiring a declaration of the rate of interest
°n the borrowing agreement.

The Federal Reserve was assigned

the task of writing regulations to carry out this Truth in
Lending legislation.
Reserve System.

It is Regulation Z of the Federal

But complications written into the law by

Congress, some 1,500 Federal Reserve interpretations and
many court decisions have enlarged a relatively simple concept


into a mass of material nearly two feet high.

Even the

largest banks in the country, with huge legal staffs, are
pressed to keep up with all the pertinent
tion Z.

details of Regula-

Where does that leave smaller lenders?

To give

you an iuea of the problems we are causing, let me read to
you a letter from the president of a small bank in Missouri:

We are returning your proposed Rule Book to

We have no comment to make since we couldn't find

anyone within 80 miles around here who could understand
what in the hell it meant."
Traditionally, economists think of regulations
as necessary in the public interest in our complex society
in order to smooth imperfections in the private economy and
our market system.

Generally, regulations are classified in

two ways:

Economic regulations, which focus on a

specific market or perhaps a single industry and prices
in that market, and;

Social regulations which typically deal with

the conditions under which goods and services are produced
or the physical characteristics of the goods.
An example of the first, older type, is the Interstate Commerce Commission control over railroads.

It is,

however, the second, newer social-type regulation

which has

contributed most to the recent explosion in regulatory


The 1970s have seen the establishment of such regulatory commissions as the Environmental Protection Agency


the Office of Consumer Affairs and Regulatory Functions and
the Consumer Product Safety Commission.

Each agency is con-

cerned with some facet of job safety, environmental purity,
safe products and overall consumer protection.

Earlier this year the Center for the Study of
American Business, headed by Professor Hurray Weidenbaum,
released figures covering the budgeted expenditures of 56
federal agencies with major regulatory functions.


showed the most rapid expansion in the "newer product lines."
A growth of almost 1,200 percent in 10 years for government
regulatory expenditures in the environmental and energy
areas; nearly 600 percent growth for regulating job safety
and other working conditions, and a 300 percent growth for
consumer safety and health regulatory budgets.
Meanwhile, the 10-year increases in the older areas
of regulation--such as finance and banking, specific industries
(including the ICC, CAB and FCC) and general business
the SEC and FTC)--was a combined 166 percent.


Budgets of the

newer social regulatory agencies accounted for over four-fifths
of the regulatory expenditures estimated for fiscal 1980.


that does not lessen the Federal Reserve's responsibility for
ameliorating the regulatory burden on the financial world.
Recognizing the spreading disease, President Carter
issued an executive order On Improving Government


accompanied by establishment- of an inter-agency
Analysis Review Group and Regulatory Council.

The Review

Group was directed to evaluate regulatory analyses of 10 to
20 major regulations a year.

The Council was directed to

coordinate activities of agencies to avoid overlapping and
duplication in regulation and is to publish a unified


of planned major regulations stating goals, benefits, expected
timetables and estimates of economic


Congress has also reflected the concerns of constituencies about government over-regulation.


committees, including the Subcommittee on Economic Growth
and Stabilization of the Joint Economic Committee, have
conducted extensive hearings on the costs of government

And numerous regulatory reform measures are

pending in the current Congress.
The tremendous costs of government regulation, as
hard as they may be to determine accurately, have inspired
these actions.

Based upon what he describes as a conserva-

tive estimating procedure, Professor Weidenbaum uses a
multiplier of 20 times the budgeted expenditures of the
regulatory agencies to determine the costs of the private
sector in complying with federal rules.

In the year ending

September 30, 1979, he estimates the direct costs of running
the federal regulatory machine at over $5-3/4 billion.


the multiplier of 20 produces a total estimated cost of federal
regulation, including the costs of compliance, of above $120


bi11 ion, or over $600 for each man, woman and child in the


United States.

These figures are just about double the 1976



Measuring costs of regulation, even direct expenditures only, is no easy job.

The costs of secondary effects

of complying with regulations are even more difficult to

Most of us in business know firsthand about the

paperwork necessary to comply with government rules.



there are many other diversions of time and manpower in
meeting regulatory requirements that are not as easily

Hiring of professional help to comply, maintaining

files to be able to comply the next time, meeting with regulatory officials, and monitoring new and revised


I have already mentioned some of the other hidden ana visible
costs involved.
This, then, is the ever-spreading malady, born in
the public interest, but now costing society more than its
benefits in many cases.

It demands quick-acting medicine.

1 •.

We have reached the point today when a magazine of
mass appeal reprints an article headlined "Time to Control
Runaway Regulation;" when a major daily newspaper runs an
editorial entitled "Costly Regulation;" and when the nation's




premier business journal concludes an editorial about "regu«U»w

latory-born virus" with the suggestion--only partly tongue
in cheek--that:

"Undoubtedly the answer lies in the creation

of a new superagency for the protection of people from



With this somewhat pessimistic background, let
me now turn to the regulatory problem at the Federal Reserve.
Make no mistake about it, the Federal Reserve is one of the
principal agencies issuing consumer regulations these days.
As I mentioned already, the Board administers the Truth in
Lending Act and Regulation Z.

But, in addition, its regula-

tions deal with many other consumer subjects including (1)
the nondiscriminatory granting of credit, (2) the resolution
of computer billing errors, (3) the privacy of credit files,
(4) the disclosures required on consumer leases, and so on.
Just as consumer statutes

prompt the issuance of

regulations, the Board's consumer regulations, as I pointed
out earlier, prompt the issuance of complex and formal
Board interpretations, staff interpretations, examiner
guidelines and other regulatory material.

In the past ten

years, the small staff of five initially assembled to administer Regulation Z has grown to a full Board division with a
current total staff of 43, and the efforts of this division
are supplemented by additional staff at the Reserve Banks.
But that is not all.

The Board's regulatory

responsibilities concerning bank holding company activities


have grown rapidly since the passage of new legislat
in 1970.



the Board's responsibilities have grown

even further with the passage of The Financial


tions Regulatory and Interest Rate Control Act late last

This legislation requires, among many other things,

stringent regulation of bank loans to insiders, close
monitoring of changes in bank control, and detailed regulation of electronic funds transfers.
All of these were added on to the existing core of
Che Board's regulatory activities relating to monetary policy,
hank supervision, and securities credit.
Given the System's deep involvement in the regulatory
process, what can and should be done to minimize the regul'Hory burden?
I am pleased to report that the Board last year
inaugurated a Systemwide program to review and simplify all
Federal Reserve regulations.
has been assembled

A small group of professionals

to work full time on the project.


addition, heavy reliance is placed on Federal Reserve Bank

Under this program, a zero-based review of each Federal

Reserve regulation is being conducted to determine (1) its
fundamental objectives and the extent to which it is currently
meeting them, (2) the costs and benefits of the regulation,
(3) any unnecessary burdens that can be eliminated, (4) the
clarity and readability of the regulation, and (5) nonregulatory
alternatives that would accomplish the same objectives.


To date, the Board has taken final action on
eight regulations. Four of these have been completely overhauled, and three have been rescinded.

In addition to

reviewing existing regulations, this regulatory review
group has put a good deal of effort into ensuring that the
Board's newest regulations--those implementing the International Banking Act and the Financial Institutions


and Interest Rate Control Act (FIRA)--were written as simply
and clearly as possible..
A significant part of the Federal regulatory burden
is related to reporting requirements.

The Federal Reserve

has both wide-ranging supervisory responsibilities and substantial economic data needs.

Both of these, unfortunately,

involve heavy reporting demands.

The Board has instituted

a program to establish better control over the entire reporting

It has established stringent guidelines for the

evaluation and clearance of proposed new reports.
groups subject any report proposal to critical
before it is adopted.



Moreover, each report now has a short

each is subject to a "sunset" date after which it must

be reviewed and reauthorized by the Board.

Using a simple

calculation of burden (the number of items of information
required, times the frequency of the report, times the number
of respondents) a gross measure of overall reporting burden
has been developed.

Through the program, a significant re-

duction in reporting burden has been accomplished.


The Board has also adopted new regulation-writing
procedures directed toward improving both the substance
and readability of its regulations.

Elements of the program

include early involvement of the public in the rulemaking
process by such means as advance notice of proposed rules;
a special effort to identify areas in which the Board would
particularly like comments; informal public hearings; and
the direct solicitation of the views of interested persons
or groups.

A particularly important part of this program is

the presentation of a "regulatory analysis" with each major
new proposal.

This analysis focuses on possible regulatory

and nonregulatory alternatives, and includes an estimate of
the possible economic impact of the regulation, as well as
the burdens of compliance.
As part of this program the Board has recently
begun publishing a "regulatory agenda" listing all of the
regulatory actions likely to be considered in the next six

The agenda even tries to introduce a human element

into the regulating process by giving the name and telephone
number of the staff member working on the project.
Other efforts are underway.

A new regulatory service

will provide a single convenient source to all Board regulations, published and previously unpublished Board interpretations, staff opinions, and policy statements.

It is

our hope that this publication, assembling all regulatory


materials, will ease the task of understanding and complying
with Board rules.
However, the success of all of these efforts aimed
at significantly reducing the regulatory burden will depend
upon our overall concept of the proper role of Federal
It is my deeply held view that the nation simply
cannot afford to orchestrate a Federal regulatory response
to every problem of the marketplace.

Certainly our experience

of the last few years should make us acutely aware of the
tremendous costs associated with Federal regulation.


each instance of proposed regulation we must be sure that
whatever problems are identified are of such magnitude that
they warrant the often massive allocation of resources and
the di sruptions that Federal regulations necessarily entail.
It should be clearly understood, however, that from
a policy-maker's point of view it is sometimes far easier
to regulate than not to.

The issuance of regulations serves

to quiet the sometimes shrill Congressional voices calling
attention to cases of individual abuse.

It is far easier

to acknowledge the occurrence of such problems and write
new rules than to suggest that a new Federal regulatory
scheme may

not be the appropriate response.


X i order for the regulatory agencies to be
successful in arguing against more regulation, in the face
of admitted instances of overreaching, we must have the
support of the affected industry in providing nonregulatory
solutions to these problems.

Strong industry efforts are

needed, for example, to limit questionable bank advertising,
unreasonably delayed availability of funds, and other potential areas of abuse if we are to be successful in holding
the line on new regulation.

With the commitment of the

System, and the help of industry, I feel confident we can
begin to find a solution to this serious national problem
and hopefully resist, in the future, the tendency to overregulate.

But it is unquestionably an uphill battle for

which I solicit your support.