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anticompetitive effects that may result from the rules and regulations they promulgate, and clearly justify an occasion in which a rule has an anticompetitive result. NFIB has longed believed that the regulatory process has produced too many overly complex, inflationary and unjustified procedural and substantive requirements, which often have only a tenuous connection to a public purpose or Congressional intent. We are very pleased to see that this fact is being recognized in many quarters within the Federal Government. Recent actions within the administration, including the formation of the Regulatory Council and the issuance of the executive order requiring plain-English regulations, are a good start at providing the necessary focus on regulatory actions within the administration. But, NFIB believes that firm pressure in the form of legislation will be more effective at provoking essential basic changes in patterns of thought and action within the agencies as well as in reaching those which can be touched in no other manner. S. 382 is a simple and effective proposal which is clearly needed. For these reasons we feel it is good legislation.
From the perspective of small business, anticompetitive regulation takes on three forms. The first and most obvious form serves to limit the entry of new competitors or new competitive technologies. Perhaps the most visible example involves the need for certain types of truckers to obtain a Certificate of Convenience for the Interstate Commerce Commission (ICC), and the administrative procedures by which this is accomplished.
But equally blatant examples can be found in other areas as well. One of the more interesting was presented by an NFIB member, Mr. David H. Fulton, president of the 25-employee Plantabbs Corporation in Timonium, Maryland.' It seems Mr. Fulton was handed a monopoly by EPA on a product for the control of insects on houseplants, while simultaneously being denied the right to enter the market in dog repellents. Events leading to Mr. Fulton's status are rather involved, but the heart of the matter is that new registrations on fungicides, insecticides, et cetera, were frozen until existing registrations could be studied. Originally, it was believed the studies would last 2 years, but 3 years have already passed with only a small number of registrations reviewed. When this process will be completed is anybody's guess, presumably maintaining the monopolies for an extended period of time.
In a slightly different twist on the same theme, the utilization of specification standards rather than performance standards can create a monopoly or near monopoly situation. By requiring a specific method to achieve a regulatory objective, it is possible for an agency to "lock-in" a specified patent or series of patents. Thus the small firm finds only one source of supply and, often more importantly, cannot employ the entrepreneur's considerable ingenuity to reach the regulatory objective.
The second type of anticompetitive regulation involves requiring acts which the small competitor either simply cannot afford, or which must be accomplished in a manner more ideally suited to the needs and business practices of larger firms. Let me offer several examples to illustrate, the first being rather lengthy. Nutritional labeling of processed meats has at one time or another been discussed by the Department of Agriculture (USDA). Assuming for the moment USDA determined the nutritional labeling of processed meats was in the public interest, regulations promulgated would probably require, among other things, the listing of specified components, for example, protein and the minumum amount, for example, 12 percent weight. Each consumer unit of product, for example, a package, would be expected to meet the assertions found on the label.
Let us briefly examine the differential impact such a single set of regulations would have on Big Boy Meats, an industry giant, Little Boy Meats, a small processor, and Joe Smith's Locker Plant.
Big Boy Meats should have comparatively little difficulty complying. Each of its plants contains several mixing vats producing the same meat, for example, salami, with a testing laboratory right next to them. After each batch is mixed, a sample is taken and analyzed. Within a minute, it will be known if the batch matches the labeling claims. If the batch does not, the proper adjustments are made, and Big Boy always produces its processed meats right to label specification. Little Boy Meats faces an entirely different situation. The firm doesn't have a lab on the premises, let alone anyone who could operate it. Little Boy's procedure
1 Statement of David H. Fulton, President, Plantabbs Corporation, testimony before the Subcommittee on Consumer of the Senate Committee on Commerce, Science and Transpor tation, Nov. 21, 1978.
has been to send a sample to a professional laboratory for analyzing. If the ingredient mixture is not exact, adjustments are made in the next batch. But the new regulations would effectively prohibit continuation of existing practice.
Little Boy Meats must now make one of three choices: The firm can build a lab, install a computer-like testing machine at a cost of approximately $35,000, and train someone to operate the equipment. But that choice is prohibitively expensive, considering the facilities may be used less than 5 minutes a day. The second choice is to produce a label that deliberately underrepresents the quality of the firm's normal product. In that way, any batch which is slightly different from label claims will be covered. But if nutritional labeling means anything to consumers, Little Boy is placed at a competitive disadvantage because the product's quality is labeled to account for the worst possible circumstances. Finally, Little Boy can close his doors, and with some luck induce Big Boy to buy his good will, name, and marketing.
If Federal regulation compels States to have equivalent standards, forget Joe Smith's Locker Plant. Joe may stay in business exclusively with custom slaughtering, but there will be no more sales of processed meat to the public.
Should you find this example too improbable or hypothetical, I would draw your attention to a similar ongoing labeling problem small bakers are having with the Food and Drug Administration (FDA). 2
Other regulations are promulgated in a manner more conducive to compliance by larger firms than smaller ones. The classic case is found in the paperwork requirements of the Employee Retirement Income Security Act (ERISA). Both the legislation and the implementing regulations were drafted with large firms in mind. But the Congress did include sec. 110, which gave the Internal Revenue Service (IRS) and the Department of Labor (DOL) an option to use abbreviated reporting requirements for small pension plans, among other possible variances. Instead, the bureaucracy chose to institute a form (Form 5500) obviously designed for an international conglomerate. That presented numerous small businesses with the option of competitive disadvantage or dropping (as well as not instituting) an employee pension program. Not surprisingly, the latter was frequently chosen. Only after the major damage was done did the bureaucracy become sufficiently concerned to attempt to rectify the problem.3
This class of anticompetitive regulation creates numerous unnecessary difficulties for smaller firms because it is so alien to the thinking of most regulators. It has simply been too subtle, and small business has not had the capacity to systematically point out the problem. While the condition is admittedly improving, much remains to be accomplished in redirecting the bureaucracy's thinking and making them understand small business is an important competitive element with somewhat unique competitive problems.
Finally, it is important to recognize that regulation per se tends to have a disproportionate impact on smaller firms. There are economies of scale in regulatory compliance just as there are economies of scale in the production and distribution of goods and services. That is not an argument against all regulation, but it does enter an anticompetitive (anticonsumer or antipublic) cost, though difficult to quantify, into the regulatory cost-benefit equation.
This point is not surprising once attention is focused on it. The problem is that all too frequently it is overlooked in regulatory decisions. And perhaps while not directly pertinent to S. 382, it clearly reveals that the competitive impact of a regulation is not always obvious or direct. Coincidentally, it also re-emphasizes the need for Senator Culver's S. 299, the Regulatory Flexibility Act, a bill harmonious with the one now under consideration.
2 "The Food and Drug Administration's Food Labeling Regulation: Its Effect on Small Business," Subcommittee of Special Small Business Problems of the House Small Business Committee, 95th Congress, 2nd Session, Washington, D.C. July 13, Aug. 13, 1977 and Mar. 15, 1978.
It has been estimated that over 6,000 plans were terminated in calendar year 1975. For further information, see "Foundations for a National Policy to Preserve Private Enterprise in the 1980's," Subcommittee on Economic Growth and Stabilization of the Joint Economic Committee, Apr. 8, 1977.
See, among others, "Differential Impact of Pollution Control Requirements on Small vs. Large Business in Grain and Stone Industries," Small Business Administration, prepared by JACA Corp., (Fort Washington, Pa.), May, 1975; "The Impact on Small Business Concerns of Government Regulations Forcing Technological Change." Small Business Administration, prepared by Charleswater Associates (Boston, Mass.), September, 1975; statement of James D. McKevitt, Washington counsel, National Federation of Independent Business, testimony before the Subcommittee on Administrative Practices of the Senate Judiciary Committee, October 7, 1977.
Regrettably, NFIB can neither quantify the impact of anticompetitive regulations on small business nor can we provide a comprehensive list of regulations pertinent to the present discussion. It is doubtful anyone can. That in itself is sufficient argument for proceeding on the "broad brush" approach found in S. 382 rather than something piecemeal. NFIB expects that the application of a standard which would forbid anticompetitive regulations will serve as an effective threat for regulators. It will force those who administer the laws to do something about the effect their actions will have, and if that effect is anticompetitive, to find a less burdensome alternative.
We hope, for instance, that agencies will make greater use of performanceoriented standards rather than demand particular and expensive technologies. Such technological requirements create, in effect, needless economic barriers to doing business and have a clearly anticompetitive effect on the small business. We would hope that this standard would be interpreted to require agency review of required paperwork and reporting requirements.
We would hope section 3(a) would be interpreted in a broad sense. In other words, we hope this legislation recognizes that anticompetitive regulation is not solely a function of "locking in" a particular competitor or competitors. Our reading of the bill indicates a broad interpretation is appropriate. However, we suggest report language to that effect.
NFIB feels it is important to force agencies to consider the impact of their regulations. We are pleased that S. 382 would provide the legal basis to do this without creating any new procedural mechanisms which could unduly hinder or delay the regulatory process. We do believe that whatever time it takes to consider the anticompetitive ramifications of agency rules and decisions is clearly worthwhile.
PREPARED STATEMENT OF THOMAS A. ROTHWELL
Mr. Chairman and members of the committee: My name is Thomas A. Rothwell. I am antitrust consultant to National Small Business Association (NSB), a multi-industry trade association representing approximately 50,000 small business firms nationwide. These members represent over 1,000 of the 1,200 Standard Industrial Classifications.
National Small Business Association applauds and wholeheartedly endorses S. 382, the Competition Improvements Act of 1979. It has been recognized for some years past that governmental processes themselves frequently function to inhibit and obstruct the interplay of natural competitve forces. The distinguished chairman and other members of this committee are to be commended for perseverance as well as insightful understanding of the problems to which the measure is addressed. This is the third Congress to which the substance of this proposal has been presented for consideration.
Generally stated, the problem is a pervasive one throughout government; namely, a marked bias in those making regulatory policy, rulings and decisions. This bias operates to oppose the specific manifestations of competition, such as new market entrants, or the establishing of a priori pricing mechanisms that are inimical to competitive processes.
Every economic system known to man may be viewed generally as a system pursuant to which decisions are made determining who gets how much of what goods and services (the economic product of the culture), when and under what circumstances, and most importantly, for what set of reasons. Is it a matter of heredity, because one is born to the aristocracy or even the royalty? Does the division of wealth, meaning the goods and services produced by an economy, turn on the decisions of some Central Planning Committee or subordinate Bureau in a Peoples' Republic? The economic system to which we have fallen heir is still developing, and at times in disquieting dimensions. One such dimension is the torrent of rules, decisionmaking and regulations pouring forth daily, memorialized in the Federal Register, the work product of agencies, departments and bureaus functioning throughout the Federal Government.
Our economic system theoretically operates on the basis of merit and achievement, the unifying and overriding principle thereof being competition. This is the theory-the common understanding to which we all gratefully pay lip service. But in practice we too often strive for other goals. As recently reported by the National Commission for the Review of Antitrust Laws and Procedures: "As a result, the anticompetitive and protectionist tendencies of regulation were left
largely unchecked and regulators increasingly interpreted their statutory authority as a mandate to overlook or even suppress competition in pursuing regulatory goals."
As noted by this distinguished National Commission, the legislation at hand "would encourage and facilitate the use of procompetitive policies in regulatory decisionmaking. It would require agencies to focus on the economic effects of their actions and to maximize competition as a regulatory tool."
In other words, let's give competition a chance.
S. 382 is more specific and compelling by far than the relatively bland legislative admonitions of prior years to the effect that the regulators should take competitive values into account in determining the public interest and public policy underpinnings of their rulemaking and other regulatory activities. Yet S. 382 is at the same time of general application, and wisely differentiates as between the independent regulatory agencies and those subject to more immediate control.
In reviewing the competitive shortcomings of present agency activity, one frequently encounters as cited examples, limitations, and other obstacles designed to limit entry-what the antitrust lawyers call market entry barriers, pricing controls, and even compulsory collective ratemaking. The prevailing attitude as noted by the National Commission is that of protectionism, The net result, the bottom line if you will, is that regulation by Government functions in such a manner as to be more harshly punitive to the small business as compared to the large. The failure of Federal agencies to assess properly the economic impact of their regulations on the small was noted last year by the Antitrust, Consumers and Employment Subcommittee of the House Committee on Small Business, 95th Congress, Second Session, Report No. 95–1810, dated November 9, 1978; Union Calendar No. 944. Pointing out that the Commission on Federal Paperwork estimates that small business spends $15 billion annually on paperwork imposed on them by various Federal agencies, the subcommittee summarizes its findings on the burdens imposed on the small by Federal regulatory policies as follows:
"Testimony presented before the subcommittee also pointed to the disproportionate share of the regulatory impact which small business must bear. It has neither the financial nor the human resources available to big business to examine, understand and fully comply with the precise obligations imposed by the regulators. Thus, this also exposes the small business to a greater risk of fines and penalties for violation of rules and regulations it may never fully understand.
"The regulatory bind which the small business sector is in has not been fully recognized by the Federal Government. While there are examples of regulatory and administrative schemes which consider the substantive differences between the small and large business, the majority of regulatory actions taken by the Federal agencies fail to take these differences into account.
"Another point emphasized at the hearings was the cumulative effect of regulations imposed by various governmental bodies. Duplicative and often conflicting requirements are imposed on businesses by agencies at the Federal, State, and local levels. Thus, when examining the burden of regulations, it is necessary to consider the combination of all regulations as impacting on the small business community."
This same report goes on to record its finding that inadequate enforcement of the antitrust laws are "severely limiting the ability of small businesses to compete effectively in the marketplace." Thus, if, as and when competitive principles are honored in their observance, rather than their breach, by the departments of the Federal establishment, such should turn out to be good news for small businesses everywhere.
In order that the proposed regulatory reform embodied in S. 382 may be effective, we urge this distinguished committee to take the time and make the record of its intentions unmistakably clear. For S. 382 will be effective only if the regulators are given a clear exposition of what is meant by Congress by the use of the terms "procompetitive policies" and "alternate means having lesser anticompetitive effects."
We respectfully submit that the one overriding indicator of the nature and degree of competition is simply the number of competitors in any given market. Numbers of firms and market share data are the most important measuring devices to disclose the degree to which competition is present or absent. Other data, such as market entry, the course of pricing, innovation, et cetera, are also helpful, but the regulation and rulemakers must understand that when Congress mandates competition as a unifying principle, this means competitors. Regulatory action designed to, or with the necessary effect of, increasing the number of viable
competitors in a given market is consistent with the congressional command; whereas the converse is not.
Thus we perceive two distinct problem areas concerning S. 382 in operation. First, will the agencies heed both the spirit and letter of this salutary legislation? A diligent effort by the Attorney General, insistent on compliance, as provided in the bill, holds out much promise. But as best we cannot expect an overnight miracle. Long-entrenched attitudes are difficult to change.
Yet this problem is the lesser of the two. The second area, that of understanding and agreeing as to which specific actions are procompetitive and which are not, will keep lawyers and judges busy for years, unless Congress legislates on the basis of specific language in respect to its purpose and intent. Even though the language of S. 382 be enacted as is, the committee report as well as debates on the floor will provide an opportunity to reduce this problem to a manageable size.
Realistically, this is far too important a consideration as to the actual day-to-day impact of S. 382 on the regulatory process when it becomes law to leave to the individual discretion of hundreds of regulatory officials. Antitrust and trade regulation issues frequently tend to be complex; our most profound economists, lawyers and yes, even Supreme Court Justices, are often in sharp disagreement as to whether a particular public policy or rule of law is procompetitive or anticompetitive. Reference to the conflicting views as to competitive policy set out in the Schwinn case in 1967, as opposed to the G.T.E.-Sylvania decision a decade later, provides a compelling example of this difficulty.
To invite the numerous, farflung and most diverse community of Federal regulatory officials to participate in the making of such decisions may well turn out to be an invitation to chaos. Thus at a minimum, Congress should provide specific guidance to the regulatory agencies as to how to distinguish between a procompetitive practice, policy or regulation and the unwelcome intrusion of the converse thereof. Experience demonstrates that monopolists are always skillful apologists and rationalizers as to their misdeeds.
Therefore, it is submitted that the most obvious and simple measuring device to assist one in determining the index of competition-its presence or absence on a relative basis-is the number of competitors actually competing in a given market segment and their individual market share. Ideally, this index should be written into the statute itself as a clear and unequivocal legislative mandate.
Mr. Chairman, National Small Business Association and I am very grateful to you for this opportunity to express our views. Thank you.
Senator HEFLIN [continuing]. If not then I suppose we can go to the next witness who is Ms. Kathleen O'Reilly, the executive director of the Consumer Federation of America. The Consumer Federation of America is a federation of national, State, and local nonprofit organizations that join together to articulate the consumer viewpoint. CFA and its member organizations represent over 30 million consumers throughout the Nation. Ms. O'Reilly's testimony here today will reflect the direct impact of the Competition Improvements Act on the consuming public.
STATEMENT OF KATHLEEN O'REILLY, EXECUTIVE DIRECTOR, CONSUMER FEDERATION OF AMERICA
Ms. O'REILLY. I do not have the ability to speak today because of a sore throat. I would ask that my statement be inserted in the record. I will ask for the opportunity to answer all of your questions in writing.
Senator HEFLIN. Without objection, so ordered.
Ms. O'REILLY. Thank you.
[The prepared statement of Ms. O'Reilly follows:]