Back in the 1600s, Spain was pretty much looting the New World. Galleons would sail for Spain in convoys loaded down with gold and silver extracted from the Aztecs and the Incas. These fleets, called Plate Fleets after the Spanish word for silver, also carried people, supplies and trade goods, but it was the return journey with the treasure that really paid the bills. With so much wealth literally floating about, the Spanish government naturally had to and make sure they got their cut. Accordingly, the Spanish Crown came out with a blizzard of paperwork regulating every aspect of the trade, including scheduling, accounting, permits, and exactly how the cargo was to be divvied up, all assuring the King got his piece of the action. The penalties for irregularities were severe, so, among the sailors, Conquistadors, and assorted adventurers on these voyages, each expedition carried a clerk/inspector whose sole job was keeping track of the paperwork, the permissions, the licenses, and the disposition of the cargo to make sure all the mountain of regulations were being obeyed. No doubt it was a full time job. (Monty Python’s famous sketch of swashbuckling seagoing chartered accountants comes to mind.)
Today, most of us are familiar with the extensive reporting and coding requirements of Medicare, and some insurance companies. Even small family practitioners now have been forced to create an office position for someone to keep track of all the intricacies of modern government regulations and requirements. Of course, many people find it necessary to hire a service to help with the thicket of income tax regulations each year as well. These are annoyances of modern life we have come to accept grudgingly, but we may not be aware of just how much is involved in simply figuring out just what is required and keeping one step ahead of regulatory demands in the business world. I was reminded of this the other day when I went on a tour of a local guitar factory.
The Paul Reed Smith Guitar company is the third largest guitar manufacturer in America, and uses a combination of modern production techniques, innovative design features, and meticulous craftsmanship to produce guitars that are not only superb musical instruments, but works of art as well. At one point, I asked the tour guide about the infamous Gibson Guitar raid of 2011. Gibson Guitar’s Memphis factory was raided by a 30 man SWAT team from Homeland Security and the U.S. Fish and Wildlife Service (Didn’t know Fish and Wildlife had a SWAT team, did you? For that matter, why is Homeland Security chasing domestic guitar manufacturers?)
The raiders said they had a warrant, but said it was “sealed” and could not be seen. They herded the employees outside, shut down the factory, and carted off half a million dollar’s worth of wood and guitars as “evidence”. When the dust settled, Gibson was told they were in violation of an old law against importing endangered animals that had recently been amended to include plants and wood. At issue was some mahogany imported from Madagascar whose documentation was apparently suspect. It was the old “Your papers are not in order” routine. Gibson claimed the wood in question was actually from India, but documenting each individual strip of wood was difficult. After years of wrangling and leaks to the press, thousands in lost income from the factory shutdown, and mounting legal fees, Gibson was forced to settle by paying a fine of $250,000 and make a $50,000 “contribution” to an environmental activist group !!!! (No word on whether this was the same activist group that lobbied to have the law expanded in the first place.)
Although the alleged violation was apparently serious enough to warrant a SWAT raid and $300,000 in fines, no charges were ever filed, and the confiscated guitars and suspect wood were all returned to Gibson. Apparently there was no endangered wood there after all, but the ransom still had to be paid. Gibson got a tiny measure of revenge by using the returned wood to build a line of guitars they called their “Government series” ! The full story is here.
Back to my conversation at the PRS plant: The PRS person said they were well aware of the Gibson case and in response, had employed a full time person to continuously monitor the laws, permits, documentation and all the complex regulatory requirements that go with making a product that incorporates exotic woods. Think about that a moment; a full time person just to keep the SWAT teams from the door. It’s the Spanish Plate Fleet all over again, with the threat of the Spanish Inquisition thrown in.
And wood is not the only regulatory pitfall. PRS has stopped using Ivory for the tiny fretboard bird inlays on its lower end models, and has gone to plastic. African elephant Ivory is illegal, of course, but Mammoth Ivory from old Mammoth tusks that PRS used, is completely legal. The problem was providing documentation to be able to prove that every tiny piece of ivory on every location on every fingerboard was not the wrong sort. It just wasn’t practical, so plastic is now used.
The upshot of this story is that there is a hidden cost of regulation as time, energy, and resources that could have been applied to improving products or services, or lowering prices, are diverted to defensive regulatory compliance. When regulatory laws are written, it seems doubtful anyone takes these hidden costs into account, but as long as regulatory agencies have the power to demand exorbitant fines for unproven, and even unfounded charges, this will continue.