The “Overhead Smash” Of ITAR

Over at Beltway Confidential today, Tim Carney asks if one of the unintended (or perhaps not-so-unintended) consequences of Dodd-Frank will be to make big banks bigger:

“The Overhead Smash,” is how I describe Big Business’s use of regulation to crush smaller competition. Regulation increases overhead costs. Overhead generally falls heavier on smaller business. For this reason, regulations often benefit the bigger guys by keeping out new entrants and forcing smaller guys to fold.

We could be seeing that in banking, thanks to Dodd-Frank. Check out this report by the Investigative Reporting Workshop. The chief pressures leading to consolidation of the banking sector are market factors, but regulation plays a role:

…a new competitive landscape, increasing regulations and a sluggish economy are putting heavy pressure on banks, particularly smaller community banks…..

The result of more consolidation might well mean that some banks will remain “too big to fail,” despite pressure in Congress and elsewhere to make sure the government isn’t forced to bail out large institutions in the event of another financial crisis.

There is a similar process at work in the aerospace industry, with the International Trade in Arms Regulations (ITAR). As industry analyst and journalist Jeff Foust described a few years back, the new laws passed in the 1990s have had the effect of hamstringing start-ups, requiring extensive paperwork and months of delay before a small company could so much as have a technical discussion with (say) one of those dangerous Canadians.

One of the reasons that it’s been hard to get much action out of Congress to fix the problem is that the big players, such as Boeing and Lockheed Martin, don’t mind it that much, because they have large government contracts that justify and pay for the overhead of a department dedicated to nothing other than dealing with the State Department on such issues, a luxury that a small company with little or no government work can neither afford or justify. Hence, it actually represents a convenient barrier to entry for the larger companies to protect them from competition from upstarts.

Until someone in Congress starts to make decisions on the basis of American competitiveness in space instead of how many campaign contributions they get from the traditional players, this is a problem that will persist.