Documenting Ourselves into the Poor House

Published June 29, 2017

Barack Obama was the first president since the Great Depression not to preside over any year with at least 3 percent growth in inflation-adjusted Gross Domestic Product (GDP).  The expansion since the end of the Great Recession has been weak, as least as measured by GDP.  Economists are trying to explain this growth slowdown.

One contributing factor, I think, is one of America’s fastest growing industries, compliance.  Compliance and the related documentation obsession are spreading through the economy like kudzu.

What exactly is compliance?  According to the Bureau of Labor Statistics (BLS), compliance officers “examine, evaluate, and investigate eligibility for or conformity with laws and regulations.”  The Competitive Enterprise Institute estimates that Federal regulations cost nearly $2 trillion annually, largely attributable to compliance.  Businesses must also comply with other laws and contracts; for instance, insurance claims will require documentation.

Banking and finance has witnessed enormous compliance growth since 2010’s Dodd-Frank reform legislation.  In 2014, Citi Group had 30,000 compliance employees, one third more than in 2011, totaling 13 percent of the company’s employees.  That year J.P. Morgan Chase reported a 30 percent increase in compliance staff, while HSBC’s compliance staff was 10 percent of its workforce.

The BLS’s Occupational Employment Survey provides economy-wide evidence.  Employment in eight compliance occupations totaled 612,000 in 2016, an increase of 20 percent since 2006.  For comparison, employment nationally increased by less than 6 percent during that decade.

Lawyers, accountants, education administrators, and financial managers all perform compliance tasks.  Many accountants and lawyers do work unrelated to compliance, so employment totals for these jobs would overestimate the compliance industry.  But the 26 percent increase in employment in these occupations since 2006 might be evidence of a compliance boom.

Documentation is not necessary for value creation.  For example, consider a good meal at a favorite restaurant, an excellent book, or an entertaining movie or show.  Or consider a very good employee who contributes to her employer’s success and profitability.  The value in these cases does not increase if documented.  Because documentation does not directly create value and uses scarce resources, it makes the pie of goods and services in our economy smaller.

Compliance and documentation can indirectly contribute to value creation.  For example, tracking expenditures can help a household stay on a budget and spend their money wisely.  Businesses can use data on defects and sales to improve products and customer service.

Regulations which create value will require compliance efforts.  For example, consider EPA regulation of hazardous chemicals.  Manufacturers must document compliance with safety protocols and track delivery, use, and disposal to help prevent improper and dangerous release into the environment.  Compliance costs are worth incurring if regulation produces enough benefits.

Compliance and documentation can have adverse effects beyond their cost.  Much economic value is intangible, like ambiance at a restaurant.  Compliance favors the measurable over the intangible.  Consider health grades assigned to doctors and hospitals, often based on patient outcomes.  While this sounds reasonable enough, doctors then have an incentive to avoid hard cases, like patients with aggressive cancers, who really need the best care available.

Compliance and documentation are infecting other business decisions, especially in the workplace.  Employment in America has historically been mostly at-will, meaning that the employer could hire or fire without providing a reason.  Employers consequently did not have to document which applicants or employees were better and why, and could make judgements based on tangible and intangible factors.  Requiring businesses to demonstrate that hiring, promotion, and termination decisions are not arbitrary makes documentation of measurable performance virtually necessary.

Finally, the compliance mindset can impair morale and effort throughout an organization.  Counting only documented contributions deemphasizes initiative and experimentation and turns employees into bureaucrats.

What is causing the growth slowdown?  We don’t know for sure yet, and likely several factors contribute.  I propose that any organization which lives by the saying, “If you haven’t documented it, you haven’t done it,” is probably contributing to the growth slowdown.