The growth of the regulatory state has created an industry around litigation, compliance and enforcement. As the administrative state expands, so does the demand for expertise — expertise that is increasingly monetized by insiders who understand the system best.
Whether through tort litigation, regulatory enforcement or whistleblower incentives, inside players with knowledge of legal and administrative processes are finding ways to turn oversight mechanisms into business models generating millions. While these mechanisms can serve vital functions, their expansion has created financial incentives that reward processes over outcomes.
The rising costs of compliance illustrate this trend. The American Action Forum’s Regulation Rodeo tracks the growth of federal regulations. In four recent years, the United States finalized 1,100 rules, imposing $1.8 trillion in compliance costs on the economy. Each rule introduces additional complexity, increasing the need for specialized knowledge to navigate regulatory requirements. The more intricate the system, the more valuable the expertise required to interpret it. This dynamic has made regulatory compliance a growth industry, with law firms, consultants and advisers playing a role in helping businesses navigate the expanding rulebook.
For some, the financial rewards of regulatory complexity go far beyond consulting fees. The plaintiffs’ bar provides a particularly striking example. In a recent Delaware lawsuit challenging Elon Musk’s compensation package at Tesla, attorneys requested an astonishing $6 billion in legal fees. While class-action suits can play a role in corporate accountability, such windfalls highlight the scale of the financial incentives. The size of these awards underscores how the legal system has become a high-stakes industry, where the returns for litigation often rival or exceed those of the businesses being sued.
Former regulators have built careers around leveraging government oversight mechanisms. For example, former Securities and Exchange Commission attorney Edward Siedle has a law practice turning alleged whistleblower complaints into lawsuits. In one noteworthy case, Siedle wrote a report as part of organized labor’s fight against a pension reform effort in Rhode Island. While then-state Treasurer Gina Raimondo was negotiating a settlement related to the reform, he wrote a “forensic investigation,” that, according to the Wall Street Journal, “accuses Ms. Raimondo of bilking pensioners to ‘enrich herself and her hedge fund backers.’”
Siedle has since focused on public pension systems in other states and has claimed multi-million-dollar awards. While the whistleblower system is intended to encourage transparency and accountability, cases like these raise questions about whether it also incentivizes the legal process’s monetization.
For pensioners, the benefits are less clear. Public pensions need reforms that are bitterly opposed by organized labor. Public pensions nationwide remain substantially underfunded — with unfunded pension liabilities reaching as high as$1.6 trillion. For organized labor, there is no downside to running pension deficits, as taxpayers can always bail them out. In 2021, private-sector multi-employer pensions benefited from a bailout that cost the taxpayers $94 billion. Despite the taxpayer bailout, many are still likely to go insolvent.
Beyond the regulatory and legal professionals who benefit from these structures, the broader costs of this system ultimately fall on businesses and consumers. The U.S. Chamber of Commerce estimates the tort system imposes an annual cost of $4,500 per household. These expenses stem from legal expenses and the broader cost of compliance, which can deter investment, slow economic growth, and increase consumer prices.
The expansion of the regulatory state has brought an ecosystem of litigation, compliance and enforcement that serves essential functions but also creates financial incentives that do not always align with better outcomes. Ultimately, the legal and regulatory system should serve the public interest, not just those who have learned how to navigate it. Ensuring that it functions efficiently, fairly and without undue financial incentives for insiders should be a priority for policymakers.
