July 03, 2002
From the desk of Jane Galt:Regulation Today. . . regulation
Regulation Today. . . regulation tomorrow. . . regulation forever!
I think it's fair to say that at this point, many of the calls for "More Regulation!" of companies to prevent the kind of accounting fraud we've just witnessed are fairly reflexive. Oh, I think those making them are very earnest and well-meaning, but many of the people calling for us to vest the SEC with the kind of intrusive powers that would have them screaming to high heaven if the target were, say, John Walker Lindh, would be calling for "more regulation" if the problem were the decline of fruit roll-ups sales in the Midwest. There is a group of people in this country who think that the finest response that can be mustered to any crisis is a new law.Which is not to say that conservatives, at least those of us of a libertarian bent, trust corporations any farther than we can throw them. We only trust them relative to the alternative, which is having the government provide the things we currently get from corporations. Many of us notice that pretty much everything we get from the government, well, sucks. While we have been called starry-eyed idealists or free-market utopians, at least we are not so blind to reality as to expect quality health care from the folks who gave us the DMV.
We are also aware that regulations have consequences other than the "Fix it!" demands being made urgently by the public interest groups. Believe it or not, those same public interest groups were, I'm told, in favor of that brilliant market innovation, mandating the purchase of California's electricity on the spot market. They believed that this would ensure that California's consumers would always benefit from the lowest possible electricity prices -- no windfall profits for those greedy corporations! Though they may have noticed that all the private companies made extensive use of forward contracts, they thought that they were smarter than the market. So smart, in fact, that they thought that they could make a law that consumers would always get low prices, no matter what.
Ooops.
Advocates of regulation seem generally to believe that there is, somewhere out there in the Platonic ether, an ideal regulation that will make everything work all the time and no one will be able to get around it, and if they do, we can stop that quick. Libertarians understand that there is no such animal. People are surprised that Corzine is jumping on the corporate regulation bandwagon, what with him being a big Wall Street type. Honey, how do you think Wall Street makes all its money? By dreaming up new financial "structures" which game the abstruse systems of tax, financial, and other regulation in this country. Want to increase regulations? Corzine is all ears. The regulations you want to write are going to put money in his pocket, as the legions of young MBA's at Goldman Sachs get busy finding ways around them. And while it's cute that you think you can write bulletproof regulations, go check out Jewish Law -- they've had 5,000 years and they're still arguing. And the people arguing are nowhere near as well paid as your average investment banker.
At this point in the discussion the regulophiles, the ones who aren't throwing their drinks at the libertarians, generally start saying "Well, the important thing isn't the specific rules; it's to create a smart regulatory body and give it enough power to really curb this sort of thing."
Oh, ho, ho, my friends. Would that it were so easy. First of all, you can't afford a smart regulatory body. Goldman Sachs pays people straight out of business school well over 100K. That's before they know anything. The salaries march rapidly upwards from there. And since there will always be more money in avoiding regulations than in making them, you'll always have a talent asymmetry heavily skewed towards the regulatees. Especially since to adequately audit the companies the way that these well-meaning and totally clueless souls are imagining when they call for stepped up enforcement would require a staff at least several times larger than the current number of employees at all the public accounting firms combined. Think I'm exaggerating? Don't take my word for it. Find a Democratic-leaning auditor for a public firm and ask him what it would take to really uncover fraud at public firms, and then ask them to compare that, in man-hours, to what they actually do on a typical audit. The gap is apparently enormous.
And then, once you've created this omniscient, omnipotent regulatory body, what happens? You lose control of it to the companies it regulates. It's called "regulatory capture", and it's pretty much universal. Again, don't take the word of Jeremiad Jane, shill for the Military-Industrial Complex. Ask anyone you know who's worked for, say, an advocacy group -- they'll be happy to tell you exactly how the regulatory agencies are in the grip of those fat-cat corporations. Bruce Baugh has an absolutely fantastic post on this subject which you should go read -- just as soon as you're finished listening to me rant.
Which is actually now. Lesson for the hour: things that sound simple, aren't. And you know this, don't you? When you try to explain the things you're an expert on, you get bogged down trying to demonstrate how complicated they are while your ignorant listeners jump to seemingly obvious yet utterly wrong conclusions about what you've just said. You know that the things you're an expert in are complex -- and yet you think you've got a ten-word solution to the problem of corporate governance in this country?
The less you know about the industry or market or scientific problem in question, and the easier and better a proposed solution sounds, the more likely it is to produce some catastrophic unintended cock-up which will have you screaming, in no time flat, that tireless refrain: "There oughta be a law."
Please excuse us if we can't resist a couple choruses of "I told you so."
Posted by Jane Galt at July 3, 2002 04:46 PM | TrackBack | Technorati inbound links