The New Clarion

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Killing The Golden Goose

December 27th, 2008 by dismuke · 3 Comments · Politics

Writing in the Wall Street Journal,  Michael S. Malone has an excellent column which provides an overview of some of  the disastrous wealth-killing regulations implemented over the past decade (all under the Bush Administration). These regulations, when combined with proposed increases in capital gains taxes,  will mean that, once the recession finally does bottom out, we will likely be in for a generation in which there will be very little wealth creation and non-governmental job growth.

“From the beginning of this decade, the process of new company creation has been under assault by legislators and regulators. They treat it as if it is a natural phenomenon that can be manipulated and exploited, rather than the fragile creation of several generations of hard work, risk-taking and inventiveness. In the name of “fairness,” preventing future Enrons, and increased oversight, Congress, the SEC and the Financial Accounting Standards Board (FASB) have piled burdens onto the economy that put entrepreneurship at risk.

The new laws and regulations have neither prevented frauds nor instituted fairness. But they have managed to kill the creation of new public companies in the U.S., cripple the venture capital business, and damage entrepreneurship. According to the National Venture Capital Association, in all of 2008 there have been just six companies that have gone public. Compare that with 269 IPOs in 1999, 272 in 1996, and 365 in 1986.”

Malone blames this on Sarbanes-Oxley which has also had the unintended consequence of transferring the world’s financial capital from New York to London.

Regarding other regulations, Malone writes:

“FASB’s biggest crime against the economy and the American people came when it decided to measure the impossible: options expensing. Given that most stock options in new start-up companies are never worth anything, this would seem a fool’s errand. But FASB went ahead — thereby drying up options as an incentive for people to take the risk of joining a young company and guaranteeing that the legendary millionaire secretaries would never be seen again.

Not to be outdone, the SEC has, through the minefield of “full disclosure” requirements and other regulations, made sure that corporate directors would never again have financial privacy and would be personally culpable for malfeasance anywhere in the company. This has led to a mass exodus of talented people from boards of directors in places like Silicon Valley. Full disclosure was supposed to make boards more responsible. Instead, it has made them less competent.”

The article is not very long and is worth taking a moment to check out.

Obviously there is  little chance that any of this will be reversed under an Obama Administration with strong Democrat majorities in Congress.   The only good thing is that such nonsense will at least no longer be coming from a Republican Administration which means there is at least a chance for principled opposition to perhaps eventually exploit the disastrous consequences which will follow in order to gain a hearing. 

Malone concludes by saying:

” If Mr. Obama is serious about getting the country out of this recession using something more than public make-work projects, he should restore the integrity of the new company creation cycle: rewrite full disclosure, throw out options expensing, make compliance with Sarbanes-Oxley rules voluntary, and if he won’t cut it, then at least leave the capital gains tax rate alone.

Otherwise, Mr. Obama might end up being remembered as the second Herbert Hoover, not the next FDR.”

Fat chance of Obama doing any of that.   But if the stigma of being the next Herbert Hoover can somehow be transferred to Obama and the Democrats from the person who has certainly earned it, George Bush, that would be a good thing.

3 Comments so far ↓

  • Bill Brown

    Hah, I had this open in a tab to blog about tonight. I guess I’ll have to go with one of the other 18 tabs or the 83 links in my del.icio.us tagged 2blog.

  • Burgess Laughlin

    Mr. Malone: “If Mr. Obama is serious . . . he should restore the integrity of the new company creation cycle: rewrite full disclosure, throw out options expensing, make compliance with Sarbanes-Oxley rules voluntary, and if he won’t cut it, then at least leave the capital gains tax rate alone.”

    Mr. Malone writes like a conservative.

    Why should government “rewrite full disclosure”? Why should government be involved at all?

    Make a law voluntary? All laws should be compulsory. If laws–or the regs they spawn–are morally wrong, then abolish them.

    Cut or leave alone the capital gains tax? Why not abolish it?

    Mr. Malone seems to be arguing the standard conservative line: make statism more efficient and effective–but never challenge the underlying principle that government may and should violate individual rights to achieve “higher” goals.

    The one good thing Mr. Malone has done here is highlight a problem: a statist blockage in a major artery of the economy. It has to be removed to prevent the victim from having a stroke. Taking half a baby aspirin isn’t going to do the job.

  • dismuke

    Hello Burgess –

    “Mr. Malone writes like a conservative.”

    My strong guess is that it probably is because he most likely IS a conservative. Therefore, as such, I just take it for GRANTED that there are likely going to eventually be some limitations in any positive case he might make for capitalism as well as certain points of departure between my views and his.

    In this case, the CENTRAL FOCUS of the article was an exposition of specific highly destructive regulations. His basic underlying premise throughout was that wealth creation, innovation, risk taking and entrepreneurship is a value – something you and I would hardly disagree with.

    Ultimately, for the vast majority of people, if the case against economic statism and for capitalism is to be made, it has to be DEMONSTRATED empirically. This is even the case for people who reject altruism – one must demonstrate that a morality of self interest IS practical. And for people who are not quite at that point yet – well, our culture is not yet so corrupt that there are not millions of well meaning people out there who DO value prosperity and wealth creation and are willing to stand up for it to the best of their ability. I certainly would want those people on my side and ringing the phones at Congressional offices off the hook in an attempt to derail some disastrous piece of legislation and thereby perhaps buy us some extra time to educate and allow for a more philosophically principled case to gain cultural traction.

    As you point out, Malone provides important information of benefit to ANYONE who wishes to defend and fight for the the wealth creation process . Perhaps his column will even educate people who, up to now, had taken wealth creation for granted as, to use Malone’s words, some sort of “natural process.”

    Since THAT and not a platform of concrete legislative proposals is the main thrust of the article, I consider the articles benefits to FAR outweigh its flaws, which I consider to be relatively minor in the context of modern conservative commentators.

    If one could EXPECT prominent conservative commentators in mainstream media outlets such as The Wall Street Journal or ABC News to consistently make a fully principled case for capitalism in a manner that would pass full muster by people such as you or me – well, if we lived in a cultural climate where it was reasonable to expect that, a great many of the problems we face, including the ones that Malone highlights, wouldn’t even exist in the first place, would they?

    It is one thing to point out the intellectual flaws of conservatives and where conservatism in general is lacking. But to criticize a conservative on grounds that he is not a consistent Objectivist – well, gee, what else can you expect from a mainstream conservative columnist? To me, it makes about as much sense as finding fault with a devout Catholic on grounds that he goes to midnight mass at Christmas. OF COURSE he is going to go to mass on Christmas.

    “Mr. Malone seems to be arguing the standard conservative line: make statism more efficient and effective”

    Perhaps you are more familiar than I am with Malone’s writings and are basing this on statements he has made elsewhere . But, limiting the context to just this article, I think it is a stretch and potentially unjust to assert that his aim is to “make statism more efficient.” Obviously I cannot get inside his head – but I think a more reasonable premise to assume here is that of INCREMENTALISM, i.e., the recognition that long-term political agendas are almost always achieved in steps over time and are rarely implemented all at once overnight. And if you go back and read the context of his suggestions, he is directing them to OBAMA – who certainly would NOT be open to a principled case for capitalism but MIGHT perhaps be persuaded on pragmatic grounds to act in a less destructive manner if one can demonstrate that it will save his political skin.

    Furthermore, Malone does NOT advocate making a law voluntary. What he suggested was making “compliance with Sarbanes-Oxley RULES voluntary.” There is a big difference between government enforced laws and mere rules. There are all sorts of RULES that companies must comply with during the course of business that are entirely voluntary and contractual in nature. I do not know enough about the reporting requirements of Sarbanes-Oxley, but perhaps there are aspects of it which provide information that WOULD be beneficial for shareholders and potential to know about. If so, then there certainly would be nothing wrong with shareholders or stock exchanges exerting contractual pressure on companies to do so. Now, I have no idea whether or not this is what Malone has in mind or not. But I think it is a FAR more reasonable conclusion to jump to than that he is suggesting that compliance with a law be voluntary. My assumption when I read it was that he wanted to REPEAL the law and make any potentially valid disclosure requirements the law includes voluntary.

    Bottom line, I don’t disagree at all with your principled approach towards defending capitalism. But given the state of today’s culture, the sort of publications Malone writes for and his probable context, I think it is highly unrealistic to expect him to have a similarly principled approach. And given that context and the overall thrust of his column, I think your criticism of him was perhaps a bit out of proportion and possibly a bit unjust.