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Thursday, March 17, 2011

Why Big Business Loves the Regulator

Continuing with my goal of dispelling some common misconceptions or myths about Republicans, I attack a couple of myths today.

I'm constantly bombarded with the notion that wishing to eliminate regulations is akin to desiring a world without laws.  To that, I say absolutely not.  I'd say let's go back to the original ten that Moses brought down and go from there.  All kidding aside, there is much that needs to be understood about laws and regulations.

Myth #2 - Regulations Protect Consumers From Big Business

This myth is a bit like saying that laws protect people from criminals.  Well, duh....but think about it.  Without the law, most people are still fairly safe from criminals.  Our primary protection comes from our own actions.  The law mainly stands as a means for punishing those who choose to commit a crime.  The manner in which we punish the criminal often has more to do with prevention than the statute itself.

Our statutory laws largely developed from long held beliefs - killing is wrong, stealing is wrong, etc. - whereas our regulatory system development has been largely reactionary.  Imagine a legal system that developed in such a way. 

Someone is stabbed to death.  In response to this wrong, a law is made to outlaw stabbing people.  Next someone has their neck slit, so now all knives are banned.  Then someone is strangled and a law is made outlawing any intervention into a persons respiratory system.

Suddenly, a patchwork of laws now exists that limit normal behaviors such as cutting a steak and lifesaving measures, such as the Heimlich maneuver for a choking victim or even surgery.  Yet this system of laws still fails to accomplish what society desires - keeping people from being killed.  Rather than reacting to a particular event and setting up laws to stop that event from happening, a better solution is to stand back from the event and make a law that will meet societies desire and that can accomplish its goal.

Yet our regulatory state looks very much like what I describe; it is very reactionary and very harmful.  Regrettably, our statutory system is starting to move down this path also.  If a new law is named after a person, you can assume it's a reactionary law.

Following the Enron scandal, new regulations were put into place.  The regulations were unneeded because the act Enron executives and it's accounting buddies committed was already against the law and several of them went to jail for it.  In situations like this, making a new law will do little to prevent similar occurrences.  A sterner punishment will do far more.

One of these absolutely unnecessary new regulations, FASB 157, forced banks to implement mark-to-market accounting procedures.  These were eliminated by FDR during the Great Depression and are often held up as a primary cause of much of the trouble, both then and now.  Brian Westbury and Robert Stein at Forbes, wrote,
The history seems clear. Mark-to-market accounting existed in the Great Depression, and according to Milton Friedman, who wrote about it just 30 years after the fact, it was responsible for the failure of many banks.
Franklin Roosevelt suspended it in 1938, and between then and 2007 there were no panics or depressions. But when FASB 157, a statement from the Federal Accounting Standards Board, went into effect in 2007, reintroducing mark-to-market accounting, look what happened.
This shows the result of the worst of our reactionary regulatory system - the consumers are hurt as badly as the companies.  On the other side lie what may be argued is an even greater problem. - regulations that protect Big Business at the expense of the consumer. 

One of the greatest myths about Big Business is that they want a free market.  A truly free market creates competition.  The last thing a highly successful market-leading business wants is competition. 

The reason why we have anti-trust regulation is because once businesses become large enough, their natural inclination is to seek ways to control the market and limit competition.  Big Business has become very astute at manipulating the legislative process to form legislation that works for them.  Tim Carney at the Washington Examiner took note of this when he wrote,
Vague public calls for "reasonable regulation," of course, are often little more than smoke. But Goldman's annual report explicitly endorsed stricter federal capital and liquidity requirements. Goldman reported on the conference call that it holds 15 percent "Tier 1 capital," meaning it is very liquid and not very risky. Goldman can play it safe, you see, without needing a regulation. But regulations prevent smaller competitors from taking the risks needed to compete with Goldman (and every competitor is smaller).
Big Businesses are quite happy to work with legislators on regulations that insulate them from competition.  Legislators allow them into the process in order to use business' support in winning passage of measures.  These politicians then campaign on this legislative victory for the "consumer" while reaping the contributions from the businesses they are "regulating".  It is a self-serving circle.

The same process happened with the Health Care Reform passed a year ago.  The insurance and pharmaceutical companies were eager to negotiate the legislation with Congress and Obama's administration.  Sadly, those companies played a far larger part in crafting the legislation than the Republicans. 

It was an oft repeated chorus in the media that the GOP had no plan on health care, but that was a lie.  They had a very simple plan with a few common sense reforms.  At the top of the list was de-regulating the health insurance market and allowing companies to market their product across state lines.

Currently, each state sets it's own regulations for health insurance.  This forces insurance companies to form multiple stand alone subsidiaries to compete in each state.  Creating forced inefficiencies and increased overhead costs to existing companies, this framework constructs a huge hurdle for a small competitor.  The existing companies can handle the heavy cost by passing some of it onto the consumer while reaping the reward of investing it's substantial assets in the stock market.  The amount of capitol needed for a smaller company to compete is prohibitive.

Even as Geico and Progressive have radically changed the automotive insurance industry in a de-regulated marketplace, the health care reform legislation prevents any chance for increased competition to help lower costs for consumers.  Consumers have won in other de-regulated marketplaces such as consumer banking and telephone service, where increased competition has resulted in lower costs and greater innovation.

Myth #3 - Republicans Represent Wall Street not Main Street

Let me state right away that the longer some politicians remain in office, the more likely they are to fall into bed with Wall Street.  That's not a Republican or a Democrat issue, that's a Washington issue.  I want to be clear on that.

That said, it doesn't mean that one party doesn't favor Wall Street more than the other.  Most people will be surprised to find that Wall Street would prefer to work with Democrats in office than Republicans.  Don't believe me?  Let's look at political donations in the last presidential election cycle.  Jeff Poor at Media Research Center reports,
Based on media coverage, conventional wisdom suggests Wall Street would favor Republican Party candidates when donating to campaigns. But that’s not the case.
According to the Center for Responsive Politics Web site OpenSecrets.org, out the top 25 political contributors for the 2008 election cycle, nine were Wall Street banking or investment firms, including the now defunct firm Lehman Brothers. Employees at eight of those nine firms gave more money to Democratic candidates – nearly $17 million to Democratic candidates versus only $11 million to their Republican counterparts. That’s 60 percent for Democrats to only 40 percent for Republicans.
Keep in mind this election took place immediately following a large financial meltdown with candidate Barack Obama calling for new regulations as he ran as the representative of Main Street, working against Wall Street.

As I wrote yesterday in Why Republicans Love George Jefferson, the GOP wants a nation full of small entrepreneurs who take a chance and create a successful company, build on that success and continue to grow.  Those success stories are where jobs are created.  But heavy regulation can prevent those potential successes from ever getting started.

It would be easy to say that mandating that all dry cleaners must be licensed and have a certificate to prove competence is a consumer protection.  But if George Jefferson weren't a competent dry cleaner then his business would fail.  If a few customers were harmed by his services, they could seek redress through the normal means.  But if the requirements to open a store are too costly, then George, and his potential customers are out of luck.  Rather than create a successful business that grows and creates jobs, he lives his life working for someone else.  The consumer who would have found lower prices from the competition, now are forced into paying higher prices at Cunningham Cleaners.

Just as every law places some infringement on our rights, every regulation burdens the consumer.  And just like laws, we must balance the cost against the protection.  The cost of banning all knives is not worth the protection from stabbing, whereas banning murder no matter the weapon is an appropriate restriction.  Paying a little more to ensure our food is safe to eat is a good deal for consumers.  Attempting to prevent anyone from ever getting a bad deal is a nonsensical endeavor.
In a perfect world, simply enforcing a ban on cheating, stealing and lying would be a more than adequate regulation.  But even in the real world, a few discontent customers is a small price to pay for the greater good of a competitive marketplace.

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