State of Innovation

Patents and Innovation Economics

Jack Kemp: Anticipates My Book on SOX

In 2002 Jack Kemp wrote a prescient article on Sarbanes Oxley, entitled Criminalizing Corporate Behavior.  He correctly predicted,

 The greatest harm caused by Sarbanes-Oxley, though, will be to small firms that are pushed over the edge into oblivion or nascent public firms that are never born because of legal fees, accounting fees and other exorbitant costs piled on by the regulators!

This is exactly what has happened under SOX.  Since it was passed, the number of companies going public has dropped by over seventy percent.  The US is the only major country in the world with fewer public companies today than it had a decade ago.  The average cost of complying with SOX is over $4M per year per public company.  Sarbanes Oxley has failed to achieve any of its stated objectives.  Its proponents said it would increase investor confidence in the stock market, eliminated accounting fraud, and decrease the cost of raising capital.  I doubt that anyone would say they have more confidence in the stock market today than they had ten years ago.  It clearly did not stop accounting fraud or reduce the cost of raising capital.

Jack Kemp explained the media lies used to pass Sarbanes Oxley.

First, instances of corporate fraud and misconduct are quite rare, occurring in less than one-quarter of 1 percent of all companies. Second, contrary to how the media portrays corporate scandals, accounting fraud and sweetheart financial deals are not the result of too little government intervention into the marketplace and insufficient government oversight of an unfettered capitalist system.

Political opportunists exploit the media fiction to play the politics of envy and convince the public that stringent, far-reaching government action is required to stop this “epidemic” of corporate criminality. Rather than a dispassionate examination of the problem, Congress hurriedly enacts ill-advised legislation like the Sarbanes-Oxley Act, which essentially criminalizes accounting mistakes and poor management.

The political demagogues who have used the collapse of Enron, Global Crossing and a few other high-profile business failures as an excuse to criminalize corporate mistakes and poor management ignore the fact that over the last two years there have been more than 70 major bankruptcies in the communications industry, with at least 23 more expected. There have been more than $100 billion in corporate defaults and $7 trillion worth of losses in asset values. A few of these bankruptcies may have resulted from accounting shenanigans, and a few more may be explained by poor business judgment, but with bankruptcies running through an entire industry, and indeed, an entire sector of the economy, the evidence is clear that we confront a problem beyond telecom monopolies or greedy and shady corporate executives. Moreover, in 2001 more than 60 percent of all corporate defaults were outside the telecom sector.

By focusing on accounting scandals and criminalizing corporate mistakes, we divert attention away from the fact that in most cases it was excessive taxation, deflationary monetary policy, and overbearing regulatory policy that undermined companies and entire industries that otherwise were thriving and had a bright future. Political demagogues who play the politics of fear and envy confuse cause and effect when they blame catastrophic business failure on accounting gimmicks. In fact, it was usually the prospect of catastrophic business failure brought on by horrible government policy that created the pressures to cut corners, engage in accounting irregularities and commit outright fraud.

Congressman Kemp debunks the nonsense that the late 90s were a bubble created by the Federal Reserve.  He correctly points out that the Federal Reserve actual caused deflation, which resulted in the collapse of so many productive companies and the recession of 2000.  If you don’t believe me look at chart of the price of gold.  Its price declined from $400 per ounce in 1996 until 2001 when it hit a low of $271 and did not get back to $400 and ounce until 2004.  Unfortunately, the myth of a Federal Reserve created bubble in the late 1990s serves the agenda of both groups on the right and on the left.

Jack Kemp’s prescience on Sarbanes Oxley was amazing.  It’s too bad we did not listen to him and avoid all the pain of the last decade.

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August 11, 2012 Posted by | -Economics, Innovation, sarbanes oxley | , , , , , | Leave a comment

Washington Post Suggest Producers and Parasites are Interchangeable

Do Government Regulations Really Kill Jobs? opinion November 14,2011 Washington Post by  Jia Lynn Lang, explores the concept that one industry’s losses on overbearing regulations are another industry’s  boon.  Leaving aside the Broken Window Fallacy introduced by Bastiat that’s been around over 160 years for the moment, let’s look into the brilliant mind of Roger Noll, an economics professor at Stanford and co-director of the university’s program on regulatory policy. “Some people identify with the beneficiaries, others identify with those who bear the cost, and no amount of argument is ever going to change their minds.”  This is a leading economist paid by a major university to come up with this explanation to downplay the absolute economic wreck the US regulation and tax policies have had on our country.  You cannot make this stuff up.  By “some people” identifying with the beneficiaries, is the esteemed professor suggesting parasites are interchangeable with producers?  Some will identify with thieves, others with the victims, according to the Stanford professor.  Since the author of this article has only plumbed the depths of a few “economists, ”  I’d like to introduce her to some basic facts in from a relatively short snapshot in History.

From 1998-2000, the US saw 4470 IPOs or Initial Public Offerings.  From 2001-2010, that number fell almost 4/5th in ONE DECADE.  What the heck happened??  A little beauty  of a regulatory law, just under 60 pages, sponsored by legislators Sarbanes and Oxley in 2002.  What about that horrible tech bubble that caused the stock market to tumble in 2000?  That “bubble” was the strongest contributor to the U.S.’s position as the undisputed economic and technological leader of the world.  It resulted in disruptive technologies that changed the world and every one of our lives and is still doing so today.  Then we passed SOX.  This was supposed to stop bubbles from occurring.  Fast forward to 2008.  Well, there weren’t many IPOs for your money to invest in-which left real estate all by its lonesome.  Hmmm, that SOX sure did work on real estate.

Today, we are getting ready to face the regulatory tsunami of Dodd-Frank.  This nifty law is over 2300 pages.  What sane US company wants to stay on this island?

Well, it’s possible Sarbanes, Oxley, Dodd and Frank might cook up a new law to force them to stay here.  Slavery, 2012 style.

 

November 15, 2011 Posted by | -Economics, Regulation, Regulatory bill of Rights | , , , , , , , , | Leave a comment

London Bankers Want to Thank Us for SOX

An article in WSJ blogs is more evidence that Sarbanes Oxley has driven the investment banking business overseas.  This has significantly hurt the financial capital to technology startups.  According to the article:

A statue in the City of London of the authors of the 2002 Sarbanes-Oxley U.S. regulatory legislation?

Such a monument is worthy of consideration, joked Lord Levene, chairman of Lloyd’s of London, at a World Economic Forum panel discussion. His point was that tighter accounting and other corporate regulations delivered by the so-called SarbOx law drove business to the U.K. from the U.S. and helped London thrive before the more recent credit crisis.

Please read the full article, A SarbOx Statue in the City of London?

January 27, 2010 Posted by | -Economics, Innovation | , , | Leave a comment