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.


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

Great Again: Corp Tax Rate Driving Jobs Overseas

The excellent book Great Again by Henry R. Nothhaft with David Kline, points out that 2000 was the year in which the tax and regulatory burden in theUS reached a tipping point compared to other OECD (First World) countries.  2000 was also the year in which average corporate tax rates of OECD countries fell below theUS’s.  TheUS now has highest marginal corporate tax rate in the world (in most states) and our effective tax rate is 50% higher than the European Union average.  Is there any wonder why the US is losing high quality jobs to other countries?

The book’s identification of the year 2000 as the tipping point is ironic since this is also the year that I identified in my book as the tipping point for anti-technology startup regulations.  The book Great Again calls the decade from 2000-2010 the lost decade, let’s hope it is only a single lost decade.  Besides the negative effects of the US corporate and capital gains tax rates, the US has also significantly weakened our patent system and made it extremely difficult for startups to raise capital because of Sarbanes Oxley (although Dodd Frank only makes this worse).  The major asset of startups is their patents – legal title to their inventions.  Weakening our patent system has undermined this asset.

Some other interesting points made by the book include that a SBA (Small Business Administration) study showed that 1% cut in the corporate tax rate increases the number of start-ups by 1.5% and decreases the rate of failure by 8%.  A World Bank study showed that 10% increase in the effective tax rate results in 2.2% reduction in investment to GDP.

The policies necessary to grow high quality jobs and get our economy growing are clear.  The only conclusion is that the US is not interested in growing the economy, it is only interested in growing government power.

Great Again: Revitalizing America’s Entrepreneurial Leadership, by Henry R. Nothhaft with David Kline

May 19, 2011 Posted by | Featured Videos, Innovation | , , , , , , | Leave a comment