In reflecting on the regulatory changes we have experienced since the 2008 financial crisis, it is eye-opening to ponder the air travel regulations that have grown exponentially since 2001. The bunker mentality was understandable at first due to the disaster we witnessed on 9/11. But the reality, which I have witnessed many times when traveling abroad, is that air travel in the US appears to be more difficult and cumbersome than in almost any other country (I hear Israel may be worse, but I have yet to travel there). Are we more at risk than Europe, South America or Asia? I do not think so, but we are more bothered and most of it is through regulation.
As a matter of fact, according to the Economist article dated, February 18, 2012 entitled “Over-regulated America,” a study for the US Small Business Administration found that regulations in general add $10,585 in costs per employee. This makes me wonder how much of the jobless figure is just due to employers wanting to avoid the cost of regulation. In addition, it was over-regulation, not a lack of regulation, that prevented the SEC from discovering Bernard Madoff’s Ponzi scheme. It does not take a lot of regulation to set up an audit and determine whether a company is trading, reporting proper earnings, comingling funds, over-charging or stealing from clients.
Another example of overregulation came in the mid-1990s when there was a fear that the financial world would come to a halt due to a bug in software systems relating to the arrival of the year 2000 (Y2K). The SEC at first sent out a notice asking how it could assist and wanted to help the industry. Congress saw the response as bad politically and blasted the SEC. After that I remember reading a 20 page document on new regulations to conform to Y2K. We had to buy all new computers because we needed certified documents that Microsoft Windows was Y2K compliant. The joke was that no regulations were needed. The Y2K threat was so well publicized that any company that did not properly prepare faced an avalanche of lawsuits. There were several other examples of overregulation in that time period but since it is more than a decade ago, I only remember the most absurd ones.
That same thinking came in with the Sarbanes Oxley Act of 2002. As noted in the Economist article, the law was designed to prevent Enron-style frauds such as the sub-prime mortgage debacle that took down the financial system. However, the law did not stop Countrywide Mortgage from selling something on the order of a $1 trillion in fraudulent mortgages. The Countrywide founder was fined millions of dollars for civil fraud and in 2011 Bank of America, which bought Countrywide when it became insolvent in 2008, paid $8.5 billion to settle with the government for wrongdoing associated with Countrywide Mortgage.
So, if Sarbanes-Oxley did not prevent the Enron or Countrywide frauds, what did it accomplish? It did hamper the formation of public companies. According to the article, in 2002 just before Sarbanes-Oxley was passed, the US’s share of initial public offerings was 67% for the whole world. In 2011 that percentage fell to 16% and the fraud is still here.
To continue with some of the crazy regulations, the 2010 health care reform does very little to reduce the staggering and increasing complexity in paying for health care. In 2013 the number of illnesses and injuries for which claim reimbursement can occur rises from the absurd 18,000 that exist today to 140,000. Imagine how much the paperwork burden will grow! (As a side note, it is estimated that each hour of treatment in the US requires 30 minutes of paperwork.) It is not as if these new illnesses and injuries are intelligent differences. For example under the new regulations there are nine codes related to injuries caused by parrots and three related to injuries caused by flaming water skis. How often do you think people are injured by flaming water skis in order to make three different codes (and reimbursement rates) necessary? Not too many and when that does occur, I suspect the system could have figured out the proper costs and reimbursement rates without its own category, much less three!
Not to be outdone, we have the Dodd-Frank Act which is supposed to solve all the financial problems that led to the 2008 Great Recession. The document is 848 pages long (23 times longer than Glass-Steagall, the act that followed the 1929 crash). The Act demands on each of its 848 pages that regulators fill in further information. Some of the clarifications that have resulted are already hundreds of pages long and probably indecipherable. Of the 400 rules mandated, only 93 have been finalized, therefore, we actually have an act with over 75% of its rules either unknown or unwritten. This situation is very similar to an earlier situation with the SEC.
About two decades ago, the SEC was “overburdened” and Merrill Lynch through the goodness of its heart wrote some regulations for the SEC. The rule was affectionately referred to as the Merrill Lynch rule in the industry. After many lawsuits that finally reached the Supreme Court, it was found that the rule breached the purpose of the 1940s Securities and Exchange Act by so favoring the brokerage firms over the consumer that a federal court and two federal appeals courts struck the rule down before the Supreme Court agreed. Each time, the SEC was forced to defend the rule and spent more time and money on defending that act than auditing Madoff & Company over its 16 year Ponzi scheme period.
The reason we are getting more complex is very simple: complexity allows for manipulation and that means it is a field day for lobbyists such as Merrill Lynch. It is easy to influence a bill and insert more money for certain well-heeled interest groups when there are complexities such as the 140,000 payment categories which will soon appear in the health care system.
With Dodd-Frank, it is even worse: regulators and lobbyists are drafting documents as we speak to enact the over 300 rules yet to be written but which are mandated by the Act! And, as we see, a greater complexity rule such as Sarbanes-Oxley does not even stop the fraud it is designed to prevent. I have heard several law professors on Public Radio discuss that Sarbanes-Oxley should have prevented the financial meltdown by making the CEOs of the entities that failed criminally liable. But even after the worst financial disaster since the Great Depression, not one executive has yet faced criminal charges under Sarbanes-Oxley and the existence of the law did not prevent the fraud it was meant to deter. The best example is Country Wide Mortgage: Angelo Mozilo, the CEO, was fined for civil fraud, but although Sarbanes-Oxley exists and has significantly reduced the number of initial public offerings in America, it has had no other effect! That is why we must throw out these overly complex laws that reward people who can buy influence, adds costs to operating in America and provide little to no benefit for the problems they are attempting to solve.
