Thursday, September 18, 2008

Obama Vs. McCain: Battle of the Regulators

Obama is boasting that he is the true regulator and that John McCain is a "Johnny Come Lately" with a history of being a champion of deregulation. Meanwhile, McCain is arguing that he has a long history of being a responsible regulator and being willing to toughen the laws when it made sense.

The problem on Wall Street has more to do with incentives than regulations. Regulations have, by their very nature, serious limits. Regulations are the tactics of paternal government, often forcing businesses to do what is contrary to common sense, but meets government mandates.

When I think of regulations, I think of what was one of the regulatory capitals of the world, the former Soviet Union. In the old Soviet model, the authorities wanted a certain number of plates of glass to be produced and mandated the businesses to produce a high quantity daily or face heavy consequences. So the factories made thin sheets of glass, most of which broke before they left the factory. Will that didn't work, so the authorities demanded that the factory produce glass that was very heavy and would be awarded according. None of the glass broke in the factory, nor in transportation, but they also didn't fit when it reached its destination.

In the formerly Communist Poland, that country produced the largest number of environmental regulations of any country in the world, yet it had the highest pollution levels. In fact, when I travelled there shortly after the fall of Communism, I found it very difficult to even breath. Aristotle spoke of the "tragedy of the commons," in which things decline if they are not owned. Ownership, and the responsibility associated with such, is a necessary element for anything to get better.

This leads to the current arguments about the crisis in the financial markets today. In my opinion, the situation has more to do with an increase in government intervention, not a lack of it. Any changes in law should increase the burden of responsibility on financial institutions rather than facilitate the corporate welfarism that is rampant today.

Amity Shales of Bloomberg has offered three new rules that the financial markets clearly need:

  • "First, no more bailouts." We must take the "moral hazard" of businesses being bailed with virtually no consequence seriously and allow companies to swallow the poison they have brewed for themselves. Allow one of these companies to be dwindled to nothing due to bad decision making and be swallowed by a competitor which will fire those who made such horrible choices. Yes, the market will suffer in the short run, but it will have an "enema effect" that will result in a healthier economy in the long run.

  • "Second, clean up the rating system so that numbers speak something closer to the truth." The ratings systems on stocks on Wall Street are driven by people who make a living off their selling. It is not unlike the proverbial foxes watching the hens. Consumer Reports is considered the most credible leader in protecting individuals from shady products because they won't take advertising from the companies they monitor. We need a systematic approach to stock by someone (or thing) who doesn't have a vested interest in their performance.

  • "Third, make the U.S. more competitive by lowering corporate taxes and other levies so foreign firms will want to fill our new vacuum." Shales points out that "the worst thing about John McCain's new ``crisis'' advertisement is that it suggests a strong man -- and not a strong country -- is the answer. Here President George W. Bush's response, that he had faith in our economy, was more useful." I couldn't agree more. The US already has the highest corporate tax rates of any modern economy in the world besides Japan. Cutting taxes is the fastest way to get the US back on its feet.
Our economy needs more ownership and responsibility, not paternal regulations. We need more incentives to make good decisions and not obstacle courses to avoid bad ones. I am convinced that if these candidates try to win the regulatory game as the solution to our economic woes, the losers will be Wall Street and Main Street.

Kevin Price articles frequently appear at ChicagoSunTimes.com, Reuters.com, USAToday.com, and other national media.

Kevin Price is Host of the Price of Business (M-F at 11 AM on CNN 650) and Publisher of the Houston Business Review. Hear the show live and online at HoustonBusinessShow.com. Visit the archive of past shows here.

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