Should a majority pay for the sins of an elite few? The costs of regulation

Posted on April 19, 2010 by


By Orphe P. Divounguy

News headlines: The Securities and Exchange Commission accused Goldman Sachs of “defrauding” investors. Certainly betting against a financial product that you sell to your clients may be considered morally wrong. The financial sector needs more corporate responsibility but is regulation the answer? Allow me to point out that these “defrauded” investors are not “You and I”, not middle to lower class Americans. Most of them are highly educated upper-middle, rich, sophisticated investors who were well aware of the risks they were taking. Sure, companies that acted irresponsibly, bad apples, should be held liable but does it justify regulating an entire industry, and hurting even those who played by the rules? Regulation will encourage one of two things, or both: either business will waste resources on expensive lawyers to find loopholes in the law (which they already do) or they will move overseas, rendering America less competitive, costing jobs and slowing down our economic recovery.

One of the many reasons why America is the strongest, most powerful, and arguably still the richest nation in the world is because of the entrepreneurial spirit, the kind of risk taking ability that brought people across oceans in a quest for liberty, the pursuit of happiness and, most importantly wealth. Risk taking should not be discouraged; it should continue to be rewarded. Risk taking brought about the industrial revolution, it built our major cities, and it is the reason why most Americans enjoy a lifestyle people in most developing countries can only dream of. Risk taking has resulted in unparalleled wealth and in high living standards that the rest of the world continues to envy. Regulation discourages risk taking, which in turn reduces wealth generating activity. Risk-taking behavior is not the problem, as most politicians in Washington DC would have the American people believe as we slowly re-emerge from the worst recession since the great depression. It is not too far fetched to assume that the irresponsible behavior of a few bad apples has been blown out of proportion in order to gain enough political support for upcoming elections. Politicians in Washington DC have figured that after a recession that was triggered by “excessive” risk taking, the political party that punishes the financial industry the most, will be rewarded in the next election.

Once again the real problem is an American government that has consistently multiplied its number of unconstitutional intrusions into the free market. Since late 1990’s, many Democrats and Republicans alike supported a break-up of Microsoft and yet Microsoft is the corporate giant that made computing inexpensive and accessible to almost every household in “Main Street” America, keeping America highly competitive on a global level. Another example of “Big Business” that has even helped lift many out of poverty here in America is Wal-Mart. Companies such as Wal-Mart have greatly helped to control the cost of living in America. Everyday lower earning American families rely on companies like Wal-Mart to bring them inexpensive goods. Most of the time, basic needs such as clothing, and even food. According to a Wall Street Journal article, Wal-Mart’s CEO earned $ 19.2 million in fiscal year 2010, but with all that Wal-Mart has done for lower income Americans, is that so bad? Shouldn’t his work be rewarded? Companies like Wal-Mart have done a tremendous amount to control cost of living increases and to undo the harm to lower earning American families that has been caused by a multitude of bad government policies.

The American public at large benefits from businesses big and small because business creates wealth, at the most basic level: it creates jobs! Regulation restricts economic activity in such a way that businesses large and small are forced to try to find loopholes in the law, or in the most recent case, to engage in irresponsible behavior just to stay afloat or to turn in profits in order to continue to attract capital. For proponents of regulation, I urge you to consider the following: even if regulation was aimed at restoring a level playing field, it fails at doing that exact thing. Regulation contributes to an unfair advantage in favor of big businesses not small businesses, simply because smaller businesses can’t afford the kind of expertise necessary to find loopholes in regulatory measures. To make my argument even stronger, A few years ago, the United States Small Business Administration created The Office of Advocacy ‘s Regulatory Review and Reform Initiative, or r3, designed to identify and address existing federal regulations that should be revised because they are ineffective, duplicative, or out of date. r3 is a tool for small business stakeholders to suggest needed reforms. This new program reported that complying with federal regulations cost approximately U.S. businesses $1.1 trillion per year. The smallest businesses bear the brunt of regulations. They annually pay 45 percent more per employee to comply with federal regulations than big businesses do.

I don’t condone unfair business practices, and I don’t condone irresponsible or unlawful corporate behavior; the bad apples should be held liable to the investors that they have “defrauded”, but it is my humble opinion that regulating entire industries will hurt the middle class and the lower earning Americans more than it will hurt Big Business. Not only does regulation come at a huge cost to taxpayers, but it will also result in America losing its competitiveness and desperately needed jobs.