Loss of U.S. Competitiveness from the Perspective of the CIC

As reported by Asian Investor, Jin Liqun, who chairs the CIC’s supervisory board, made some trenchant (but accurate, imo) comments at a conference in Mumbai about the state of US equity markets. 

Here are a few of his points:

  • In the US and Europe, over-regulation is all the rage. Excessive regulation in any sector is detrimental to the economy, just as excessive taxation is destructive.
  • There is a discrepancy. On the one hand people cling to Western economic theories of free markets. On the other hand the governments and the regulators in the West are tightening their control of capital flows.
  • The financial industry is particularly sensitive to excessive regulation.  It imposes high costs that drive capital and companies to freer jurisdictions. Financial investors vote by foot, or nowadays by a click on the computer screen.
  • The reason behind this loss of US competitiveness is not hard to find: the Sarbanes-Oxley Act of 2002 placed extremely costly additional financial burdens and cost the US market $1.4 trillion of lost market value.  [Jin is referring to this study by Ivy Xiying Zhang, which found that “the cumulative abnormal return around all legislative events leading to the passage of the Act is significantly negative. The loss in total market value around the most significant rulemaking events amounts to $1.4 trillion.”]
  • [Sarbanes-Oxley] has also reduced the willingness of US corporations to take risks, which has had an adverse long-term impact on the US economy. And this is meant to be the paramount free market in the world. 
  • Sarbanes-Oxley Act played precisely no role in preventing the outbreak of the financial crisis in 2007-2008. This attempt to cure problems that are not problems at all has clearly not helped the US economy.

And finally, there is this bomb:

The SEC has placed a number of costly new regulations on companies that have not been justified by competent cost-benefit analysis. Worse, the SEC has engaged in a number of enforcement abuses, notably charging companies in the press with possible securities violation without sufficient proof. This makes these companies subject to SEC … blackmail.

I can’t comment on “charging companies in the press . . . without sufficient proof” without knowing which cases he has in mind, although it is true that the SEC regularly uses the press as a bully pulpit in order to leverage its resources.  As to his other point, I do believe (and the DC Circuit has so held) that the SEC has done–at best–an inconsistent job of justifying its regulations through cost-benefit analysis. 

Undoubtedly, cost-benefit analyses are difficult, and costs may be easy to find while offsetting benefits are difficult to calculate.  But that is not a convincing reason for excusing the SEC from a rigorous exercise of justifying its regulations, especially when many millions of dollars in company (and, by extension, shareholder) dollars are at stake.  Some may worry that cost-benefit analysis opens up the SEC to industry capture–the argument is that companies will lobby vigorously to show that costs exceed the benefits of any proposed regulation, and the SEC will be cowed into weakening its regulation.  I think that argument has the value of cost-benefit analysis completely backward–it is a rigorous cost-benefit analysis that protects the agency from accusations of capture by showing a clear, thorough evaluation of the merits of its proposed rulemaking.  And while we are considering issues of capture, what does it tell us that, according to Stratmann and Verret, “the unanticipated application of the proxy access rule to small firms, particularly when combined with the presence of investors with at least a 3% interest (who are able to use the rule), resulted in negative abnormal returns”?  [But see conflicting evidence here.]  Did the three commissioners at the SEC who approved the proxy access rule really believe that the market–the shareholders they were trying to protect through the proxy access rule–would actually value proxy access, or is there another explanation for the rule?

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