Platt Perspective on Business and Technology

Considering a cost-benefits analysis of economic regulatory rules – 4

Posted in in the News, macroeconomics, outsourcing and globalization by Timothy Platt on April 18, 2012

This is my fourth installment in a series on the cost-benefits analysis of economic regulatory rules (see Macroeconomics and Business, postings 64, 66 and 69 for parts 1-3.) I have been discussing this complex of issues through a series of case studies drawn from United States history and from more current events. And I continue along that pattern here with this installment too, starting with an approach taken by Howard Schultz, the CEO of Starbucks. Schultz takes a very clear-cut position according to which ethical and moral behavior on the part of businesses both supports the marketplaces and the communities they serve, and those businesses themselves.

I contrast that with the perspective on business and on morality and ethics in business that was so glaringly shed light upon with the public resignation of Greg Smith from Goldman Sachs, starting with his New York Times published resignation letter (see Part 3 of this series for a discussion of that as a case study example.

The ongoing existence of these polar opposite points of contrast in the marketplace of ideas, and in the economic marketplace is important here. And on a macroeconomic basis, as driven by the collective, cumulative voices and pressures applied by a multitude of businesses and consumers, it is this conflict of views that drives the debate over regulatory control – with some favoring a hands-off, laissez faire approach and others favoring regulatory and even strict regulatory controls to limit the actions and impact of would-be predators and of the shortsightedly foolish.

And on this note I turn to consider a bill that at the time of this writing is still working its way through the United States Congress that directly illustrates the challenge of finding the right regulatory balance: the Jumpstart Our Business Startups (JOBS) Act. I note up-front that this proposed law is by content all about enabling small and early stage businesses, but its name was intentionally selected for its acronym so that it would be known by is potential for having a positive impact on jobs and employment. In this, it is acknowledged that the majority of employment and of job creation in the United States, as with most countries, comes from small and medium sized businesses. And the majority of activity in the marketplace takes place through business transactions with them. And collectively they play a much larger role than do larger and major corporations in driving the overall economy. So while this is a small business empowerment bill, it is also for all intent and purpose a jobs creation bill and an economic stimulus bill too – all needed as we continue our collective way out from under the Great Recession.

The 2012 JOBS Act went through the US House of Representatives as H.R.3606, with bipartisan support, bringing in both Democratic and Republican backers. Its provisions as developed in the House version of this bill focus on relaxing certain regulatory statutes as they would be applied to small and startup companies, delaying when these companies would have to register any common stock tended with the Securities and Exchange Commission (SEC), and delaying out to five years when these companies would have to fully comply with the Sarbanes-Oxley Act and its reporting requirements. This law would also allow small companies to advertise for investors and its House version provisions include allowance for options that would help these businesses to develop crowd funded backing too, in raising startup and early-stage growth capital. This summary only touches upon a few of the provisions included. I will simply note that this law’s overall goal, and certainly in its House version is to relax regulatory restrictions for smaller and newly founded companies that lack the infrastructure and other resources to fully comply and still be competitive. This passed a House vote on March 8, 2012 and went from there to the US Senate. And in a real sense, that is where this story begins – and with the fact that 2012 is a presidential election year in the United States and one in which political debate is unusually polarized and strident.

Going into the 2012 elections, the House is controlled by members of the Republican Party with their majority largely coming from wins by a group of Tea Party activists who were swept into office in the 2010 elections. And these candidates all came into office as ideological purists. The Republican Party has been moving over the last several election cycles to a progressively more extreme position so what happened next after the 2010 elections simply followed an already established pattern and trend. Party rhetoric heated up even more and the overall message was that whatever a Democrat wanted to see done must be blocked – and with definitive finality where that Democrat was the President. Yes, I acknowledge that this takes an extreme view of matters but it is one that has been repeatedly expressed in the news and it has come to be seen as the existing state of affairs by many.

Republican economic conservatism has been built on an unexamined but absolute assumption that any regulatory control is bad, and in fact immoral – tying their versions of economic conservatism and social conservatism together in one immutable package. Compromise is viewed as immoral according to this standard. The Republican Party controls the House. Meanwhile, the Senate holds a controlling majority in the US Senate and their membership includes senators who are equally reluctant to compromise towards common ground.

House Republicans and Democrats disagree and strongly on a wide range of issues, but enough on both sides understand that the only solutions to the issues they deal with that can work long-term, have to at least nominally meet the needs of the majority and of the vast majority and from both parties. So compromise and consensus building were reached but at the cost of significant long term impact on regulatory law. And this brings me back to H.R.3606, the House version of the JOBS Act that arrived at the Senate door for them to work on. And I add some real world complexities to my discussion of this bill.

The chairwoman of the Securities and Exchange Commission, Mary L. Schapiro is adamantly opposed to this bill as presented in the House version as she sees grave risk in relaxing SEC requirements from the potential that would raise for abuse. The House version, I add, does take a very relaxed view as to what constitutes an “emerging business”, allowing for businesses with up to $1 billion in annual revenue to qualify for coverage under this law. The SEC’s position on this is that the cap for qualifying for small business exemptions should be set at a quarter of that at $250 million, and most small or even medium sized businesses would see that as generous when compared to their revenue generated. As I said above, this bill has been developed as a stimulus bill and that means making it inclusive in coverage rather than limited.

Senate Democrats including Jack Reed, a senator from Rhode Island would tighten up the coverage eligibility with a cap for the maximum annual revenue of a covered emerging business set at $350 million per year. And other Senate Democrats are offering amendments to tighten up this law in other ways as well. A number of Senate Republicans and certainly more conservative members would prefer to see the definitions loosened even more. So they are adding in amendments too, or at least seeking to. One such amendment would conflate the loan limits allowed by the US Export-Import Bank into this law.

What will come of this bill? I am certain to come back to this story in future postings. I am going to step back from the specifics of individual case studies in my next series installment to discuss some of the general issues involved here, starting with a point that I simply noted at the end of Part 1:

• The absolute levels of potential risk and benefit are not as important as the symmetrical distribution of risk and benefit as shared – ideally, at least, equally by all involved stakeholders.
• And the real risk of instability and crisis comes from risk and benefits distribution asymmetry.

And I will discuss this in terms of short and long time frames as to need and consequences and how perception and differences there can shape any due diligence considerations that would go into setting and interpreting regulatory law. Meanwhile, you can find this and related postings at Macroeconomics and Business and also at Outsourcing and Globalization.

2 Responses

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  1. Chuck Merk said, on April 24, 2012 at 9:59 am

    Tim, you may have made a typo but to clarify: the House of Representatives is controlled by REPUBLICANS 242 to 193, whereas the Senate is controlled by DEMOCRATS 51 to 47 plus 2 Independenets who usually side with the Dems. So, the jobs bill passed in the Republican controlled House. And the Republicans are outnumbered and therefore unable to stop it in the Senate.

    • Timothy Platt said, on April 25, 2012 at 2:29 pm

      Hi Chuck and thanks for point out my slip of the pen.

      You are right that the Republicans control the House and the Democrats the Senate, so I reversed the two chambers of Congress when I wrote this posting. I was tired when I wrote this posting and should have waited. I have updated and corrected my original draft and the update is what is showing now.

      Compromise and consensus building, I add, are still difficult and on too many issues and for both the House and Senate and for both major political parties – and definitely in an election year. My basic concerns as to the JOBS Act stand, as this is not so much a matter of who voted for what, as it is of what was ultimately voted for and signed into law – and its impact upon regulatory law as it would provide due diligence protection and both for the marketplace as a whole and for businesses and consumers that participate in it.

      Thanks for the catch – and I add that this mix-up on my part probably indicates something as to my view of the mess that both parties are in that I got them confused as I typed.

      Tim


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