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Saving Capitalism . . .

from the capitalists.

Jan 18, 2010, Vol. 15, No. 17 • By IRWIN M. STELZER
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We have met the enemy and he is us. So Pogo might have described the situation that the business community has created for itself. There is no question that the Obama administration, and even more the Democratic leadership in Congress, harbor something between skepticism and hostility towards free markets. They believe they can do a better job of allocating the nation’s resources than can millions of consumers signaling their preferences to millions of producers by setting the cash registers ringing. That’s one reason—indebtedness to trade unions is another—Obama and the Democrats bailed out a manufacturer of cars no one wanted to buy.

Saving Capitalism . . .

But the wave of regulations that characterized the latter part of the Bush administration and the first year of the Obama administration has as much to do with the behavior of the business community, or at least some of its most prominent members, as with the ideological bent of our political masters. Start with George W. Bush—no antibusiness ideologue he—and the much railed-against Sarbanes-Oxley Act.

No matter what one might think of that attempt to solve the problems of corporate book-fiddling, there is no denying that this 2002 statute is a regulatory burden that the business community brought on itself. Company directors, supposed to be independent of the executives they are charged with supervising, simply did not do their jobs. They approved mergers that drove down the price of the acquiring companies’ stock, harming the interests of the owners; acquiesced in estimates of “savings” that had no chance of being realized; allowed stock options to be re-priced and re-dated so that executives who had not met performance standards nevertheless received the same rewards for failure that they would have received for success; and made certain that “their” executives were never paid less than some average concocted by fee-seeking compensation consultants. Little wonder that Congress and President Bush felt it necessary to pass a law that attempted to make certain that directors are indeed independent of the CEO, that no one is cooking the books, and that compensation committees feel at least some pressure to behave as guardians of shareholders’ interests. No surprise that under the new accounting oversight rules the cost of doing business has gone up, and that an excessive aversion to risk-taking might well have been introduced into boardroom deliberations. These costs, which may or may not exceed the benefits of the new regulations, are in the nature of self-inflicted wounds.

Looking ahead, we have the provisions of the health care “reform” act that in effect turns insurance companies into public utilities. Like electric utilities that cannot deny service to anyone requesting it, or cut off customers who do not pay bills without going through elaborate procedures, health insurance companies will have to serve virtually all comers—and at rates for the sick and elderly that cannot deviate from some specified average by more than a statutory-fixed multiple. Actuaries out, politicians in.

The insurers will also have to limit their profits to some stated percentage of their premium charges—utility monopolies have long been subject to such limitations on what they are permitted to earn. Yes, an antibusiness Congress was waiting for an opportunity to get its hands around the throat of an industry that it deems provides a necessary service and has monopoly power—the two broad criteria for utility status.

The insurance industry’s monopoly power does not arise from any natural cause, though, such as the enormous cost of constructing competing electricity transmission lines, or of tearing up the streets of a major city to allow competing gas distribution companies. No, such monopoly power as insurance companies have was created by laws it lobbied for and got—exemption from the antitrust laws, and limitations on competition across state lines. The way the industry saw it, unregulated monopoly power is best, but if that game is up, regulation is to be preferred to competition. Which is why the industry fought to retain its exemption from the antitrust laws—and, to its relief, won.

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