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Paralyzing America's producers

By Yaron Brook and Alex Epstein
web posted October 28, 2002

When it comes to what to do about our teetering economy, nearly everyone is out of ideas. Economic analysts and federal officials are mystified after repeatedly seeing their predictions of an economic recovery fall flat. Republicans ignore the economy and offer no solutions; Democrats bemoan its decline and offer "solutions" such as repealing Bush's tax cut or extending unemployment benefits -- as if taking away more of our money or paying more people to produce nothing will somehow lead to a more productive economy.

To know how to fix our economy, we must first identify what is wrong with it. Here, analysts have it mostly right when they cite a decline in business investment as a major roadblock to recovery. But the problem is actually broader than this. Not only are businesses investing less money in new technologies, new manufacturing plants, and research and development -- all of which are crucial to long-term profitability and therefore economic growth -- they are reluctant to enter mergers, to formulate new strategies, to take risks. Hewlett Packard CEO Carly Fiorina says her company and others are "less likely to undertake bold moves, even if you feel those are vital to the future of your company."

America's economy is stagnating because America's businesses are stagnating. The cause -- and the factor that must be removed to revive the economy -- is the government's ongoing regulatory crackdown on business.

When scandals like Enron and WorldCom broke, instead of focusing on prosecuting individual perpetrators, politicians smeared businessmen collectively as stricken by "infectious greed." Instead of taking an honest look at the regulations that foster corruption in business -- like anti-hostile takeover laws that restrict the ability of the market to replace bad managers -- our leaders immediately blamed "lax regulation" for the scandals, and heralded more regulation as the solution. In addition to passing Sarbanes-Oxley -- an allegedly "anti-fraud" accounting law that leaves "fraud" undefined and thus open to arbitrary interpretation -- the Bush Administration gave carte blanche to its regulators to be "tough on business." From the SEC to the FCC, bloodthirsty bureaucrats are now gleefully enforcing previously unenforced regulations, broadly interpreting ambiguous new ones, harassing CEOs with threats of jail-time, and more aggressively preventing mergers and acquisitions.

Consider the FCC's recent rejection of the proposed merger between the two leading satellite content providers, EchoStar and DIRECTV. Earlier this year, the merger -- which would enable the companies to combine their satellite bandwidth and offer many new and enhanced services to customers -- seemed set for approval. However, thanks to what a Wall Street Journal story called "the regulatory climate" and FCC chairman Michael Powell's "newfound aggressiveness," the merger was blocked.

The essence of the new "regulatory climate" is that now, more than ever, businessmen cannot know what is legal or illegal until after the fact. They have no means of knowing in advance whether their accounting methods will get them thrown in jail, whether they will be bankrupted by a class-action lawsuit for "defrauding shareholders" if their new product does not sell as well as expected, or whether a strategic merger that takes years of planning will be thwarted by the "aggressiveness" of Michael Powell or his equivalent. In short, as a Businessweek reporter wrote recently of today's CEOs, "their jobs have become nightmares."

Businessmen burdened with a perpetual fear of arbitrary government reprisal will increasingly strive, not to create new products, but to appease bureaucrats -- not to generate the best long-term strategies, but the ones that will attract the notice of the fewest regulators -- not to appoint the best boards of directors, but directors that Washington deems sufficiently "independent" and "disinterested."

How can businessmen function in such a manner? How can they improve their companies when they can no longer act on their best ideas? How can Americans hope for a bounteous economy when we are paralyzing America's greatest producers?

America's businessmen are the productive dynamos that move our economy forward -- they have brought us from horse and buggy to automobile, from slide rule to personal computer, from log cabin to skyscraper -- but they can only function insofar as they are free. Businessmen (and all hardworking Americans) fare best in a market free of all regulations, in which they deal voluntarily and to mutual benefit with investors, employees, and customers -- and in which all are governed by clear laws against force and fraud. If Americans want an economic recovery, we must demand that our politicians end the unjust witch-hunt against businessmen, and start lifting -- rather than imposing -- regulations.

Yaron Brook is the executive director of the Ayn Rand Institute (ARI) in Irvine, CA. Alex Epstein is a writer for ARI. Send comments to reaction@aynrand.org.

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