Bail-outs, regulation and unintended consequences
President Bush’s bail-out bill has brought the almost-inevitable response from lawmakers - they are using it to tack on extra controls in areas which have dubious links to the original problem. It seems to be a given, that once lawmakers and regulators start intervening in markets, they go too far. And the result is usually not what they intend. For example, Sarbanes-Oxley turned into a bureaucratic burden of huge cost and dubious merit. Clearly it doesn’t prevent much, and only encourages greater care by miscreants covering their tracks. It and similar regulatory burdens have cost New York a large share of legitimate corporate activity, to London’s benefit. I predict that unintended consequences of similar or greater magnitude will come out of the add-ons to the bail-out bill.
The US isn’t the only country subject to this problem. I’ve seen it in both the UK and NZ, too. For example, overly-prescriptive and restrictive employment regulation intended to protect workers has been one of the factors in the widespread move to contract labour in a number of industries. The outcome for the shop floor is less employment certainty than before, not more, and not at all what the regulators envisaged. Ask any employer about who employment law most protects and the answer will be under-performing managers and senior professional staff, who take ages to fire because of the bureaucratic process required. Yet their incompetence is far more likely to cause job losses among shop floor workers. Unintended consequences again. So incompetents get rewarded to go away, by bogus redundancies and settlements. When the law encourages deceit and the counter-measures are worse than the original problem, you know the law is flawed.
There are numerous other examples of this naive belief by lawmakers and bureaucrats that prescribing processes will assure outcomes. Any good business owner or school principal knows it ain’t necessarily so. Culture, ethics, leadership behaviour, peer pressure, and “the way we do things around here” are far more powerful tools.
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September 25th, 2008 at 1:07 pm
Jim, I subscribe to your blog and am sure you are a classical liberal, are you getting involved with the election this year? Perhaps ACT?
September 25th, 2008 at 3:27 pm
You’re right on the CL tag, but as for politics, I prefer to be an éminence grise, sharing my ideas and thoughts freely with whomever asks me for them.
September 25th, 2008 at 5:19 pm
Agree they go too far & often don’t address the issues (principally because they don’t run businesses & never have so they will never have the true insights to contorl them). However, I think the drivers are human desires & wants & the incentive programs in organisations that drive people to do particular things in order to get those desires & wants. The culture, ethics, leadership behavoiur, & peer pressure, though important, are just mitigating factors in my mind. My view is that not many people believe they are doing unethical & culturally misguided things that the leadership team wouldn’t do when things go wrong, they are, however, more often than not maximising their short term bonus & share maket value as these are prinicipal drivers upon which they are paid so they can get more shiny things & security of wealth. Any organisation with short term rewards based on a Profit & Loss + Share Market value is asking for trouble. It would be interesting to know what % of firms do do this that get into trouble. For me if you run a business on cash & at least a substantial long term bonus, + forget about the share market (which is less & less about businesses performance & more & more about speculation) things get a lot more visible & harder to dodge + your more tied to long term outcomes, which makes for a disincentive to drive short term benefits (unless off to a carribean island for a while).
September 29th, 2008 at 1:28 am
Too bloody right on the employment paragraph—I think any New Zealand firm who has been through this will agree with you.
October 11th, 2008 at 5:30 am
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