Saturday, June 23, 2012

Bad Laws Behaving Badly

One of the biggest government myths that Americans need to overcome before they can restore their freedom is that when politicians pass a law, then all is well in the world, the assumptions being that 1) the intended consequences of the law will actually materialize and 2) there will be unintended (usually bad) other consequences. If one takes the time to consider laws from various areas and levels of government, it becomes obvious that the intended benefits of the laws written by our current politicians rarely materialize and there are usually negative unintended consequences. Consider the following examples:

- It is against Federal law to use marijuana for any purpose. However, if you search the Internet for current usage levels of marijuana, you get estimates, that while inconsistent in actual estimates, all agree that millions and millions of Americans have and are currently using marijuana. What good is a law if millions of citizens flaunt it and are unlikely to suffer an consequences from flaunting it?

- A recent news article by Steve Chapman from the Chicago Tribune claimed that the United States is the biggest online gambling country in the world (estimated at billion a year) despite the fact that the Bush administration outlawed online gambling at the Federal level several years ago. Thus, outlawing online betting could not stop it from becoming bigger than ever, certainly an unintended consequence.

- It is illegal at the Federal level to enter the United States without proper credentials and permission but by most estimates, over 10 million non-Americans have flaunted that law. Another bad law that has not performed as advertised.

- A recent article in Reason magazine pointed out the fact that Utah recently repealed a law that had made it illegal to collect rain water for personal use, certainly a bad law behaving badly, criminalizing the collection of falling rain water. Unfortunately, Utah could not quite get totally out of the bad area in this matter since while the replacement law said it was no longer illegal to collect rain water, Utah residents now have to report to the state government how much water they collect. Can you imagine having the state government job of collecting and tracking collected rain water? Talk about a bad use of taxpayer money.

- Early in the Bush administration's tenure, Congress almost unanimously passed the Sarbanes-Oxley legislation. The purpose of this law was to clean up the accounting and financial reporting requirements of public companies in the wake of a handful of accounting scandals (e.g., Enron, Worldcom, etc.). The purpose of the law was to force every public company in America to have transparent and accurate financial statements and behavior in order to protect stockholders and other investors from investing in companies that were providing bogus financial statements and provide an accurate picture of the companies financial health. Sounds like a good bill but it quickly became evident that while the intent was good, the behavior was bad:

1) First, while it was true that there were some companies that had fudged their numbers, the vast majority of American companies were never implicated or accused of putting forth bogus numbers. Thus, the law became an onerous and waste of money and resources for all American businesses even though only a small handful of businesses had behaved criminally badly. This waste of time and resources takes away resources that could be better spent on competing in the world marketplace.

2) Second, early last year, all of the major banks and financial institutions in the United States were put through so-called "stress tests" to determine what their financial health was after the recession had started. But wait a minute, wasn't the Sarbanes-Oxley supposed to provide accurate and transparent accounting and financial statements? Why did we have to do these additional extensive stress tests to find out how stable these financial institutions were? Wasn't Sarbane-Oxley enough? And if the law was not enough in this case, how can we be sure that it is even worthwhile having if additional tests and analyses had to be done? Seems like a bad bill behaving badly if additional effort was needed to determine what Sarbanes is supposed to do on its own.

3) Third, two of the biggest casualties of the economic downturn were Bear Stearns and Lehman Brothers. These two companies were once two of the largest investment banks on Wall Street, having been in business for many, many decades. However, consider a short timeline of their demise. In February, 2008, Lehman Brothers had a stock price of over per share and Bear Stearns had a stock price over . By the middle of March, 2008, both companies were gone, with Lehman Brothers disappearing completely and Bear Stearns being bought by JP Morgan for .00 a share. Thus, another example of how bad the Sarbanes-Oxley law performed. An established company cannot go from having share prices over a share one month and than be out of business the next month without there being some major structural problems, problems that should have been evident in its financial statements. However, no where could I find a source that said how well Sarbanes-Oxley worked by providing protection for investors In these two companies. here today, gone tomorrow and the Sarbanes-Oxley processes never had a clue of the problem.

4) The biggest accounting and fraud scandals of the past few years were Ponzi scams operated by shady characters such as Bernie Madoff that fleeced many, many people for millions of dollars. However, Sarbanes-Oxley was not good enough to see the next generation of accounting fraud, it was just poorly fighting the last generation of accounting fraud and is not even doing a good job at that, given the stress tests. Just four instances (Lehman/Stearns, stress tests, wasting every U.S. public company's resources) where a Federal law was another failure of delivering what it was supposed to do.

- And finally, consider the recently passed financial markets regulatory reform law. Politicians would make you think that they just passed the perfect law to protect America from the next "great recession." However, a review of the media accounts of the reform law described the new law in various ways including calling it an empty "shell bill," the law did not fix the problem. consumers are still unprotected, the politicians punted the hard decisions, the politicians kicked the can down the road, etc. You cannot have a good bill, only a bad bill, when you delay making the hard decisions, which many feel this bill does, and when you exclude two of the biggest financial areas in the economy, auto loans and Freddie Mac/Fannie Mae. Looks like this will be another bad law behaving badly.

At least four steps are needed to address this problem of politicians passing bad laws. First, we need to start downsizing the Federal government by at least 10% a year for the next five years. The only hope for getting good laws that work well is by having our politicians work on fewer but more important issues. Hopefully, the would then get them right. Second, we need to put an end to the gerrymandering of Congressional districts in order for us to get politicians in Congress that are more likely to compromise and incorporate others' worthwhile ideas into our laws going forward. Third, we need to implement term limits so that we continually to get a fresh set of ideas into Washington that may be more in tune with the reality outside of DC, as compared to politicians that have been in office for decades. More importantly, this step would eliminate the taint of campaign donations that distort and weaken laws before they are passed as politicians trade legislative favors for donations. And finally, we need to repeal Sarbanes-Oxley since it makes no sense to have a useless law on the books if it does not do what is is supposed to do but wastes American corporate resources in the process.

The bigger issue is that if we keep passing bad laws that people realize are bad, stupid, wasteful, or unlikely to be enforced, the more likely citizens are to ignore or break all laws, both good and bad. Fewer laws that are better and fairer and actually work: what a concept.

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