Sunday, January 06, 2013

Sarbox, Dodd-Frank, and Now the Drug War

I am always amazed that my colleagues think that Sarbox or Dodd-Frank increase regulation, and are therefore good.  What they do, and what they are designed to do, is to advantage the big financial companies  (Goldman in particular, but generally the large outfits) at the advantage of small nimble companies that would otherwise make the industry competitive.

All Sarbox or Dodd-Frank really do is the raise the cost of doing business legally.  As an intercept shift, just a bunch of fixed costs.  If you already have a giant accounting and compliance office, like the big shops, then this is just a small extra cost, one that is easily passed on to customers as fees.  But if you are a small shop, or are considering entering the industry, the effect is devestating.  You have to make a much bigger nut to pay off your accountants and compliance people, before you can run even your first transaction.  If you want to lie, the SEC won't catch you, so the Bernie Madoffs of the world are perfectly safe.  This regulation doesn't affect actual criminal behavior, it just represents an entry barrier for new firms that want to do business legally.

It's true that compliance costs fall on big banks also, but you have to think about Bastiat's "seen and unseen."  What we don't see is the new firms that are not there, the start-ups that do not happen.  The big firms would prefer no regulation, perhaps, but this is the next best thing: regulation that reduces competition.

This is hardly surprising.  The Obama administration, and the Democratic party generally, is bought and paid for by the dinosaurs of the financial industry.  Goldman, et al. are desperately trying to defend what they see as their birthright of keeping what they win--if they win--and getting bailed out at taxpayer expense--if they lose.  Gotta keep the little guys out.  That's what regulation is designed to do, and that is what regulation does in fact do.  The idea that Dodd-Frank was "better" regulation is risible.  I'm laughing at it right now, in fact.  Ha.  Ha ha!

What I did not expect is that this logic would extend also to ILLEGAL business.  Consider:

The paradox of the war on drugs is that the harder governments push the fight, the higher drug prices become to compensate for the greater risks. That leads to larger profits for traffickers who avoid being punished. This is why larger drug gangs often benefit from a tougher war on drugs, especially if the war mainly targets small-fry dealers and not the major drug gangs. Moreover, to the extent that a more aggressive war on drugs leads dealers to respond with higher levels of violence and corruption, an increase in enforcement can exacerbate the costs imposed on society.

No comments: