More On Why Regulation Reduces Competitiveness

Glenn Reynolds republishes an interesting email on how Sarbanes-Oxley compliance impacts technical workers:

It got much worse after Sarbanes-Oxley. Suddenly we revamped all our processes to include “separation of duties” and other constraints ostensibly to prevent the merest possibility of fraud. But not really of course: really to provide ass-coverage at every level. But this applies as well in all sorts of situations where fraud is not an issue, like developers testing their code. The effect where I work has been disastrous.

People respond to incentives, and incentives were distorted at every level by SOX requirements.

That’s precisely the problem. Sarbanes-Oxley was the financial equivalent of the PATRIOT Act—a piece of federal legislation rushed through in the face of a crisis that gave broad powers to federal agencies with little oversight so that Congress could say that they “did something.” Even while both were reactions to legitimate crises, their effects have far-reaching well beyond their original purposes. SOX has added millions of compliance costs to all sorts of businesses, and it’s small- to medium-sized businesses that bear the brunt of this. IBM can pay millions for regulatory compliance. Joe’s Computer Equipment cannot.

Congress needs to consider the economic effects of legislation like SOX first. The problem is that nobody actually reads these bills, and even if they did they don’t have the analytic will to understand them. Congresspeople, being politicians, tend to react to emotional stories rather than hard data. Congressional staffers tend to do the same. It’s hard to concern yourself about future competitiveness when you have to deal with constituents who lost all their money to Enron.

The sad part of all this is that things have to get markedly worse before they’re at all likely to get better. Congress will only react when there’s a crisis. A political Machiavellian would try to manufacture one, but even when there’s a real crisis on the horizon, Congress doesn’t react unless it’s imminent. (Think Social Security.) Things won’t get better until Asia starts eating America’s lunch. Even worse is that the day in which that starts happening may be within our lifetimes.