If you wanted to get rich, would you invest your energies in starting a business to sell an innovative new product or service, or would you move to Washington, D.C. and become a lobbyist? Townflier CEO Morris Panner looks at trade association CEO salaries and notes that the smart bet is to go inside-the-beltway, and this is bad for business and entrepreneurship.
We are creating so much regulation – over tax policy, health care, financial activity – that smart people have figured out that they can get rich faster and more easily by manipulating rules on behalf of existing corporations than by creating net new activity and wealth. Gamesmanship pays better than entrepreneurship.
Panner notes that passage of the health care and financial reform bills exacerbate the problem by delegating expansive regulatory authority to administrative agencies. Though both bills were quite large and complex, the details for each will be filled in by various federal agencies, creating massive opportunities for lobbyists and interest groups and further obstacles to innovation and entrepreneurship. As he explains:
This is highly dangerous to innovation, which depends on clear and transparent rules. The more complexity, the more incumbents are favored. They have the capital to participate in complicated regulatory proceedings. They can hire high-priced lobbyists to present facts in a light most favorable to them. The more incumbents are favored, the harder it is for new companies to gain traction.
According to Panner, a self-proclaimed socially liberal Democrat, the solution is to require Congress to delegate less and enact clearer and easier to understand legislation. When a law is passed, people should know what it means, and what it requires. Concludes Panner, its time Washington prized “wealth and value creation . . . above rule manipulation and influence peddling.”
ruuffles says:
You complain that the bills are too long and leave too much up to federal agencies. Yet your solution is to make them shorter and delegate less? How exactly would you let Congress delegate less (Congress would be more specific) yet not make the bills more complex?
November 19, 2010, 11:45 amZathras says:
Isn’t the same true of financial firms–that they are sucking in so much talent manipulating the rules, rather than creating new activity and wealth, that would have a far more productive use elsewhere?
November 19, 2010, 12:08 pmalanstorm says:
Ruufles, things don’t get much simpler than the answer to that question. That answer is, “Legislate less!” If Congress wasn’t trying to pass legislation on every aspect of our lives, we wouldn’t have 2,000 page bills written by lobbyists and unread by those who pass them.
Your errors are in assuming that these bills needed to be passed in the first place, and in their present form.
November 19, 2010, 12:23 pmTravis Ormsby says:
I think the question here is the margin at which decisions to either innovate or rent-seek are being made. It’s plausible that the marginal product of entrepreneurship of these particular lobbyists is zero or even negative.
That is to say that lobbying and entrepreneurship are nowhere near perfect substitutes and an increase in one doesn’t necessarily mean a decrease in another.
Regulatory capture is a problem insofar as it results in poor regulation, but I’d need a lot more than the (extremely scanty) anecdotal evidence Panner provides to believe it’s a problem for innovation.
November 19, 2010, 12:36 pmJP98 says:
As others have pointed out, at a certain point the number of rules becomes so great that we’re in the same situation as if there were no rules and everything was left up to the sovereign’s discretion. It becomes so hard for private actors to know and comply with all the rules, while the agents of the state have so many different rules to choose from in justifying their action or inaction, that everyone follows his pursuits at the state’s pleasure.
November 19, 2010, 12:39 pmJustin says:
So, the solution is for Congress to go against the wishes of lobbyists?
I’m not holding my breath.
November 19, 2010, 12:40 pmTK75 says:
But regulation = power, and what self-respecting narcissistic legislator willingly cedes power or the opportunity for self-enrichment through the dispensation of that power?
On a more positive note, it sounds like that “self-proclaimed socially liberal Democrat” has caught on to the message of the Tea Party (and libertarians generally): Get government out of our lives, and unleash the dynamic engine of our capitalist economy.
November 19, 2010, 12:43 pmAF says:
I read that twice and I still don’t understand what he’s saying.
He wants us to be outraged that the CEO of the US Chamber of Commerce is making $4 million a year and suggests that the Chamber doesn’t represent the interests of entrepreneurs.
Yet when it comes to specific policies, he criticizes the new Consumer Financial Protection Bureau and health care reform — both of which were vehemently opposed by the Chamber.
So I guess the argument is that big business has too much power, so let’s give big business what it wants, and then it will have less power?
November 19, 2010, 12:51 pmAF says:
Actually, he provides no evidence at all, not even personal anecdotes from his experience as an entrepreneur. The only new piece of information in the article (other than old talking points about federal spending and the tax code) is about the salaries of business lobbyists, which doesn’t tell us anything about the effects of regulation on innovation.
November 19, 2010, 12:55 pmChaser says:
The argument is that GOVERNMENT has too much power, which naturally leads to huge amounts of effort by others to influence that power.
Reduce that power, reduce the activity of that government, and the parallel, parasitic activity will also be reduced.
Does anyone seriously believe that we need a government that is involved in every minutae of our society – such as legislating how much water our toilets can flush?
November 19, 2010, 12:58 pmTatil says:
I agree. Let the prices reflect the cost of water, including environmental effects, and people will chose the toilets that use less water anyways.
November 19, 2010, 1:06 pmTatil says:
I agree. Let the prices reflect the cost of water, including environmental effects, and people will chose the toilets that use less water anyways.
November 19, 2010, 1:06 pmByomtov says:
Travis Ormsby’s point is exactly right.
Why assume that those who are effective lobbyists would be good at developing and marketing new products, or even running any business other than a lobbying shop?
November 19, 2010, 1:11 pmMike says:
Because smart people do smart things.
I would consider it a harder proof that lobbying requires some specific skillset that is of no use elsewhere than arguing that successful lobbyists would likely be successful anywhere.
Money-driven people go where the money is. Intelligent or charismatic money-driven people rise to the tops of that industry. If that is in business, we have more intelligent and independent people pushing in business. I don’t think this is a radical idea at all.
November 19, 2010, 1:27 pmWill says:
To the extent that administrative agencies “help” any business, they help only larger, better-capitalized businesses. At best they create barriers of entry into the market, and at worst they completely destroy an industry (or unintentionally create a black market that is often devoid of any regulation or oversight, making it tough to even enforce basic private contracts).
Take a look at your state-level contractor boards or national agencies like the EPA. Your local one-truck handyman or small custom builder is pushed out of the market while large contractors and developers are able to devote time and resources to affect the legislative and rulemaking processes. Sure, it’s a minor inconvenience for them, but it benefits them in the long run by keeping smaller–often more efficient and innovative–contractors who don’t have the extra time and resources out of the market. And then it’s a lot easier to compete against the few fly-by-night, cash-only opportunists when they throw around their newfound licenses and certifications.
Go back and dig around in some of these regulatory agencies, attend their meetings if you have the time, and you’ll find that the bigger businesses are not only key players in their advisory boards and administration, but they often promulgated the agencies’ creation in the first place. I’ve been on both sides of that sausage-making.
November 19, 2010, 1:31 pmAllan Walstad says:
Talk about tipping points — there’s one.
Travis Ormsby
Oh but it certainly does, if successful lobbying results in a sufficiently daunting maze of regulation that it inhibits innovation, both directly and by making it more profitable to spend money on additional lobbyists rather than on additional scientists and engineers.
November 19, 2010, 1:57 pmMKS says:
The downside of extensive regulation is that it kills off the small-company challengers to the big multi-national corporations. In a low regulation environment, smaller companies often can carve out a decent share of the market through better ideas and greater efficiencies – and this ultimately benefits consumers and job-seekers. In a high regulation environment, larger corporations survive the compliance cost burden because they have deeper pockets. Smaller companies spend a proportionately greater percentage of their resources attempting to comply, and often cannot compete. Over-much regulation (such as the U.S. now has) can have the same effect on small business as does predatory pricing.
I appreciate Mr. Panner’s article, but he needs to reconsider his political affiliation. The Democratic Party deserves to be consigned to the history books as a party that had a long run which ended in the early 21st century, and given credit for Cherokee forced marches, slavery, income tax withholding, Jim Crow, abortion on demand, and attempted nationalization of health insurance.
November 19, 2010, 2:02 pmJames says:
The issue for those trying to eliminate rent seeking is which is the lesser of two evils: lobby Congress or lobby the regulatory bodies of the executive. Congress, particularly after the Citizens United decision, is very vulnerable to monetary threats and pleas. Regulatory bodies are vulnerable to capture. You have to pick one; the latest trend has been towards regulatory discretion. While elimination of regulation/regulatory legislation is laudable in the abstract, people seem to feel a bit differently when it is concerns health/safety (ACA) or monopoly power mixed with quasi-government guarantees (Dodd-Frank). To the extent you don’t want monopolies to form (there is strong argument that natural monopolies form regularly in financial services and banking), you have to have regulation.
November 19, 2010, 2:07 pmBlue Neponset says:
Why don’t smart people become all star, left handed pitchers for an MLB team instead of lobbyists? Those positions pay way more than your average lobbyist.
As others have noted, it is hard to take this guy seriously when he seems to think “entrepreneur” and “lobbyist” are interchangeable professions.
Re: Regulation
Our tax and regulatory codes didn’t get complex last Wednesday, they have been complex for decades. Despite this, the US somehow manages to have the most productive work force on the globe and continues to have a well stocked class of innovative entrepreneurs.
If Mr. Panner and his supporters want us to reduce the complexity of the tax and regulatory codes then they need to be more clear as to how this complexity is negatively affecting us. I just don’t see any innovation being stiffed.
November 19, 2010, 2:15 pmSeaDrive says:
It benefits big corporations too because they can buy the smaller companies when they’ve proven to be successful. That way they can innovate at controlled risk. The goal of many software startups is to be purchased by Google or Microsoft.
November 19, 2010, 2:32 pmByomtov says:
Mike,
Because smart people do smart things.
So the lobbyists could be brain surgeons instead? They might make good high-level salespeople, or lawyers. I’m not saying they are stupid, just that the skills are not interchangeable.
Being good at schmoozing and legal methods of bribery does not translate into being a good innovator.
I actually believe that the fact that much of our top technical and engineering talent is being drawn into abstruse financial manipulations is somewhat damaging to real innovation, while the fact that smooth talkers are becoming lobbyists is not.
November 19, 2010, 2:37 pmJP98 says:
Why are those the only choices? What about limiting the power of both Congress and the executive?
November 19, 2010, 2:40 pmElliot says:
Sure it’s true. And we might ask how much of that talent is aimed at gaming that 18,000 page tax code.
We are being smothered by mediocre folks who think they and their fellows are smart enough to direct how the rest of us live. They know this because other mediocre folks with fancy credentials tell them they are smart
November 19, 2010, 2:45 pmkurt9 says:
For the individual, such as myself, who does not have the insider connections to make it in the Beltway and the capital, my only recourse is to be an entrepreneur who makes wealth by making a new product. You see, to be successful in gamesmanship, you have to have all of the right connections and it helps to have graduated from the right universities and what not. This is definitely not me.
Since the shift from entrepreneurship to gamesmanship has progressed so far in this country, my only option is to forget about this country and do whatever business start-up I can do in an Asian country. That Ben Bernanke’s “quantitative easing” inflationary monetary policy will flood East Asia with lots of money, this could make it easier for me to raise the money for my ventures over there rather than here.
Indeed, this is my personal situation. I am meeting with a guy from China next week to discuss precisely what I have described above. If it works out, I may find myself back in China next year.
I sincerely hope the tea party movement is successful. If not, America can kiss its ass goodbye because I’m not going to be around to take the fall.
November 19, 2010, 2:47 pmkurt9 says:
It is possible that the only solution is a constitutional convention that eliminates the entire federal government except for the Constitution itself? Just delete everything, all laws, regulations, and what not and leave only the Constitution itself intact. I often think this is the only solution to the problem.
November 19, 2010, 3:02 pmAllan Walstad says:
Blue Neponset
And as I noted earlier, companies can choose to spend more on lobbyists or more on engineers. I would also suggest that really talented people can pursue a variety of careers, that there is certainly a tradeoff between innovating and lobbying, even at the individual level.
James
Seriously, your response to over-regulation’s inhibiting effect on innovation is some reflexive attack on free speech? Please.
November 19, 2010, 3:14 pmMrMath says:
A socially liberal Democrat?
Why the qualifier socially? Why not just “liberal Democrat?” Obviously, because he is fiscally conservative.
Let me see.
Socially liberal + fiscally conservative = libertarian.
So, a libertarian is advocating for less regulation due to concerns that regulatory agencies will be “captured” by those they regulate.
That is SO noteworthy.
*yawn*
November 19, 2010, 3:19 pmAce says:
@blue neponset
Thank God for that Innovative Entrepreneur Stocking Pool we call the Public School system, or we’d be bone dry!
I know! We haven’t stifled an innovation in 2 years, just like the Innovations Created vs Stifled graphic on the ARRA website says!
November 19, 2010, 4:05 pmMark N. says:
Wouldn’t this line of argument go for any line of work that pays significantly more, on average, than entrepreneurship does? Which is not a high bar, since most small businesses fail. Sure, a well-paid lobbying job is one thing that might lure away some potential entrepreneurs, but so are: high-paid finance jobs, lucrative jobs at large established corporations, BigLaw lawyering, etc.
It seems oddly convenient to the author’s political views that only lobbyists are mentioned, with the prescribed solution being to get rid of regulations. Why not focus instead, or in addition, on the problem of high finance pay luring away the next would-be Bill Gates? (It’s a real problem that people in tech are noticing, that finance has been hiring away talent, paying them huge salaries to work on things like robotic trading algorithms, when they otherwise might’ve been founding innovative new companies.)
November 19, 2010, 5:40 pm1040 says:
I think this is an accurate summary. It’s also indicative of the fact that he is also a self proclaimed not-smart guy, otherwise he’d have been in lobbying too.
November 19, 2010, 5:54 pmGlen says:
I live in Palo Alto, CA and work in the venture capital.
I am seeing direct evidence of this dynamic every day. And it isn’t limited to lobbying and personal connections. Instead, I see more and more startups focused on navigating (or exploiting) government regulation.
This first big wave of these startups began in 2003 after the passage of Sarbanes-Oxley. This bill placed such onerous responsibilities on all businesses – but especially smaller, private businesses – that it created an entirely new market in Sarbanes-Oxley compliance. There is now an entire industry dedicated to helping companies maintain compliance, one that could be considered as adding nothing whatsoever to the common welfare of our society.
SOX compliance has evolved into a conglomeration of security, forensic, and compliance products and services. Most of what is spent by businesses today under the general category of “security” is actually for regulatory compliance.
SOX is not alone, of course. The compliance market is thriving due to a proliferation of federal business regulations including HIPAA, PLC, GLBA, and FISMA, etc. And I’m already seeing business plans for Dodd-Frank and PPACA (Obamacare) compliance.
All of the activity generated by these regulations is pretty much overhead, i.e., lost productivity. Sure, they are no doubt some general benefits to society from greater transparency and less fraud, but as someone who has seen what most of these schemes compel in practice, it’s really hard to see them as anything other than useless interference. And that assessment doesn’t even begin to consider other negative effects: for example, SOX is considered to be the sole reason that there is no longer a viable IPO market for VC-funded startups.
November 19, 2010, 6:05 pmTed says:
My question:
Are collateralized debt obligations the result of innovation or manipulation of regulations?
November 19, 2010, 7:11 pm1040 says:
yes. it could also be considered as adding immense value to the common welfare of our society given that corporations have consistently shown themselves to be capable of exploiting every possible loophole and lack of information transparency in the system.
November 19, 2010, 8:24 pmByomtov says:
Glen,
for example, SOX is considered to be the sole reason that there is no longer a viable IPO market for VC-funded startups.
I don’t work in VC, but this seems like an improbable statement. Checking here, I find that venture-backed IPO volume was about the same in 2007 as in 2004, with a drop in 2005-6. They fell off the cliff in 2008-9 (6 deals in 2008, 12 in 2009, compared with 86 in 2007) and are starting to come back.
Since SOX passed in mid-2002 I don’t find your claim well-supported by this evidence. Could something else have discouraged IPO’s in 2008-9? I wonder what that might be?
November 19, 2010, 8:44 pmAllan Walstad says:
Mark N.
In principle, working in finance is a productive occupation, whereas lobbying is not about production, it’s about getting the big gun of government on your side against your competitors and against the free choices of consumers. Now of course, the big banks are a massive cartel supported by the pols and the Federal Reserve, Fannie and Freddie, political insiders and if necessary fat-cat bailouts at taxpayer expense, so it’s not clear just how productive the jobs in high finance are, relative to what the situation would be in a freer market. But again, that’s a problem of big government.
November 19, 2010, 10:38 pmDan Lavatan says:
I would find SOX a compelling reason not to IPO in the US, but SOX and the CFC statutes don’t apply to companies traded on a NASDAQ-style exchhange outside the US. Why not IPO in Bermuda or something?
November 19, 2010, 11:02 pmDan Lavatan says:
It costs most large businesses more than $1M/day for SOX compliance, so you would need to have an Enron-style failure every day for it to be close to a net benifit. Of course, fraud has always been illegal and the original SEC was intended to prevent it. I’m sure eventually companies will comit widespread fraud under SOX, which will get us to another round of useless legislation.
November 19, 2010, 11:06 pmByomtov says:
Dan Levatan,
It costs most large businesses more than $1M/day for SOX compliance,
More than $365 million/year? Really? Sounds high to me. Do companies with say, $2 billion in revenue spend 20% or so on SOX compliance?
I’d be curious to know where these figures came form, and how the marginal cost of SOX compliance is separated out from all the other financial reporting costs compnaies incur.
November 19, 2010, 11:54 pmElliot says:
The president of Intel recently gave a speech where he said that if it costs $5 billion to build a plant in the US, it will cost $4 billion in any other country. He specifically said it was not due to US labor costs, but rather was because of US taxes, and regulations.
That kind of environment stiffles innovation in the US, and forces Americans to exercise their innovation in other countries. Innovators don’t want to live with the Nannies.
November 20, 2010, 12:40 amMark N. says:
The data I can find suggests compliance costs for large companies in the $1.5-$3.0 million per year range, not anywhere close to $350 million.
November 20, 2010, 12:49 am1040 says:
Well, it’s still only 1/200th the cost per day of Obama’s trip to India. And there aren’t even battleships involved.
Innumeracy, FTW!
November 20, 2010, 1:35 amBlue Neponset says:
I don’t think building a plant should be confused with innovation. If both terms are in fact the same thing then we are in real trouble. The US has been losing manufacturing capacity for half a century, if not much longer.
I also don’t think Americans are going to flock to other countries in order to avoid taxes/regulation. You and the Intel guy are solely looking at the cost (in dollars) of working in the US. In order to have a reasonable discussion about this we also have to look at the benefits of innovating in the US and the non-monetary costs of moving from the US. When you add in those factors I don’t see how the issue is a black and white as you and the Intel guy claim it is.
November 20, 2010, 8:25 amSChaser says:
No, but their investments will, improving innovation elsewhere at the expense of the US.
November 20, 2010, 2:03 pm1040 says:
which other countries?
i love how people go on and on about free markets, but don’t understand some of the basic assumptions about the requirements for properly functioning markets. lack of information is one of them. maybe todd henderson thinks insider trading is a good thing, and maybe others think that corporations should be able to lie about their cash flow without fear of oversight. but let’s not confuse this with classical free markets.
November 20, 2010, 4:15 pmByomtov says:
Elliot,
Any other? Including the countries of Western Europe, say, or Canada or Japan?
November 20, 2010, 8:53 pmElliot says:
Each plant Intel builds is an innovation. They don’t just repeat what they did last time.
November 20, 2010, 9:12 pmElliot says:
If you are asking about the Intel guy, I can tell you no more. That’s just about all I heard.
November 20, 2010, 9:14 pmByomtov says:
Elliot,
If you are asking about the Intel guy, I can tell you no more. That’s just about all I heard.
I am asking about the Intel guy. Does his statement arouse any skepticism on your part?
November 20, 2010, 10:21 pm1040 says:
I thought Western Europe and Canada and Japan were socialist republics? So, now they are the bastions of unbridled entrepreneurial freedom and low taxes?
November 20, 2010, 10:46 pmSChaser says:
I have personally seen the costs of SOX compliance, and they are vastly more expensive in my experience than any transparency gained. In other words, like typical government regulation, it was passed in a panic, and is not adequate to its intended purpose but grossly over-intrusive and expensive.
Medium sized companies are really clobbered by SOX – paying huge fees. Many have done as my most recent employer did – withdraw from the public market for ownership by a private equity company. Do you imagine that improves transparency?
November 25, 2010, 10:48 pm