To view this issue of the CEI Planet, please click here  to download the PDF file. Below are selected articles from the January-February 2010 issue:
Reform Gathers Momentum
In lamenting the lack of economic growth during the past decade, New York Times columnist Paul Krugman pointed the finger at a typical culprit: the supposed deregulation that occurred during the Bush administration. "As for the Republicans, now that their policies of tax cuts and deregulation have led us into an economic quagmire, their prescription for recovery is—tax cuts and deregulation. "Krugman called the 2000s "the decade in which we achieved nothing and learned nothing."
But a glance at what really happened in the first decade of the new millennium shows that it is Krugman and liberals of his ilk who have learned nothing. They continue to insist that the financial crisis was caused by deregulation, even though so much government intervention in housing—from the subsidies to Fannie Mae and Freddie Mac to the reckless lending encouraged by Community Reinvestment Act—contributed to the mortgagemeltdown. And then there's Sarbanes-Oxley.
As Rep. Ron Paul (R-TX) recentlypointed out, "[T]he last decade saw the enactment of the Sarbanes-Oxley Act, the largest piece of financial regulatory legislation" in decades. Rushed through Congress and signed by President Bush in the wake of the Enron and WorldCom scandals in 2002, Sarbanes-Oxley—known as Sarbox for short—has quadrupled audit costs and achieved few tangible results in preventing fraud. University of Minnesota researcher Ivy Zhang has calculated that Sarbox has cost the economy $1.4 trillion in direct and indirect costs. And new research from economist Kenneth Lehn of the University of Pittsburgh shows that such costs reduce firms' research and development spending and business investment, two important prerequisites for job growth.
Yet there is some good news. In December 2009, prospects for substantial Sarbanes-Oxley relief or repeal grew both in Congress and in a constitutional challenge before the Supreme Court. CEI has been involved heavily in both efforts. CEI attorneys are serving as co-counsel to the Supreme Court case.
On December 1, CEI hosted an event on Capitol Hill, "Sarbanes-Oxley, the Supreme Court, and America's Economic Future," which was well attended by staffers of both Republican and Democratic members of Congress. A highlight of the event was a letter to the conference from Rep. John Adler (D-N.J.), who had sponsored the amendment to the financial regulation bill that would exempt smaller public companies—those with market valuations of no more than $75 million—from the particularly onerous "internal control" audits mandated by Sarbox’s Section 404(b). He wrote:
404(b) of the Sarbanes-Oxley Act was never intended to be such a burden on small and medium-sized businesses struggling to grow and create jobs. ...If small companies are dissuaded from going public, and are restrained in their paths to growth, we may never know whether they could have been the next successful American business. In an economy where we need to create jobs, it is my goal to fix problems interfering with our small businesses ability to grow and create jobs.
Speakers at the conference included Rep. Scott Garrett (R-N.J.), a co-sponsor of the Adler amendment; financial consultant and commentator Mallory Factor; author and former regulatory official Stephen A. Boyko; and CEI Senior Attorney Hans Bader, who is co-counsel to the plaintiffs in the Supreme Court challenge.
Among the points raised were that the law’s process can significantly delay initial public offerings (IPOs) even for a company as large as Google. Indeed, as technology journalist John Battelle chronicles in his book, The Search, Google "made its money literally pennies at a time, from millions upon millions of microtransactions," so it "had to significantly restructure its advertising reporting system from the ground up." If Sarbanes-Oxley imposes this type of burden on a company like Google, which had a market valuation of more than $1 billion before it went public, imagine the burden for smaller companies trying to raise capital. This helps explain why in the years following passage of Sarbanes-Oxley, IPOs slowed dramatically in the U.S.
Moreover, Sarbanes-Oxley has achieved very little in preventing fraud. In 2007, the Institute of Internal Auditors praised Countrywide Financial for its Sarbanes-Oxley controls. Two years and many scandals later, its former executives have been charged with securities fraud. And certainly, overall transparency doesn't increase when companies go private or delay going public, as many have chosen to do because of the law's costs.
Because of all the high-paying work it creates for auditors in helping firms comply with the law, Sarbanes-Oxley has been called "a boon for bean counters" and the Accountants Full Employment Act. Now many economists, policy makers, and members of Congress from both parties are questioning whether what is good for the Big Four accounting firms is good for America.
Despite the opposition of powerful House Financial Services Committee Chairman Barney Frank (D-Mass.), 101 Democrats joined all but one Republican to retain the relief from the law in the final financial bill that passed the House.
In the meantime, on December 7, the U.S. Supreme Court heard our case on Sarbanes-Oxley. This could lead to the gutting of a substantial part of the law, which would have a major positive impact on the U.S. capital markets. Bader, CEI General Counsel Sam Kazman, and other prominent attorneys on the case argue that the structure of the Public Company Accounting Oversight Board (PCAOB)—a regulatory body created under Sarbox that has set burdensome accounting rules that have cost the economy billions—lacks constitutional accountability because its structure bypasses presidential appointment, Senate confirmation, and the Executive Branch's power to remove officers. (You can see all the case documents at ControlAbuseofPower.org/PCAOB .)
Sarbanes-Oxley is a significant burden that is holding back job growth and a stronger recovery. If it is repealed or scaled back, the 2010s could see real prosperity as American entrepreneurial energies are once again unleashed, as the Microsofts and Googles of the future go public in ever greater numbers.
John Berlau (email@example.com) is Director for the Center for Investors and Entrepreneurs at CEI.
Let Immigrants Power America's Scientific Prowess
The melee surrounding President Barack Obama's Nobel Peace Prize distracted everyone from another potential Nobel controversy. Of the eight American citizens who received Nobel Prizes in the science categories, five are immigrants to the United States. This fact got little attention, which is unfortunate. In the immigration debate, the contributions of highly educated and skilled immigrants to American technology and science are often ignored.
Those contributions cannot be overestimated. One-quarter of American Nobel Prize winners since 1901 have been immigrants. Today, a third of all the scientists and engineers in Silicon Valley are immigrants or foreign-born, and 40 percent of the Ph.D. scientists working in the United States are foreign-born. Our immigration laws ignore these facts, to our detriment.
The driver of economic growth in the modern world is knowledge. Scientific discoveries spill over into related fields to fuel further discoveries. Scientists working in research teams can quickly share insights with each other, allowing greater output. Scientists and engineers working closely together increase the speed and scope of their research. When this brainpower is concentrated geographically, it boosts economic growth and technological development.
America's immigration laws artificially limit our capacity for technological advancement by putting up roadblocks in this process. The engineers and Ph.D.s driving much of the technological innovation in Silicon Valley are overwhelmingly Indian. A growing numberof them are here illegally. According to the Department of Homeland Security's Office of Immigration Statistics, there are almost 300,000 illegal Indian immigrants in the United States. Many of them arrived here on H-1B or student visas and overstayed their legal residency in the hope of getting a green card.
Indian immigrant workers are generally highly skilled and enjoy high incomes. Average Indian-American households have an income 62 percent greater than average. The skills, work ethic, and entrepreneurial spirit that make Indian immigrants such a successful group are remarkably constant throughout the community, regardless of legal status. Instead of making them jump through bureaucratic hoops, we should encourage them to live here peacefully and contribute to American society.
Foreign graduate students also contribute to America's ongoing technological success. A 2005 World Bank study found that foreign graduate students working in the United States file an enormous number of patents. Additionally, a quarter of international patents filed from the United States in 2006 named a non-U.S. citizen working in the United States as the inventor or co-inventor. Many of those immigrants whom our immigration bureaucracy refuses to recognize are responsible for the rapid technological advancement of recent decades.
Highly skilled immigration benefits the American economy. Counting just the value of patents, scientific discoveries, and firms started by immigrants, it is clear that their arrival has paid off handsomely for the United States. And rather than take jobs away from Americans, more people with wider skills and greater experience increase employment opportunities. The non-partisan National Foundation for American Policy reports that for every H-1B visa issued, U.S. technology firms increase their employment by five workers. Every day that nearly 300,000 Indian immigrants spend in legal limbo represents a gargantuan waste of creativity.
And that doesn't even count the millions of highly skilled individuals from China, Europe, and elsewhere who would come seeking greater opportunity if the law would only let them. Immigrant innovators come from America from around the world. The five immigrant Nobel Prize winners came from Britain, Canada, Australia, China, and India.
The number of potential Nobel Prize winners who have lost their opportunity to do research in this country is unknown. What is known is that the U.S. government is keeping out millions of the most inventive, brilliant and entrepreneurial people in the world for no good reason.
Alex Nowrasteh (firstname.lastname@example.org) is a Policy Analyst at CEI. A version of this article originally appeared on RealClearMarkets.com.
The Good, The Bad, and The Ugly
THE GOOD: Harmful Internet Gambling Regulations on Hold...for Now
The past few years have not been good to fans of online gambling. After finally getting legal recognition by some state legislatures and a positive interpretation of the 1961 Wire Act in the courts, Internet gambling businesses were targeted once again. Since Congress passed it in 2006, the Unlawful Internet Gambling Enforcement Act (UIGEA) has prohibited transfers from financial institutions to online gambling websites—a death blow to many industry players. However, the new financial regulations under the Act have been so onerous that the Treasury Department and Federal Reserve have intervened to delay implementation of the enforcement mechanisms. "Internet gambling in the United States is going to continue, with or without a regime, and regardless of any attempt to ban the activity," says CEI Director of Insurance Studies Michelle Minton. "While the best way to regulate Internet gaming, if it should be regulated at all, will continue to hotly debated by members of Congress, the first step should be to recognize that UIGEA is simply a bad law and a strain on financial institutions, and should be overturned permanently."
A month after New York Attorney General Andrew Cuomo filed an antitrust lawsuit against Intel, the Federal Trade Commission, in a separate lawsuit, accused the chip maker of violating Section 5 of the Federal Trade Commission Act of 1914. The allegations aremostly coming from competitors who view Intel's continued success in the PC CPU market as "anti-competitive." In fact, the microprocessor market is as vibrant and competitive as ever, and consumers have seen rapid speed increases and falling prices. "The FTC suit is just the latest illustration ofhow antitrust laws are often hijacked by regulators and used to promote a government industrial policy," states CEI Associate Director of Technology Studies Ryan Radia. "Struggling competitors turn to Washington or Brussels to get ahead, and regulators are all too willing to get involved in the name of 'consumer welfare.'"
In early December, environmental groups petitioned the Environmental Protection Agency (EPA) to set economically disastrous greenhouse gas regulations under the Clean Air Act. In their petition, the Center for Biological Diversity and 350.org asked the agency to set a National Ambient Air Quality Standard (NAAQS) for carbon dioxide under the Clean Air Act. Their demanded cap is 350 parts per million. "Stabilizing carbon dioxide levels at 350 parts per million as demanded by the petition, when atmospheric levels are already above 385 ppm and rising, would require the equivalent of a global economic depression sustained over several decades," says CEI Senior Fellow Marlo Lewis. "Tens of millions of jobs have thus been put at stake by EPA's decision to use the Clean Air Act to regulate carbon dioxide emissions." Unfortunately, federal courts appear increasingly likely to require that the EPA set a NAAQS for carbon dioxide.
On the eve of the Copenhagen climate summit, there was much talk on the eco-left regarding the specific changes that all us humans should be forced to make in our lifestyles in order to save us from ourselves. Dr. Rajendra Pachauri, the chair of the Intergovernmental Panel on Climate Change (IPCC), touted "sustainability" measures, such as monitoring hotel guests' electricity usage, introducing a massive tax on air travel to deter—the less wealthy—people from flying, and curtailing ice water consumption at restaurants. However, in 2007 and half of 2008, Pachauri logged 443,243 flying miles while on IPCC business. Dr. Pachaurialso happens to be very active in India's corporate cricket league—so active, in fact, that he left a seminar in New York City in order to attend team practice in Delhi, India, before flying back to New York the next day.
Rep. Alan Grayson (D-Fla.) is no stranger to controversy. The freshman congressman has already made a name for himself by comparing the present health care system to the Holocaust, using obscene language to publicly denounce critics, and taking on conservative talk radio hosts. Among progressive Democratic circles, Grayson is something of a folk hero. But the tough-as-nails leftist from Orlando apparently has a very thin skin when it comes to someone daring to criticize him using similar rhetoric. On December 15, Grayson filed a complaint with Attorney General Eric Holder, demanding a criminal investigation, and seeking a fine and five years imprisonment of the treasurer of MyCongressmanIsNuts.com, an anti-Grayson, FEC-registered political action committee. Grayson takes specific issue with the PAC's name, a pun on his own CongressmanWithGuts.com, and incorporation type. A review of the PAC's filing statement makes Grayson's allegations appear to be completely groundless. The complaint is so unhinged that it seems to support the assertion in the PAC's name.