Maybe the only things thinner than the ranks of the defenders of Sarbanes-Oxley these days are the arguments the defenders are marshaling to hold off the charge of the reformers. Thomas Palley's recent attempt—"In Defense Of Sarbox"—is so batty it more or less made us want to pick the pale, beaten body of Palley up off the street, bring him inside, comfort him and then wrap a forty-pound black iron chain around his waist while we broke the itch for bullshit from his brain. (Uhm, see above--and otherwise completely irrelevant--video for an explanation of that metaphor.)
Palley's basic defense of Sarbox is, well, actually he pretty much left that part out. Instead he kind of just attacked some of the critiques of Sarbox, and even those attacks were more pouts than fully thought out arguments.
Look. This isn't going to be pretty. So we're putting the ugly, chain-tugging, break-you-even-if-it-hurts-us-more-than-it-hurts-you-Tommy-boy bits after the jump. Normally we wouldn't be so mean but Tommy's website tells us he's got degrees from Oxford and Yale and he's a Doctor of some sort. So presumably he can take it.
In Defense Of Sarbox [Thomas Palley.com via FelixSalmon.com]
Tommy starts off in the refuge of the scammer—that is, in the generalized, abstracted truth. No reference to actual provisions sully the analysis. We're in the realm of Platonic Ideas, and specifically the Platonic Ideas of Economics.
Here's Tommy talking from planet Plato:
The economics of regulation teaches that regulation only matters if it is binding and compels people to change their behavior. It also teaches that because binding regulation compels change, those subject to it oppose it. After all, they preferred doing what they were doing before the regulation was passed. That carries an important political lesson: those subject to binding regulation will want it repealed.
Actually, everything after the first sentence here is wrong. Sure regulation that binds or compels no-one probably doesn't matter that much (although it might have some symbolic value). But that doesn't mean that the subjects of regulation oppose it. We've seen again and again that subjects of a regulation can support the regulation, even if it compels them to do things they wouldn't otherwise do.
Let's take the example of a ban on cigarette advertising. Now, we know from history that without a ban in place tobacco companies will advertise. So according to Tommy's analysis, cigarette companies should oppose advertising bans which compel them to behave differently. But that's not what happened with the real ban. As it turns out, the biggest supplier of cigarettes to the US market—Philip Morris—supported the ban on advertising. Why would they support a ban on advertising their own product? Because it also banned their competitors from advertising. And when you control 50% of the market, there is a lot more to gain from banning your competitors from advertising than from advertising yourself.
So if economics taught that "because binding regulation compels change, those subject to it oppose it"—well, economics would be wrong. Fortunately, economics doesn't teach that. Just Tommy. Because Tommy isn't paying attention to the way firms use government regulation to gain competitive advantages over rival firms. Remember, a typical economic regulation doesn't just compel one firm to perform or refrain from certain activities. It also compels that firm's competitors. And whether or not a firm will support or oppose a regulation often depends on how well it can handle the costs of the regulation compared to how its competitors can handle those costs.
Tommy next parrots one of the favorite arguments of the clown-suited Ben Stein and says that "the CEO stock options backdating scandal" proves we need regulation to prevent widespread corporate corruption. This isn't just nonsense. It's nonsense on stilts. As we (and Larry Ribstein and Holman Jenkins) have shown again and again, a lot of the backdating "scandal" is just media trumpeted nonsense. The whole thing seems to be fading away even now. You can't use a phony scandal to prove the existence of widespread corruption, Tommy.
What's more, simply pointing out that there may be corruption or even criminality at work in our public companies is hardly enough to count as a defense of Sarbox. Afterall, it's critics aren't arguing that our board rooms are refuges of saints and angels. The relevant questions are whether Sarbox addresses the right problems in the right way, and whether the benefits of the regulations outweigh the costs. But Tommy doesn't even ask those questions, much less answer them. We almost wonder if he's ever even been in the room with someone asking them.
We could go on and on with this one. The rest is more of the same. Half-arguments half-way made. We'd assume the whole thing was a joke if it weren't so damn earnest. Look, Tommy. It's the couch and the chain for you. At least till you start making sense again.