Dumb SEC Rule and the “Land of Limitations”

Before 2009 wage stagnation and rising inequality were all the fault of George W. Bush and his “tax cuts for the rich.” Now that these problems have become much worse under Barack Obama, they are “America’s problem” and “a long-term structural problem” that has nothing to do with Obama’s policies. According to New York Times pundit Nick Kristoff the U.S. is now a “land of limitations” with less social mobility than Europe. Kristoff tells a sob story about his friend Rick Goff, an Oregon resident who had a hard life working in lumber mills and machine shops. Rick would have fared better in capitalist Texas than socialist Oregon, whose timber industry was killed off by environmentalists, along with many other industries. There’s not much commercial activity left in Portland, aside from coffee shops and strip clubs. Downtown Portland on a Tuesday in December feels like Seattle on a Sunday in August.

A major reason why the U.S. is becoming a “land of limitations” is something economists tend to ignore because it is hard to measure: a huge increase in regulations, whereby DC elites spend unlimited amounts of other people’s money on projects that make no sense. Bureaucrats write a rule and companies spend billions to obey the rule, in order to avoid huge fines. Even if the expenditure has no discernible benefit, no one in DC is fired and the rule remains on the books. Exhibit A is the new SEC rule requiring companies to report the ratio of the compensation of the CEO to the median pay of all the employees. Companies will spend millions to generate data revealing that CEO’s make much, much more than the typical worker. Duh.

Even fans of this new rule admit it will have little or no effect. Regulatory guru Kenneth Feinberg confessed on Bloomberg radio, “I am not sure it will make any difference. I’m not [sure].” The Financial Times editorialized about the wonderful merits of the new rule, but half of the editorial explained why the results will be misleading. A company that outsources manufacturing to China will have a “better” ratio than one that runs its own factories. Wall Street firms will look “better” than retailers because top traders and bankers make as much as the CEOs.

Then there’s the redoubtable Gretchen Morgensen of the New York Times, who has made a good living over the years railing against excessive CEO pay. You would think she would love the SEC rule, but her praise has more hedges than an English garden. The rule “may actually do something to curb over-the-top pay,” and “may encourage other stakeholders” to pay attention to CEO pay, and “it’s possible” some consumers will care what the CEO makes. But she quotes a compensation consultant who “doesn’t think investors will pay much attention to the new law.”

It’s nice to hear that a rule that will cost millions of dollars to implement “may” not be a total waste of money, but there is absolutely no reason to think so. Even the liberal media could not find anyone who thinks it will make any difference. By siphoning off money from the real economy to the DC beltway, it simply helps to make the U.S. a “land of limitations.”


The WSJ ran a piece analyzing why, “Sagging Productivity Vexes Economy.”  It fingers the usual suspects–“hangover from the recession,” “lackluster capital investment,” measurement problems–but fails to mention increased regulation.  Economists at the Business Roundtable and the Conference Board should weigh in, with some simple modeling.  Productivity is a fraction: output / worker.  When companies add workers without adding to output, in order to follow DC’s rules, it is obviously a big drag on this fraction and an even bigger drag on the increase of that fraction over time.

Copyright Thomas Doerflinger 2015. All Rights Reserved.



About tomdoerflinger

Thomas Doerflinger, PhD is a prominent observer of American capitalism – past, present and future. http://www.wallstreetandkstreet.com/?page_id=8
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