Milton Friedman on Sarbanes-Oxley
Phil Kerpen & Mallory Factor attack the Sarbanes-Oxley legislation citing two sources:
The staggering costs of Sarbox bear repeating. An analysis by Sarbanes-Oxley Ivy Xiying Zhang of the University of Rochester measured the total stock market impact of the law, and found that it has cost over $1 trillion, with a “T.” About a third of that cost can be attributed to direct compliance costs, while the remainder is the result of the economic inefficiencies created by the law. Nobel Laureate Milton Friedman recently told the New York Sun that Sarbanes-Oxley is the biggest problem facing the U.S. economy today, noting that it tells entrepreneurs, “Don’t take chances because down will come the hatchet. We’re going to knock your head off.”
The Ivy Xiying Zhang paper is discussed by The Big Picture:
There’s a meme circulating now amongst the sloping forehead crowd that Sarbanes-Oxley costs exceed $1.4 trillion dollars. The way that was calculated was the drop in stock market market capitilization during July 2002 when the legislation was passed. Somehow, SOX gets the entire responsibility for that July 2002 sell off; Even more amusing, SOX gets none of the credit for any subsequent rise in market capitilization since then – it simply gets ignored; Further, this researcher thinks that the only factor impacting market action was Congressional legislation — and not all legislation, just SOX.
The NY Sun did interview Milton Friedman as did Robert Kuttner:
RK: So how does that translate when you are talking about financial markets, where if the last round of scandals is any indication, insiders just were in a position to fool investors, and it eventually self-corrected, but it did a fair amount of damage in the meantime.
MF: Yes it did and you didn’t note that it self corrected before government got involved. Enron wasn’t brought to surface by the government. It was brought to the surface by the market
RK: Well but the whole business of financial advisors also being investment bankers was brought to surface by [New York Attorney General] Eliot Spitzer, so it was some government and some prosecution. It certainly wasn’t the SEC. The SEC was asleep at the switch if anything.
MF: Yes, and it has been mostly since.
RK: Right. But one of the paradoxes here is that the law and economics movement seems to be in favor of restricting some rights of private remedy even as its in favor of reducing regulation.
MF: I’m not sure what you are referring to
RK: Well I’m referring to both the writings of some prominent law and economics people, but also the 1995 and 1998 amendments that made it harder for individual investors to bring suits claiming that they were defrauded by the representations of people selling securities and the accountants signing off on offerings, and that sort of thing.
MF: I’m not an expert on that area. I don’t know what those amendments were. You’ve got me out of my depth.
RK: Well, let’s come back to the SEC. In general, well, what did you think of Sarbanes-Oxley? Was that overkill? Or was that a reasonable….
MF: I think Sarbanes-Oxley is a terrible law.
MF: Here you say to every CEO in the country: you’ve got to swear to the accuracy of things you can’t possibly know. You’re going to make a perjurer of him. And you say to him, for God sakes whatever you do, don’t take risks. We’ve been having something of a slowdown, not in the economy as a whole thanks to the housing boom. But in what I describe as the healthy party of the economy: manufacturing, services, etc., the free market part of the economy. And one of the reasons why I think we’ve been having this slow down is because Sarbanes-Oxley is saying to CEOs, for god sakes don’t take any risks. And yet progress depends on doing risk. You can’t make an omelet without breaking some eggs.
RK: But the whole system of independent accounting firms certifying to the accuracy of corporate books came crashing down in the 90’s. Do you think the private market was capable of repairing that?
MF: I really have never studied that problem.
Since Professor Friedman is honest enough to admit that the economics behind the Sarbanes-Oxley debate is not his expertise, I would hope others who know even less about these issues would cease citing him as an authority on this particular matter.