Ray Malone's Commentary

Mike Oxley was my congressman when I lived in North Central Ohio. It did not surprise me that his reaction to the business scandals of the Clinton years was to author a law that tries to prevent the commission of crime. Such attempts are very leftist very costly to an economy.

Methods of crime prevention can be divided into two categories. The first and most successful are laws that prescribe punishments for those that do bad things The second category contains laws that try to make it impossible or very difficult for the crime to be committed in the first place.

The second category is always very costly and has never proven effective.

Think about it a minute. A law that says do something that results in X and you will get punishment Y can be effective. Especially if the highly likely prospect of punishment Y makes X not worth doing. The only possible way around the law it to accomplish your goal without doing X... or don't get caught. And catching crooks is what law enforcement is supposed to do. As the chance of getting caught increases, the number who will attempt breaking the law decreases.

Now consider the other category. The attempt to prevent bad behavior by making it very difficult or impossible to do. In the case of Sarbanes Oxley the law requires checked and tested accounting so no one can break the law. There is a down side. If a loophole in the law can be found, a rip off can be legally done. The crook just has to find a way to rip people off that is not prevented by the law. The prevention rather than punishment approach is always very costly and not very effective. All one must do is find a loophole. Writing a prevention law with no loopholes is nearly impossible.

But the biggest problem with prevention laws is it adds huge costs to the honest as well as the dishonest. It punishes the honest for being honest. Such laws put real pressure on profits. Such laws turn the motivation of the honest from being honest to finding a way to recover the costs the law mandates.

In the first category if one defrauds investors, or cheats customers, the punishment can be severe. Also there is no cost to the honest businessman or company. If company president or board rips off investors or customers they get severely punished. But if a company president and board never rips off investors or customers, its investors, and customers suffer no costs.

On the other hand attempts to make it impossible to rip off investors and customers adds costs to all companies, investors, and customers. The huge costs in the reports mandated by Sarbanes Oxley put huge costs on all publicly traded companies. Those costs show up in lower corporate earnings, and higher prices for goods. That is everyone pays to keep a few people honest. The costs of this 'prevention' greatly exceed the costs created by those that ripped off investors and customers.

Anyone who has studied human nature should be able to figure out that making it impossible for crooks to commit crimes is impossible. Mike Oxley and his law can't prevent crooks from ripping off investors and customers. Crooks will just find a new way... not covered by any current law. What Oxley has done is make all American companies less competitive in what is now a global market. Sarbanes Oxley is a bigger rip off of investors, workers, and customers than ever was done by an Enron CEO.

Mike Oxley may not be dumber than a sack of rocks, but he is, in my opinion, dumber than an Ox .. ley.

Could a liberal Democrat Congressman have done more damage to our ability to compete in a world market than Michael Oxley?