By Professor Melvin Dubnick, University of New Hampshire
Something happened on the way to the culture wars this week -- somehow a significant piece of bipartisan legislation actually passed the US Congress and is heading for President Obama's desk with everyone anticipating that he will sign it -- and do so triumphantly proclaiming this to be just the kind of policy needed to get American's back to work.
Of course, such a bill deserves a relevant title, and this one is called the JOBS Act. Unfortunately, the acronymic title is (like most legislation in the US) a subterfuge. The actual words behind the letters (Jump-Start Our Business Startups) tell us a bit more about what's involved. The Act is designed to make it easier for "small businesses" and "start-ups" (labels applied to two types of enterprises that have a positive aura in this age of suspicion regarding too-big-to-fail corporate behemoths) to clear the regulatory hurdles on their way to initial public offerings (IPOs) in US capital markets. The rationale for the law (or what I termed "policy theory" in an earlier opinion) seems quite reasonable in this election year where the mantra is "jobs, jobs, jobs": by loosening the requirements for access to the capital markets for these emerging enterprises, we are providing more incentives for investment and (it follows) job growth.
In opposition to the law stood those interests who were quick to note that, even under the most optimistic scenario it will take more than a year for the required changes to be put in place, and that the law will have minimal direct impact on the current (or perhaps even future) job market. As important, opponents feared that any retreat on the regulatory front in this arena made deception and fraud more likely, and that over the long run it will have the same consequences for the securities markets that the repeal of Glass-Steagall had on banking.
Passage of the JOBS Act represents something even more significant, however. Its underlying logic reflects the fact that we have learned little or nothing about the nature of regulation from the economic turmoil of 2007-2008. We remain myopically tied to a bifurcated view of regulatory policy reform reflecting two extreme and incommensurate positions. On the one hand, we view regulation as an extension of the criminal justice system that needs to be strengthened and extended. To regulate a behavior is to criminalize it, and today regulations (so the argument goes) ought to be designed to be "enforced" with heavy fines, "perp walks", and even imprisonment. At the other extreme is the view of regulation as an obstacle to market efficiency, something to be minimized if not eliminated.
Over the past four decades, the latter view -- in the form of deregulation -- has dominated our policy agendas. Every so often, typically in response to some scandal (e.g., Enron) or a crises (such as the economic collapse), we have the passage of legislation that re-regulates (major portions of Dodd-Frank) or explicitly extends the reach of criminal law into the realm of economic activity (the 1988 "honest services" law). The JOBS Act is clearly of the deregulatory mode, although some last minute amendments made it less objectionable to its critics who wished to retain some oversight and sanctions against potential fraudulent (criminal) behavior in the IPO process.
But there is a "missing middle" position on regulation that has all but disappeared from the logic of regulatory reform. Government regulation, if carefully and correctly designed, can and should serve a moral purpose by creating a setting within which the regulated will behave in a more reflective and principled fashion when dealing with customers and clients. Threats of criminal sanctions can accomplish this to some degree, but conducting business on the basis of avoiding jail falls short as a standard of moral behavior. But assuming that principled and thoughtful behavior will emerged in an unregulated marketplace is naïve at best. When considering the reform of our regulatory infrastructure -- whether in the form of legislation such as the JOBS Act or more comprehensive reform efforts -- we need to ask ourselves whether or not the moral function of regulation is being served.