NCPA - National Center for Policy Analysis

Market Discipline Better Than Re-Regulation

March 25, 2002

Deregulation saves consumers tens of billions of dollars each year in lower airline fares, telephone bills and other costs, economists estimate.

Ralph Nader's group, Public Citizen, and Robert Kuttner, editor of the American Prospect magazine, among others, blame deregulation for the Enron collapse, and advocate re-regulation, warns Bruce Bartlett.

However, there is no evidence federal regulators would not have been misled, just as Enron's board was, or induced to look the other way at questionable activities, as the auditing firm Arthur Andersen was.

On the other hand large stockholders and institutional investors, such as mutual funds and employee pension funds, have the incentive, the means and the fiduciary responsibility to keep a close eye on the inner workings of the companies in which they invest.

  • For instance, CalPERS, the California government employees pension fund, has become more aggressive in overseeing companies in which it invests.
  • And with about $100 billion in assets, CalPERS has both the resources and the expertise to know, far better than small investors or government bureaucrats, what management is up.
  • CalPERS has admitted that it did a poor job overseeing Enron and suffered a $100 million loss as a consequence.

Another group, financial analysts, is far more capable than government bureaucrats to discipline corporate misbehavior.

  • Analysts can make companies pay a severe price instantaneously by issuing "sell" recommendations that can cause stock prices to collapse.
  • And with managers increasingly being paid with stock options, those at fault can pay a heavy personal price for unwise and unethical behavior.

Thus the answer to Enron is not re-regulation, but greater transparency and scrutiny of management by institutional investors and financial analysts. In short, more market discipline is what's needed.

Source: Bruce Bartlett, senior fellow, National Center for Policy Analysis, March 25, 2002.


 

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