The president has delivered a speech on jobs in front of a joint session of Congress. National Review Online convened a panel to respond.
There was very little surprising in the speech, most of which sounded like it could have been given at one of Barack Obama’s 2008 campaign rallies. But there was one sentence that did surprise me, and, depending on the follow-up, it could even be a pleasant surprise.
In discussing regulation, the president gave his standard line of the past few months: We should get rid of regulations that put an unnecessary burden on businesses while still not exposing kids to mercury. This has been followed with little action other than a government-wide review. But one deregulation initiative in this speech, while still vague, did at least have a degree of specificity that has been lacking from his past rhetoric. Toward the middle of the speech, President Obama said, “We’re also planning to cut away the red tape that prevents too many rapidly growing start-up companies from raising capital and going public.”
Obama didn’t identify the source of this “red tape,” but those following the issue know that the primary impediment to going public for smaller firms is the Sarbanes-Oxley Act of 2002. This is a law containing a series of accounting mandates, which was rushed through Congress in the wake of the Enron and WorldCom scandals. Mostly through a vague mandate for “internal controls,” Sarbox has made companies responsible for documenting the tiniest minutiae of little importance to shareholders
Politically, if Obama wanted to scale back or repeal a big regulation, this would be an excellent candidate. The law was signed by George W. Bush (though largely drafted by the Democrat-controlled Senate that came after the Jim Jeffords switch, as I explained in NR in 2005), and Republicans foolishly never took the opportunity to relax or repeal it when they were in power. Thus, Obama does not have to go back on legislation he supported and can even triangulate to the “right” of the Bush administration. And it is hard to see what priorities Obama would be sacrificing through a relaxation or repeal of this law. Sarbox hits start-up companies in politically favored industries such as alternative energy every bit as much as it hits other firms.
Sarbox remains a significant burden keeping the U.S. economy from reaching its potential — U.S. initial public offerings dropped off dramatically after Sarbox’s passage and have never come back. According to statistics from University of Florida finance professor Jay Ritter, in no year after Sarbox’s passage has the number of IPOs reached that of the slow-growth recession years of 1991 and 1992, let alone the late ’90s boom years.
And the law still disproportionately burdens smaller public companies. According to a Securities and Exchange Commission study released this April, for small-cap and micro-cap companies with market valuations between $75 million and $250 million, the cost of first-year compliance with the “internal control” mandates equals an amazing 77 percent of their total assets. Even after four years, this cost only goes down to 41 percent the firms’ total assets.
The difficulty of going public for smaller firms has been missing from the conversation about job creation, even from Republicans (though Newt Gingrich has mentioned repealing Sarbanes-Oxley in some recent instances). At the very least, Obama’s speech gets this specific burden to economic recovery back on the policy table. And who knows? Maybe this president will even pull a Jimmy Carter, who deregulated airlines and trucking after decades of rigid price-setting rules.