Rein in regulation

Commentator and economist Glenn Hubbard

KAI RYSSDAL: New York City likes to bill itself as the center of global finance. But the fact is more and more companies are taking a pass on the Big Apple. And they're taking their stock with them. Companies looking to go public are going overseas, instead. To places like London. New York's Economic Development Corporation says it's going to hire powerhouse consultant McKinsey to find out why. Commentator Glenn Hubbard says he can answer the question right now.


GLENN HUBBARD: We all have a big stake in the competitiveness of our capital markets. That's because the free-flow of capital around the world generates lots of economic benefits, including the birth of new public companies that stimulate economic growth and jobs. But the question is whether the regulation of those capital markets outweighs the benefits.

Good financial regulation on things like internal accounting procedures can improve the workings of capital markets through promoting trust in corporate numbers. But it's not cost-free.

Our well-functioning capital markets have traditionally been a financing powerhouse for companies from all over the world. But now listing activity is declining here and growing abroad. Firms can list on foreign exchanges and still have access to deep pools of capital.

Of course, other financial centers aren't standing still and are competing. The one reason is that some of these companies fear class-action lawsuits of the type you don't see in many foreign countries. Congress has tried twice to reform the legal system but failed.

As it stands now, U.S. firms have to compete with, say, British companies. But in Britain, plaintiffs have to bear the cost of frivolous litigation, not the companies. Another is that foreign companies don't want to spend huge sums of money and scarce top-management time on the very rigorous internal controls that the post-Enron, Sarbanes-Oxley law demands.

That distracts attention from doing business and creating shareholder value. Some business groups want a major rethink of financial regulation. And of course it's only natural to want less of it. But we still need regulation that promotes transparency and accountability. The question is how.

And we're finally going to answer that question through the sort of cost-benefit analysis that countries like Britain routinely use to make their markets thrive. After all, mandating regulation without assessing its costs is like ordering from a menu with no prices — the bill might surprise you.

RYSSDAL: Glenn Hubbard is dean of the Graduate School of Business at Columbia University. He used to run the Council of Economic Advisors for President Bush.

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