The Comeback (20 page)

In an earlier chapter, I noted the destructive impact of the 2002 Sarbanes-Oxley Act, which regulates financial reporting by public companies and is inhibiting entrepreneurs from raising growth financing and eventually going public. It is worth another mention because a 2009 study from the National Venture Capital Association calculated that 92 percent of all job growth generated by U.S. public firms occurs after a company goes public. Inhibiting entrepreneurial companies from going public is simply another example of foolish regulation that destroys economic growth and job creation.

Destructive class-action lawsuits.
Class-action litigation is the lifeblood of a group of lawyers commonly called trial lawyers (also known as the tort bar and plaintiffs’ bar). To describe their pernicious impact, I’ll merely quote the findings of a 2005 study by the Cato Institute:

Since 1930, litigation costs have grown four times faster than the overall economy. Federal class actions tripled over the past ten years. Class actions in state courts ballooned by more than 1,000 percent. The U.S. Chamber of Commerce estimates that the annual cost of the tort system translates into $809 per person—the equivalent of a 5 percent tax on wages. The trial lawyers’ share—roughly $40 billion in 2002—was half again larger than the annual revenues of Microsoft or Intel. In 2002 the estimated aggregate cost of the tort system was $233 billion,
according to the actuarial firm Tillinghast-Towers Perrin. That cost represented 2.23 percent of our gross domestic product. Over the next ten years the total “tort tax” will likely be $3.6 trillion.
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No fair-minded person disputes holding businesses responsible for actions that injure others, but the trial lawyers have turned our legal system into a massive and expensive farce. I personally have watched companies in California sued because they advertise screen-size in TV sets a few millimeters too large, and I have been appalled at lawsuits aimed at companies whose products merely have an expired patent number as part of their packaging. I have been disgusted by scores of class-action lawsuits where lawyers make money and class holders only get pennies. I have seen hundreds of cases where soulless plaintiffs’ lawyers file spurious complaints simply to extort a settlement.

As a side note, there seems to be a growing corrupt confluence of regulation and class-action suits. Case in point is the Financial Accounting Standards Board (FASB), whose mission is to promulgate federal accounting standards. This seems straightforward and unobjectionable. However, the FASB is currently considering mandating that companies account for the
potential
cost of ongoing litigation. As revealed by
The Wall Street Journal
, “supporters insist this is merely about disclosure, but the proposal would hurt investors by offering roadmaps for new litigation and bigger settlements . . . [by forcing] companies to divulge snapshot details of ongoing litigation that put investors at greater risk of loss.”
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My major suggestions for dealing with these problems are as follows:

Lower or eliminate corporate tax rates.
As noted above, corporations are pass-through entities to owners and customers. If we drastically lower—or better yet, eliminate—the corporate tax, the government will still collect its tax revenues from taxes on investors, but we will alleviate one of the causes of our corporations being whipping boys of those who are ill-informed or deceitful.

Allow international revenue to be repatriated to the United States.
The U.S. is the only country that taxes revenue from abroad—even though it is also taxed by other countries. So corporations respond by keeping billions in cash and not returning it to the United States. Allowing such revenue to return here at a reduced tax rate would stimulate the economy and add to government revenue. This no-brainer is challenged by Democrats as a corporate tax giveaway.

Require every law passed by Congress to be analyzed for its cost-benefit impact on business operations and the nation’s economic growth.
This should be fairly straightforward. And if this requirement slows down Congress’s legislative process, that’s probably a side benefit.

Establish implementation timetables for legislation that impacts business.
As I noted in a previous chapter, uncertainty in taxes, regulation, and other government initiatives is a huge impediment to business investment, economic growth, and job creation. One solution might be to impose extended periods for legislation and regulation to take effect, with a
multi-year timetable for major changes and no less than a one-year timetable for minor changes. This would alleviate at least some of the uncertainly about legislation and would facilitate businesses investment decision-making.

Change our legal system to “loser pays.”
Anyone is free to file suit against an individual or institution, but if the suit is without merit, the plaintiff pays no penalty aside from his own legal costs, regardless of how meritless the suit was or how much time and expense the defendant incurred. Instead, simple fairness should require that any plaintiff who loses his case must also pay for at least the defendant’s legal costs. That is the system in England, where it demonstrably curbs spurious lawsuits, and it is desperately needed here. It likely would also have the additional benefit of curbing the practice of lawyers taking on clients on a contingency fee basis, wherein they bet a company will settle rather than suffer the enormous cost and time to defend a lawsuit. As a companion measure, we should consider capping the amount of contingency fees paid, both in total and as to the share that goes to the plaintiff’s lawyer.

Change the standards of liability from automatic damages to actual demonstrable harm.
The Recording Industry Association of America (RIAA) lawyers sued 30,000 Americans because the RIAA got laws passed that allowed downloading kids to be sued even without harm to the RIAA or its members being proven. Similarly, one newsletter publisher makes more money off lawsuits than subscriptions because it embeds Web crawling software, waits for years, and then claims millions of dollars in statutory damages by claiming that each day a copy is made is a technical violation. Our
laws now occupy tens of thousands of pages, and lawyers scour them for technical violations and then sue. Real harm has become irrelevant.

Enact a moratorium on all new regulations for the next three years, with an exception for national security and public safety.
I am honored to adopt this suggestion from George Schultz (former economist; business school dean; Secretary of Labor, Treasury, and State; and senior business executive), who, along with other accomplished scholars, recently advocated this and other measures to deal with our current economic crisis. They said;

Going forward, regulations should be transparent and simple, pass rigorous cost-benefit tests, and rely to a maximum extent on market-based incentives instead of command and control. Direct and indirect cost estimates of regulations and subsidies should be published before new regulations are put into law.
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My further suggestion is to start eliminating existing regulations that don’t meet the same standards.

Neither our Founding Fathers nor Winston Churchill would recognize what we have allowed to happen to degrade our free enterprise system, costing us untold trillions of dollars in direct and foregone economic growth. The time for radical restoration is upon us.

A few years ago I was asked to give a keynote address at a Paris business conference. My topic was on what French companies must do to be competitive. I spoke about taking risks, enabling free trade, building markets, and overall economic development. Without being arrogant, I acknowledged that the rest of the world admires and envies innovative technology in American companies. The United States, after all, is the platinum standard.

Immediately following my remarks, the French Minister of Education spoke and evaluated many of my comments. He said that France wants so much to be like the United States that they will soon require all graduating high school students to learn English and to have basic computing skills. I must admit, I was thrilled to hear this. After such strained Franco-American relations, it was a nice change of pace to hear a foreigner speak so approvingly of my country and its business practices.

However, my delight turned to horror as the next French government official spoke. This was the Subminister of the Numerique
(Internet). She made it clear that the strategy in France and through the European Union would be to use antitrust laws to sue companies with “closed” systems. You didn’t have to be a rocket scientist to know she was talking about Apple, Intel, Google, and others. In other words, she was explaining how to use government to undercut America’s competitive advantage.

It was an eye-opening moment for me. While I understand other countries’ envy, and naturally their inclination to do whatever they can to get a leg up on the United States, I started to wonder how our own government was going to counter such measures. But that’s just it. The French really don’t need to do a thing because the U.S. government not only refuses to defend but, rather, often leads the attack on our crown-jewel companies.

Our government, primarily through political appointees seeking to make their mark without concern for consequence, uses ambiguous antitrust standards to investigate and often sue our most innovative companies. These investigations and lawsuits spur other countries to challenge, sue, and shake down America’s top companies. If the U.S. government leads the charge, how can we possibly object to other countries following suit?

I first noticed this disturbing trend with Microsoft in the 1990s. Bill Gates’s empire had “monopoly” power, so the theory went. Yet Microsoft was a homegrown American success story, which not only created thousands of American millionaires and employed tens of thousands of Americans, but also fundamentally changed how we create, write, edit, present, and share information in our daily lives. Microsoft is an American institution. It improved our productivity and changed the world. More, it became one of our leading and
biggest companies almost overnight. Created by societal geeks, as a scrappy innovative company, Microsoft’s successful domination parallels the story of the birth and success of our nation.

But success breeds enemies, especially in a democracy like ours. The higher you climb, the more your enemies want to tear you down. It wasn’t long before our own government began a relentless attack on Microsoft, spurred, ironically enough, by other countries. The envy Microsoft engendered allowed the politicians to pounce, without concern for all the jobs and wealth Gates’s creation had given America.

But leaving aside political advantage, what these attacks meant was cost and a shift of resources for Microsoft. None of the suits ever amounted to anything significant. But tens of millions of dollars and thousands of hours of executive time were spent. Also, Apple, Google, and others succeeded in competing against Microsoft. It’s not that Microsoft lost its competitive advantage; it’s that the government did so much to distract it and thus help its out-of the box-thinking competitors.

Of course the cycle continues, and what goes around comes around. In the last few years, Apple, Amazon, Google, eBay, and Facebook have all been accused of becoming too powerful. Intel and Qualcomm have been threatened by our government. In Intel’s case, the Federal Trade Commission actually demanded that every future product of Intel’s be licensed to anyone who wants it.

In the great American novel
Atlas Shrugged,
Libertarian author Ayn Rand fantasized that the country’s innovators decide to stop creating in response to our government’s determination to punish success. I know firsthand that many of our nation’s CEOs are perplexed about our government’s irrational desire to punish, demonize, and tax their success. In the real world of business, this surely encourages them to relocate their people, facilities, and perhaps even their headquarters.

As a matter of policy, our government must protect and advocate for leading U.S. companies. This does not mean defending egregious conduct; it means giving American companies the benefit of the doubt. It also means thoughtful policies on taxes, unions, litigation, and resolution to encourage investment, innovation, and jobs.

Innovation requires that potential entrepreneurs trust that government will not punish them for success. A political attack on our best companies should be met with national condemnation. Furthermore, innovation requires a tax system that rewards investment, start-ups, and risk. Taxes should be stable and not subject to changing political winds. Instability in taxation (or in government) causes uncertainty, and uncertainty discourages investment. Innovation requires a certain level of confidence in government.

Innovation does not require that government determine or decide where innovation occurs. It can’t, and when it tries, it usually fails, notable exceptions notwithstanding. Our atomic development during World War II and President Kennedy’s moon shot were rare cases where government was on the forefront of innovation. But, lest we forget, both occurred during times of great national security challenges: winning a war and defeating the Soviets. We can’t depend on national crises to advance innovation. I would hope that the evidence I’ve presented in this book proves that innovation occurs
despite
government action.

Moreover, innovation does not require massive government spending on entrepreneurs. Innovation does not actually even require a healthy economy. In fact, recession economies often force innovation in companies and by under-employed people or people out of work. Microsoft began in the terrible economy of the late 1970s. For all that the dot-com bubble burst the expectation of instant success, most of today’s top Internet companies were created in that time. Sometimes when a company’s survival is at risk or a person is unemployed, there is a special focus on doing
things differently and undertaking risk. In short, risk is more likely to occur if there is less to lose and more to gain.