by Goetz Aly

Metropolitan Books • 2007 • 431 pages • $32.50

Reviewed by Richard M. Ebeling

In Hitler’s Beneficiaries, German historian Goetz Aly “focus[es] on the socialist aspect of National Socialism” so as to better understand “the Nazi regime as a kind of racist-totalitarian welfare state.”

Since the 1930s many historians on the left have tried to portray Nazism as an extreme right-wing system meant to preserve and serve the German capitalist order. The use of the word “socialist” in the full name of the Nazi movement—the National Socialist German Workers Party—has been interpreted as a ruse meant to manipulate and deceive the people of Germany.

Aly emphasizes that the ideology and practice of the Nazi regime were in fact deeply socialist. Within Germany, among the German people of “pure Aryan blood,” the ideal was an egalitarian social order in which every German would be freed from traditional class barriers so that he might have the opportunity to rise to any level of success in serving the fatherland. The welfare-state policies begun by Bismarck in late nineteenth-century imperial Germany were viewed by the Nazis as a prelude to a complete guarantee of a quality standard of living for all “real” Germans that would be paternalistically provided by the National Socialist state.

The problem was that the promises of the welfare state could not be fulfilled within Germany’s 1933 borders. If the German people were to have this material paradise on earth, someone would have to supply the manpower and the resources to provide the means for this massive redistribution of wealth.

Aly points out that before and during World War II, the German “capitalist class” was made to pay its “fair share” for the benefit of the rest of the German people. Taxes were proportionally far higher on the “rich” in Germany than the rest of the population. During the war the government established mandatory overtime pay in all industries and imposed wage increases to keep “the masses” loyal to the regime—all at the expense of German business. At the same time, German industry worked under government-commanded four-year plans from 1936 until the end of the war in 1945.

But it was only after the war started that the machine of redistributive plunder was really set into motion. Every country overrun by the German army not only had to pay the costs of the occupation, but also was systematically looted for the benefit of the German population as a whole.

Aly’s book is remarkable because, rare among histories of the period, it explains how the Germans used inflation to loot the occupied countries. After most of France was occupied in June 1940, German soldiers were issued scrip that by mandate had to be accepted by French businesses. Retailers willingly accepted the scrip because the Nazis also mandated French banks to redeem it in francs; the banks in turn could redeem it for francs it at the Bank of France. The only way for the French central bank to meet this obligation was to print more money. With some variation Germany did this in every country it conquered.

German servicemen stationed in occupied Europe were regularly given scrip bonuses at holiday times so they could buy up virtually anything and ship it to family and friends. Thus along with the soldiers, tens of millions of Germans back home benefited from the inflationary plunder of Europe.

On top of this the German government imposed taxes and surcharges on the governments in the occupied countries—their contribution to Germany’s establishment of the “new order” for the “benefit” of all the people of Europe. In many cases the redistributive tax burden was larger than the nation’s annual prewar budget.

Both within Germany and around the rest of Europe, the great “enemy” that the Nazis were determined to eliminate was the Jews. Before the war the regime had attempted to pressure German Jews to leave the country. After the war began the government was determined to expel all Jews in western and central Europe to “the East.” Finally, the “solution” to the “Jewish problem” was found in the concentration and death camps.

But beginning in 1941 and 1942 the expelling of Jews from Germany and the rest of occupied Europe was accelerated as part of the Nazi welfare state. When Britain began to bomb German cities, first thousands and then tens of thousands of Germans found themselves homeless, with all their belongings destroyed. Municipal governments, with the approval of the Nazi leadership in Berlin, began to confiscate the Jews’ houses and apartments, including the contents, to make room for racially pure Germans needing new places to live.

In every occupied country the Nazis initiated similar confiscatory policies with local accomplices with whom they shared looted Jewish property. (Only in Belgium and Denmark did large segments of the population and the bureaucracy resist participating in this plunder of the Jews.) The Nazis first nationalized Jewish property and then distributed it to those deemed worthy among the German or occupied populations.

Hundreds of trainloads of stolen Jewish property were either given away or sold at discounted prices in German cities, large and small, throughout the war. Aly estimates that because of this looted property and the goods sent back to Germany by soldiers, many, if not most, Germans enjoyed a more comfortable standard of living throughout most of the war than the civilian population in Great Britain.

What also fed a large part of this Nazi plunderland was the invasion of the Soviet Union in June 1941. In the East, Hitler wished to show none of the minimal “niceties” with which the people of western Europe were treated. The vast and rich lands of Russia and Ukraine were to become the economic Promised Land in the Nazi dreams of the future. Under the plan at least 20 million Russian peasants would be worked and starved to death in the countryside after a German victory to make room for a huge German resettlement that would provide the living room for the Aryan race. The cities of Moscow and Leningrad were to be razed, their populations left to die.

Besides the official plundering of the Soviet cities and countryside, there was a vast black market at work in the East that left those under German occupation with almost nothing.

The vast majority of German families continued to feast, even under the allied bombings, thanks to the locust-like seizure of anything and everything across occupied Europe. Aly estimates that during the five-and-a-half years of war, the Nazis plundered $2 trillion worth of property, goods, and wealth from the peoples of Europe—a large sum by any standard, but truly huge considering the much lower levels of output and income in Europe 70 years ago.

Of course, the German people finally paid dearly for their adventure into international welfare redistribution through war. When Germany finally surrendered in May 1945, millions of Germans had been killed in the conflict, all the major cities of the country were in ruins, capital accumulated over decades was destroyed, and Germany was occupied and divided by the victorious Allies for more than half a century. It was high price for pursuing the ideal of National Socialism.

* * *

The Big Ripoff: How Big Business and Big Government Steal Your Money

by Timothy P. Carney

Wiley • 2006 • 241 pages • $24.95

Reviewed by Sheldon Richman

Timothy Carney has written a refreshing book. There is no shortage of books critical of big business, but almost without exception their authors are hostile to free markets. Carney is an avowed fan of free markets and a critic of big business’s collusion with government—collusion that enables businessmen to gain profits they could never obtain under free, open, and unprivileged competition.

The Big Ripoff is a myth smasher. Leftists and rightists alike tend to think that business people favor laissez faire, which is well defined as the political-economic system that lacks any government-sponsored privilege. But it is a rare business person who wants the government out of the picture. Free competition is nerve-wracking. It respects no vested interests or historical market share. As Frank Sinatra sang, “You’re ridin’ high in April, shot down in May.” Those darn consumers are fickle. So business people (including agribusiness people) have lobbied for regulations, licensing, price floors, price ceilings, codes, inspection, tariffs, import quotas, subsidies, loan guarantees, taxes, tax exemptions, eminent domain, and more. It is easy to assume that no big company would want new taxes and regulations, until one realizes that those things burden smaller and yet-to-be-started companies more heavily. Government impositions are de facto subsidies and barriers to entry.

Big companies have had no trouble getting such things from Congress and the various state legislatures—because another myth is that government tends to be hostile to business. In a mercantile society such as the United States, business people are highly influential. Politicians see them as indispensable to economic stability, jobs for constituents, even labor peace, and hence want to keep them happy. Business has always had political clout in America, both nationally and locally. The period usually regarded as the most hostile to business, the Progressive Era, was nothing of the sort, as historian Gabriel Kolko documented in The Triumph of Conservatism. To his credit, Carney appreciates Kolko’s research and helps to dispose of the fairy tale that statism in the early twentieth century was the product of Marxism and other foreign left-wing imports. While “progressive” intellectuals saw opportunities for power and prestige in the rise of American-style corporatism, they were riding the coattails of the Morgans, Rockefellers, Carnegies, and others who turned to the state to tame unruly (read: competitive) markets. (This is not to overlook the relatively few true entrepreneurs described by Burton Folsom in The Myth of the Robber Barons.)

Things haven’t changed much since the Progressive Era. In our time business people are as influential as ever, perhaps more so. And the influence is rarely in the direction of more economic freedom. Carney documents the quest for corporate welfare (which, curiously, gets much less attention from the right wing than that other kind of welfare), regulation, taxes, and environmental—yes, environmental—controls.

Do you want to know why Phillip Morris joined the “war on tobacco,” why General Motors pushed for clean-air legislation, why Boeing supports the Export-Import Bank, why Archer Daniels Midland likes ethanol, and why the Chamber of Commerce often supports higher taxes? Do you think Enron was a creation of the market and supported general deregulation? Read Carney’s book to find out.

The Enron story is valuable because misunderstanding about that company has provided an abundance of ammunition against the deregulation of energy markets. “Most analysts use the term deregulation to describe the setting in which Enron thrived, deceived, and then collapsed. But in nearly every corner of the Enron tale, we can find the fingerprints of big government,” Carney writes. If Enron’s CEO, the late Ken Lay, was what a New York Times reporter called him—“an evangelical believ[er] in free markets”—then Britney Spears is up for Mother of the Year.

Would a free-marketeer have called for a government bailout when his company began to collapse? (Fortunately, Lay didn’t get it.) While running the company, would he have supported export subsidies, energy regulations and price controls that favored Enron’s interests, and the Kyoto Protocol limiting carbon emissions? Obviously not. So why did Lay do it? Because he had no principled objection to using government power—physical force—to advance his company’s fortunes (not to mention his own).

Carney’s reporting clarifies our understanding of political economy. Regulation and taxation are anti-competitive. Incumbent firms don’t like competition, so they like intervention. But competition is good for worker-consumers because their welfare is enhanced by unhampered bidding for their business and services. Thus they constitute the real natural constituency for the free-market movement.

* * *

Income and Wealth

by Alan Reynolds

Greenwood Press • 2006 • 223 pages • $55.00

Reviewed by George C. Leef

Writing in the Wall Street Journal shortly after the 2006 election, Jim Webb, the victorious U.S. Senate candidate in Virginia, argued that the American economy has become a rigid class system. The rich are getting richer while the poor are getting poorer. Top business executives used to earn about 20 times as much as average workers, but now they’re raking in more than 400 times as much, Webb complained. The United States, he said, was “literally a different country” from the one in which he grew up. Webb viewed his election and the Democratic takeover of Congress as proof that people want the government to do something about this horribly unfair situation.

Many other politicians and writers have repeated this economic indictment, which has political “traction” both with the envious poor and the guilt-ridden wealthy. As Alan Reynolds shows in Income and Wealth, however, the indictment should be summarily dismissed since it is based on misleading statistics and tendentious rhetoric. H. L. Mencken once wrote that politics is just about frightening people with “an endless series of hobgoblins” to keep them clamoring for politicians to protect them. After reading Income and Wealth, it’s clear that the campaign to convince Americans that we face disaster unless the government does something about “the income gap” is another of those hobgoblins.

The first point Reynolds, a senior fellow at the Cato Institute, makes is that the current frenzy over inequality has nothing to do with poverty. Back in the 1960s and 1970s, “liberals” worried about the poor and there was a national debate on how best to improve the lives of people at the bottom of the income scale. That changed in the early 1990s. “Starting around 1992,” Reynolds writes, “inequality began to be redefined in such a way that nearly all the attention shifted away from the troubles of the bottom quintile to the high incomes of the increasingly tiny number of people at the top.” (He doesn’t speculate on the reasons for that shift. My surmise is that the leftists knew they had gotten all the mileage they could out of the plight of the really poor—after all, the government had been running all sorts of antipoverty programs for decades without much success—so they decided to fashion a new “issue” out of the enormous wealth of a few.)

Creating this new issue called for resourcefulness to make people think that dark, momentous changes were occurring in the economy. There have always been some super-rich; the trick was to get people up in arms by suggesting that those people were profiting unconscionably at the expense of the disappearing middle class. Reynolds easily refutes that idea. The middle class isn’t disappearing, although quite a few people who used to earn “middle class” incomes now earn significantly more—scarcely a problem.

Furthermore, it’s not true that the earnings of middle-income workers have been “stagnant” since the 1970s. That illusion, Reynolds shows, is based largely on the fact that due to tax-law changes in 1986, increasing amounts of investment income common to middle-class people no longer show up in income-tax data—401(k) and college savings plans, for example. Other changes in tax law tend to have the opposite effect on the reported income of the wealthy. If instead of looking at income-tax data, you look at data on consumption spending, the whole “crisis” vanishes.

Another major component of the “income gap” mania is supposedly excessive compensation paid to business executives. Is it really the case that the average CEO now makes more than 400 times as much as the average worker? No. Reynolds handily demolishes the notion that greedy CEOs are robbing workers (or, more plausibly, stockholders) of money that should be theirs.

What’s really going on here is an elaborate cover for a host of interventionist policies desired by various special-interest groups. “Nobody who uses income distribution figures as an argument for adopting their pet government policies would advocate different policies even if they could be persuaded their statistics are wrong,” Reynolds observes. Those who are against free trade, for example, cite the “shrinking middle class” as an excuse for protectionism. For union advocates, the same myth serves to justify their desire for new pro-union laws.

Not only is there no “income gap” problem, but the remedies offered would be economically harmful. In his concluding chapter, Reynolds makes the case that laissez-faire policies to reduce the size and meddlesomeness of the government will continue the real trend in our economy: the rich get richer and the poor get richer, too. If, however, we adopt the policies of the egalitarians and interest groups, we actually will “improve” the income gap. Everyone would be poorer, but the wealthy would lose proportionally more.

Reynolds has given us an important and timely book, a refutation of the economic equivalent of the global-warming scare.

* * *

The Sarbanes-Oxley Debacle What We’ve Learned; How to Fix It

AEI Press • 2006 • 135 pages •
$25.00 paperback

The Joy of SOX: Why Sarbanes-Oxley and Service-Oriented Architecture May Be the Best Thing That Ever Happened to You

by Hugh Taylor

Wiley • 2006 • 283 pages • $50.00

Reviewed by Barbara Hunter

These two books cannot really be considered two analyses of the Sarbanes-Oxley Act, which was signed into law in 2002 following several high-profile corporate scandals. The first book examines the law, its effects on the conduct of publicly traded businesses, and its failure to accomplish its purported purposes of preventing fraud and restoring investor confidence. The second simply adopts the thesis that Sarbanes-Oxley is a beneficent and effective law and that all that is required is to learn the best methods for compliance.

The Sarbanes-Oxley Debacle raises an issue rarely so much as mentioned in the voluminous literature on this law: the return on investment resulting from time, money, and talent expended on behalf of the law’s many requirements. This is no small matter when considering a law whose annual direct compliance costs on business run into the billions.

The cost figures bandied about in the popular financial press ignore the manner in which the law now influences the minutiae of individual corporate decision-making when the shadow of bureaucratic enforcement hangs over every decision, from internal production methods to mergers and acquisitions. This must inevitably produce a significant opportunity cost that will, to some extent, deter risk-taking in business. Professors Butler and Ribstein make that point very clearly.

Another unique point in this book, and one that has been virtually ignored by other writers, is that no combination of laws and penalties can produce total protection from fraud at every possible level within a company. Thus shareholders may understandably accept the possibility of some level of fraud if, on the one hand, its influence on the company’s bottom line is considered insignificant and, on the other hand, the cost (in time and money) of ferreting out every such conceivable instance is exorbitant.

The book further notes that Sarbanes-Oxley circumvents and in effect nullifies existing state laws that may have been more effective than the new law, and federalizes yet another field that historically has been within the purview of the states.

For such a slim volume, The Sarbanes-Oxley Debacle manages to include a startling number of significant arguments relating to the deleterious effects of this ill-considered law.

A review of The Joy of SOX needs to be tempered by the fact that its author is an officer of one of the ever-growing number of companies dealing in computer programs devoted largely to compliance with the Sarbanes-Oxley Act. In light of this, it may not surprise the reader that Sarbanes-Oxley’s negatives, especially its compliance costs, are never mentioned. Even within this perspective, however, its exuberant embrace of the law occasionally borders on the absurd. The author goes so far as to dismiss those who contend that the costs of the law exceed its benefits as “whiners.”

Taylor assumes that Sarbanes-Oxley places everyone on the same compliance basis and thus is not a problem. Sadly, experience has demonstrated that the cost of compliance is far from equal; in fact, its burden on small companies, as a percent of sales, is far higher than on large companies. Regulation tilts the playing field.

On occasion, the author’s acceptance of the near-axiom that government regulation is beneficial and therefore desirable leads him to use examples that are badly at variance with the truth. In his introduction Taylor writes, “In the last century, American businesses resisted labor organizations and workplace entitlements, only to discover that modern labor practices and diversity programs created long-term loyalty among employees and helped build strong brands.” Many businesses, of course, have found just the opposite—that the effects of dictatorial federal labor regulation have been very harmful—and in any event it does not follow that Sarbanes-Oxley is beneficial just because some other federal laws allegedly are.

The structure of the book is a theoretical discussion by the department heads of an imaginary company that, on the one hand, must comply with Sarbanes-Oxley and, on the other hand, must be able to make quick decisions in order to meet customer needs and competitive pressures. The book’s pervasive themes are two: “agile compliance” and “compliant agility.” It soon becomes evident, however, that compliance comes first and the firm’s well-being comes second, as is the case with every regulatory compliance regime.

Those who expect any insight into the effects of Sarbanes-Oxley will find this volume a disappointment, and those who have read The Sarbanes-Oxley Debacle will laugh at the idea that this law could be “the best thing that ever happened”—unless you’re in the business of selling compliance software.

If any person or any group had set itself the task of creating a law whose purpose was to destroy the American free-enterprise system, it could not have done a better job than what has been produced by the Sarbanes-Oxley Act of 2002. The law is predicated on the principle that all companies are inherently evil and untrustworthy and thus must be governed from above by benevolent bureaucrats with both dictatorial and second-guessing powers.

What brought on this draconian law? In all likelihood, anyone born before 2000 who has been living in anything other than a deep cave is familiar with the name Enron, which is emblematic of corrupt corporate dealing and disastrous losses to employees and stockholders. It is significant, however, that the fraudulent acts of the principals of that company were prosecuted under existing law and within the then-existing rules of the public stock exchanges. It follows that new laws were not in fact necessary either for punishment of the malefactors or for prevention of further criminal acts. What was needed, however, at least from the view of members of Congress, was some evidence of their “doing something”; that is, not a legal solution but a political solution.

What then has Sarbanes-Oxley accomplished? So far, the history of the law has been an endless list of compliance requirements that (with few exceptions) have been of no productive benefit but that have inflicted enormous losses on the affected companies both in dollars and time.

Sarbanes-Oxley imposes such draconian demands that everybody’s money is affected—including yours. The full text of the law essentially turns much of the nation’s corporate governance on its head. Its effect is to place a new government agency—the Public Company Accounting Oversight Board (PCAOB)—in charge of the financial, accounting, reporting, procedural, and security operations of every corporation registered with the Securities and Exchange Commission (SEC). The Board is authorized in effect to look over every corporation’s shoulder, decide whether the firm “complies” with the Board’s own interpretations of law, and even punish the principals (such as the chief operating officer, chief financial officer, and chief information officer) with fines and, incredibly, incarceration for such infractions as failure of sufficient supervision. As noted in a “white paper” (informational document) prepared for a prominent software company, Sarbanes-Oxley “significantly increases penalties . . . with maximum jail terms that now exceed the penalties for crimes such as armed robbery, assault with a deadly weapon and negligent homicide.” Congress can pass laws pretty much at will, with little concern for the associated costs on those who must comply. It should come as no surprise that former government employees are valued, even sought after, by companies forced to deal with the new bureaucracy. For many companies, compliance skills now trump an understanding of corporate goals.

Sarbanes-Oxley empowers the Board with the most authoritarian powers imaginable. It can conduct investigations and disciplinary proceedings at will and can impose fines and otherwise discipline companies and the accounting firms they employ. In effect, it is prosecutor, judge, jury, and executioner. The notorious Section 404 requires that any “process” that could in any way affect financial results be audited and reported and, further, that the chief executive of the company must personally accept responsibility for the accuracy of all reports, under penalty of up to 20 years in prison. Exhaustive procedures required have entailed thousands of hours of work and expenditures in the billions of dollars. Because these requirements affect all publicly traded corporations, large and small, the law has had the perverse result of according large companies an unfair advantage over their smaller rivals, which must devote a larger percentage of their time, money, and human assets to obeying the law.

To add insult to injury, the Board is permitted to make any changes it wishes, which places companies in the position of forever trying to hit a moving target. The changes issued last November, eliminating some of the minutely detailed auditing requisites, were widely hailed as good news. Unfortunately, this does not take into account that both the companies and the auditing firms had already instituted these procedures at enormous cost in money and computer-design talent, and thus would be unlikely to expend even more of the same to undo these efforts. (This is explained further below.)

The law prohibits auditors from providing any other services, such as bookkeeping, financial information-systems design and implementation, appraisal or valuation services, fairness opinions, or other advisory services. The result is that auditors must report whatever may be amiss but are forbidden to advise the company how to correct it and thereby comply.

Also thanks to the new law, audit continuity will be a thing of the past, because an accounting firm can provide audit services for no more than five years. And in a provision that sets up the Board as final arbiter of corporate America, it is authorized to prohibit national securities exchanges and associations from listing any stock from a corporation that fails to meet its audit rules.

According to the Board’s rules, every e-mail and even every instant message must be preserved permanently, giving rise to a whole new industry offering products (both hardware and software) that can store almost inconceivable quantities of data. One effect is likely to be that more communications, especially simple questions or comments, will be made by telephone or in person. The perverse effect is to make information less available.

Field Day for Law Firms

Sarbanes-Oxley has contributed mightily to the demand for lawyers at all levels of government, as well as for legal assistance for the companies themselves. To make things even worse, the stock exchanges (NYSE, ASE, and NASDAQ), at the behest of Sarbanes-Oxley, have mandated that the majority of company directors be “independent”; that is, directors can have no material relation to the firm itself, either directly or indirectly, within the previous five years. It appears the requirement for director independence would exclude anyone who knows anything about the company.

The accounting firms that haven’t already been sued out of existence have more work than they can handle. However, the law is certainly doing corporations, and by implication their shareholders, no favors. The now-overburdened larger accounting firms can cherry-pick the most lucrative clients, leaving the other companies to find whatever they can among the second-string firms.

If Sarbanes-Oxley has been difficult for publicly listed companies, it has been positively sunshiny for consultants and producers of software dealing with sales, financial reporting, and document storage. It is all but impossible for corporations to comply with the various rules, or even to determine whether they have complied, without the purchase of pricey software. Trade publications and websites are replete with advertisements for products to assist in both complying and testing compliance. Consulting services have been raking in abundant revenue based in part on the sheer difficulty of knowing how to meet requirements.

In addition to the quandary faced in locating independent auditors, the hefty filing fees embodied in the new law, similar to the other expenses detailed above, have hit small companies especially hard.

The hope that the law’s requirements would eventually provide payback in more effective company management once the initial measures were put in place has been illusive for most firms. This effort and expense is especially galling to the majority of companies, which have striven throughout their existence to maintain the highest standards of business ethics. For them Sarbanes-Oxley has been an endless series of repetitions of what they already knew and were already doing in principle, if not in precise form.

But the costs are tremendous. According to CNNMoney.com last year: “A recent study conducted by the Securities Industry Association estimated that the cost of compliance has nearly doubled in the past three years to an estimated annual total of more than $25 billion in 2005, up from $13 billion in 2002.” Note that the costs were supposed to go down with time.

The law’s toll on time, talent, and productivity has affected virtually every publicly listed company. It isn’t bad enough that the actual productive activities of companies have been delayed to the detriment of both profitability and competitive advantage. Once they actually get started on the postponed work, the Sarbanes-Oxley hammer is wielded anew. Company projects, especially those involving information technology and other computer-related activity, must now document the same type of internal controls as are mandated for the company as a whole. The effect on project life-cycles in many cases has been little short of disastrous with regard to meeting deadlines, which are the heart of profitability.

Effects of the Data-Retention Rules

The requirements of retaining all data (every change, every correction, every previous version) in unerasable form has created an information behemoth that is not only massively expensive to create and run, but is also far more difficult to search and otherwise use than anything required heretofore. If one multiplies the size of such documentation by the number of companies affected by the law, it becomes evident that no matter how massive a bureaucracy may be created, there is close to zero possibility that any of this will benefit companies, shareholders, or the public.

With Sarbanes-Oxley bureaucrats watching everyone in corporate America, there can be no doubt that companies are practicing defensive management. The chairman of a large software house has commented, “We might have killed the goose that lays the golden egg. . . . You’re mitigating every possible risk that can be conceived. Risk didn’t use to be a bad thing.” This person has suggested that, as a result, the biggest opportunities for private equity companies over the next ten years will be in China and India.

In light of the foregoing, it may seem attractive for publicly listed companies simply to go private, and in fact the rush to do so has become a torrent—almost 200 companies as of mid-2005. However, it may not be either as simple or as helpful as it might seem. There is a significant possibility that even privately held companies may come within the Sarbanes-Oxley sway in the future. While on the surface this may seem remote, it should be borne in mind that all incorporated companies are subject to many state and federal laws, not just publicly listed ones. In this case, the PCAOB has been delegated enormous powers by Congress, and at least so far, most of those powers have not been challenged either for legality or constitutionality.

In 2004 the full force of the law took effect for foreign firms listed on U.S. exchanges, and the result has been an unmitigated disaster. Bearing in mind that other countries, as well as the EU, already have their own requirements, Sarbanes-Oxley has only heaped more burdens on the backs of foreign entities. According to the law, a foreign company listed on a U.S. exchange must meet all the Sarbanes-Oxley requirements if its shareholders include at least 300 Americans (even if they are merely invested indirectly through funds). Thus we see the phenomenon of U.S. law being enforceable on non-U.S. companies. As noted in a French-language paper directed to U.S. readers:

The largest European conglomerates want to leave Wall Street but are having a hard time making this move happen. The French Association of Privatized Industry, a powerful group of corporate heads, has just joined their German, British, Greek, Dutch, Italian, Austrian, Swiss and Polish counterparts in an effort to persuade the Securities and Exchange Commission (SEC), the federal regulatory agency of the American securities market, to liberate them. . . . In other words, these corporations are trapped, held captive by their American shareholders, whose interest is protected above all else. As of 2002, or more specifically, since the Sarbanes-Oxley Law was passed . . ., this law has become increasingly repressive and costly to foreign owned companies.”

It is indeed sad that foreign firms now view the U.S. financial markets, which were once the shining example of freedom and opportunity in the world, as something from which to be “liberate[d],” “allowed to leave,” but are “trapped,” “held captive” by “repressive” U.S. laws. How far we have come! Some foreign firms have already decided to do the obvious: They are buying out U.S. shareholders.

The other effect of the demands on foreign firms (which certainly should have been understood and anticipated) is that their new listings on U.S. exchanges have been reduced almost to zero. As a Wall Street Journal editorial succinctly expressed it: “In 2000, nine out of every 10 dollars raised by foreign companies through new stock offerings were done in the U.S. . . . [L]ast year [2005] not one of the top 10 initial public offerings (IPOs) measured by market capitalization was registered in a U.S. market.”

Is There Hope for Meaningful Change?

What has Sarbanes-Oxley accomplished? The answer is that it is just what would be expected of a law that was thrown together in great haste in order to “do something” about corporate malfeasance. Everyone pays the price, although, as noted, the price is larger for some.

By the usual standards by which the federal bureaucracy is judged, we might be tempted to throw in the towel and live with whatever Sarbanes-Oxley sends our way.

There is, however, one faint ray of light: a legal challenge to the PCAOB from a Washington D.C.-based lobbying group that has joined with a small Nevada-based accounting firm. The basis of the suit is that the Board has government-like powers, such as the ability to levy fines, but little oversight by the government and thus is a violation of the Constitution’s separation-of-powers clause.

It is also possible (though not likely) that the powers that be in Congress will realize that Sarbanes-Oxley has been one giant mistake brought about by misguided notions of where such qualities as honesty and ethics come from and will revisit the law and its reason for existing. It makes sense, but don’t hold your breath.

The full extent of the destructiveness of this law may not be known for years. However, there is no denying that the bloom of creative possibilities has been replaced by the blight of endless fears of compliance violations. Will the Law of Unintended Consequences eventually be recognized and the effects ameliorated? Only time will tell.