Pork for the Vaterland

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					                                                                           IN REVIEW

     Pork for the Vaterland                                                                                             Since then, its budget has grown rapidly,
                                                                                                                        reaching $40 billion in fiscal year 2005.
     Reviewed by George C. Leef                                                                                         CORNUCOPIA OF PORK           Is that money
                                                                                                                        well spent? Is it going into programs and
                                                                       see who can gain the greatest political          equipment that are necessary to prevent
     HOMELAND SECURITY SCAMS                                           advantage from the supposed promo-               terrorist attacks or deal with them if they
     by James T. Bennett                                               tion of “security.” Bennett finds it all to be   should occur? Bennett leaves no doubt
     218 pages; Piscataway, N.J.:                                      stupendous folly.                                that the answer is in the negative. Much
     Transaction Publishers, 2006                                          The first part of the book is devoted to     of the dhs spending is pure pork. Politi-
                                                                       the creation of the Department of Home-          cians immediately realized that the

                  oliticians are known for their                       land Security (dhs) and the outlandish           mushrooming dhs budget was a cor-
                  proclivity to overreact. They                        pork barrel spending that is taking place        nucopia and soon projects having only
                  often react excessively to                           under its control. Bennett begins with a         the most tenuous connection with ter-
                  imaginary or highly doubtful                         long-forgotten fact — that a                                   rorism defense were show-
                  problems (think of the Alar                          proposal from the biparti-                                     ered in federal money.
     scare, for example) and, when faced with                          san Commission on Nation-                                      Unsurprisingly, there have
     an unquestionably real problem of great                           al Security/21st Century for                                   even been conferences
     importance, their overreaction is usu-                            the establishment of an                                        devoted to the art of
     ally of gargantuan proportions. In Home-                          agency to protect against                                      wheedling funds from the
     land Security Scams, George Mason Uni-                            terrorism had been made                                        generous folks in Washing-
     versity economics professor James T.                              months prior to the 9/11                                       ton for just about anything
     Bennett argues that the latter is the case                        attacks, but had gained no                                     that might be called a
     in the United States’ efforts to guard                            political traction. Following                                  “homeland security need.”
     against terrorism.                                                9/11, Congress rushed fran-                                        Here are just a few of the
         In the wake of the September 11, 2001,                        tically to do something to                                     ways our tax dollars have
     terrorist attacks, the stream of statutes,                        make Americans think that the politicians        been spent under the homeland security
     regulations, and spending that has issued                         were leaving no stone unturned in the            rubric:
     from Washington, D.C., has been prodi-                            effort to protect the country. Although
     gious and expensive. That response has                            President Bush was not initially in favor of     ■   The Village of Little Chute, in rural
     significantly undermined our constitu-                            the legislation to establish a new cabinet-          Wisconsin, received $38,000 to
     tional liberties, yet has done little or noth-                    level department (he believed the Office of          purchase new air tanks for its fire
     ing to make Americans safer from future                           Homeland Security that he had estab-                 department. The department prob-
     terrorist attacks.                                                lished was adequate), he readily acqui-              ably has use for the tanks, but the
         While our elected officials constant-                         esced to the political imperative of max-            spending is hardly a response to
     ly reassure us that they are doing a mag-                         imum visible action. Bennett writes:                 terrorism risk.
     nificent job of protecting our “home-
                                                                                                                        ■   Just down the road from Little
     land” (a term that our author finds                                  There was no political downside
                                                                                                                            Chute is the town of Combined
     bothersome, since Americans never                                    to the creation of a Department of
                                                                                                                            Locks, which used homeland secu-
     before used such terminology, unlike the                             Homeland Security. The limited-
                                                                                                                            rity funding to install bulletproof
     Germans who refer to the Vaterland), the                             government Republicans, to the
                                                                                                                            glass in its police headquarters.
     truth, Bennett writes, is that “homeland                             extent that any such grouping
                                                                                                                            There has not been much shooting
     security is developing into the largest                              exists anymore, had largely lost
                                                                                                                            in Combined Locks, much less any
     boondoggle in the history of the U.S.                                their voice after 9/11. So President
                                                                                                                            terrorism, but I suppose the all-
     government.” Politicians, of course, bear                            Bush proposed his own dhs —
                                                                                                                            purpose political justification
     no cost for being extravagant with tax-                              which promptly came under
                                                                                                                            applies — “better safe than sorry.”
     payer dollars and the most feared attack                             attack by Democrats for being too
     from political challengers is that the                               small and niggardly!                          ■   Bennington, N.H., is probably not
     incumbent “did not do enough.” Thus,                                                                                   considered a high-value target by
     we have gotten into a bidding war                                    So the spending war was on. Bennett               Islamo-fascists. Yet it received a
     between Republicans and Democrats to                              covers the sprawling domain of dhs,                  2003 homeland security grant of
     George C. Leef is director of the John W. Pope Center for High-
                                                                       which as of March 1, 2003, had 180,000               $6,500 to buy chemical weapons
     er Education Policy and book review editor of The Freeman.        employees and a budget of $31.2 billion              suits for its “first responders.” You
     He may be contacted by e-mail at georgeleef@aol.com.              — the third largest cabinet department.              never know — those suits might

44   R EG U L AT IO N F A L L 2 0 0 6
    come in handy some day.                   objection. In the latter part of the book,         seldom later regained. The power of the
                                              he argues that Americans’ civil liberties          government ratchets up, but hardly ever
■   Colchester, Vt., received $58,000 to
                                              have taken as much of a hit as our wallets.        ratchets back down.
    purchase a search-and-rescue vehi-
                                                 For example, dhs’s Office of Intelli-              H.L. Mencken once wrote that the
    cle capable of boring through con-
                                              gence is busy compiling a prodigious               aim of practical politics is to keep peo-
    crete to find victims buried in col-
                                              database of information on every                   ple clamoring for government protec-
    lapsed buildings. Of course, it is
                                              American citizen. This project, origi-             tion from “an endless series of hobgob-
    extremely unlikely that the vehicle
                                              nally called Total Information Aware-              lins.” The prospect of terrorism has been
    will ever be used, but as long as
                                              ness, continues despite the fact that              cleverly used by politicians to make
    there is some chance that it might
                                              Congress officially terminated it in               Americans believe that the politicians
    be useful, that is enough.
                                              2003. Research is ongoing on “methods              are diligently guarding us — and they
■   The Steamship Authority of                by which the police and military can               should therefore remain in office. It has
    Massachusetts, which runs ferries         identify persons by their walk, their              also been used by those who feed at the
    that shuttle tourists from the main-      talk, their irises, their facial features, and     public trough to fatten up. Bennett’s
    land to Martha’s Vineyard and             even, incredibly, their usual smell,” Ben-         book shows us exactly how politics
    back, received $900,000 from dhs          nett writes. Will that make us any safer           works these days, and that is what
    to upgrade security. The harbor-          from terrorism? The likelihood is infin-           should truly frighten us.
    master told a local newspaper             itesimally small. Will the information                And there is no relief in sight. The
    reporter, “Quite honestly, I don’t        ever be used for purposes having noth-             book does not end with one of those
    know what we’re going to do, but          ing to do with security from terrorists?           optimistic “Here’s what we can do!” chap-
    you don’t turn down grant money.”         Informational firewalls have often been            ters, apparently because the author
                                              breached in Washington.                            believes that America is so thoroughly
■ Homeland security pork sometimes
                                                 Then there is the USA-Patriot Act, a            politicized that we should accept the
    doubles as corporate welfare.
                                              huge piece of legislation that scarcely any        bungling of any big issue as inevitable.
    Several of the nation’s largest oil
                                              member of Congress had completely
    companies have received dhs
                                              read, much less thoroughly analyzed,               A FEW ERRORS Homeland Security Scams
    money for fencing, cameras, and
                                              prior to voting on it. (The lopsided votes         is not without flaws. For one, there is so
    gates around their refineries. Why
                                              of 356 to 66 in the House and 98 to 1 in           much frothy writing that it gets some-
    should firms like Citgo and Shell
                                              the Senate are a testament to the frantic          what tiresome. For example, mention-
    pay for their own security needs if
                                              political atmosphere in the fall of 2001.)         ing how John Kerry constantly used fire-
    the government will?
                                              Bennett quotes Sen. Russ Feingold’s lone           fighters as props during his 2004
■   Former Washington, D.C., mayor            dissenting voice:                                  campaign (he had pledged to support
    Sharon Pratt managed to obtain a                                                             legislation desired by the International
    contract for “bioterrorism consult-          If we lived in a country that                   Association of Fire Fighters that would
    ing” worth $236,000. Her qualifica-          allowed the police to search your               benefit the union by dragooning non-
    tions in this field? “It requires some-      home at any time for any reason; if             union firefighters into its ranks), Bennett
    one who appreciates how to pull              we lived in a country that allowed              writes, “A Bic couldn’t be flicked within
    the players together,” she explains.         the government to open your                     a mile of the Kerry campaign before
                                                 mail, eavesdrop on your phone                   whole departments of fire fighters
■   Among other howlers, $100,000
                                                 conversations, or intercept your e-             aimed their hoses at the little flame.”
    was spent on a group of 40 young
                                                 mail communications; if we lived                There is just too much of that sort of
    people in a summer employment
                                                 in a country that allowed the gov-              thing, detracting from the seriousness of
    program. Their connection to
                                                 ernment to hold people in jail                  the book.
    homeland security was that they
                                                 indefinitely based on what they                     There are also some errors that a more
    wrote and performed a dance and
                                                 write or think, or based on mere                careful editing job would have corrected,
    rap number about emergency pre-
                                                 suspicion that they are up to no                like referring to “Fort Dietrick, Maryland”
                                                 good, then the government would                 (it’s “Detrick”) and spelling the same per-
    To make matters worse, homeland              no doubt discover and arrest more               son’s name two different ways on the
security grants seem to be following the         terrorists. But that probably                   same page.
usual political course: they are becoming        would not be a country in which                     A few mistakes in a book hurried
annual entitlements. As for accountabili-        we would want to live.                          into print will not do any harm, how-
ty, the General Accounting Office has                                                            ever. The enormous political mistakes
found “a history of poor systems and inad-       Bennett briefly discusses each crucial          involved in the mania for “homeland
equate financial management” in dhs.          section of this law and then observes that,        security,” will. Bennett deserves con-
                                              as historian Robert Higgs has shown to             gratulations for a book that exposes the
CRISIS AND LIBERTY Foolish expendi-           be the case in previous emergencies, lib-          high price we are paying for allowing
tures, however, are not Bennett’s only        erties that are lost to “crisis” legislation are   the political process to run wild.       R

                                                                                                                     R EG U L AT IO N F A L L 2 0 0 6   45
                                                                                     IN REVIEW

                                                                                                                     traditionally been left to the states. Some
     A Wonderful Opportunity                                                                                         of the law’s main features are as follows:
                                                                                                                         First, the law requires increased inter-
     Reviewed by George C. Leef                                                                                      nal monitoring by business executives to
                                                                                                                     prevent fraud by corporate employees.
                                                                                                                     The key provisions here are that the
                                                                       restore confidence in the market, the         board’s audit committee must consist
     THE SARBANES-OXLEY DEBACLE                                        politicians went wild. Even though very       only of independent members, and that
     By Henry N. Butler and Larry E. Ribstein                          few people were actually affected by          top executives must certify the accuracy
     135 pages; Washington, D.C.: American                             those business failures, the climate of       of statements and reports, with criminal
     Enterprise Institute, 2006                                        opinion dictated that a law be passed and     penalties looming over those who certi-
                                                                       most politicians were only too happy to       fy documents later found to be false.

               judge high school debates.                              oblige. In the great theater                                   Second, sox attempts to
               Those debates often go some-                            of Washington, Enron’s col-                                guarantee that professionals
               thing like this: The affirma-                           lapse was a wonderful                                      who oversee corporate trans-
               tive side presents a case for                           opportunity to grab media                                  actions will do so more dili-
               changing the status quo that is                         attention with bills, and                                  gently. Key provisions include
     based on weak evidence, emotional                                 speeches, and press releas-                                attorney reporting of evi-
     appeals, and faulty logic. The negative                           es, and hearings showing                                   dence of fraud and the cre-
     side then demolishes the affirmative                              the senator or representa-                                 ation of a new governmental
     case by demonstrating that the alleged                            tive at his most concerned.                                watchdog, the Public Compa-
     problem is not nearly as awful as                                    It is easy to understand                                ny Accountability Oversight
     claimed, that the status quo can deal                             why Democrats would                                        Board.
     with it, and that the affirmative’s plan                          jump on the issue of cor-                                      Third, sox mandates more
     for improving matters will actually                               porate fraud, but Republicans were also       disclosure of information pertaining to a
     make them much worse. Barring some                                eager. An important reason why, Butler        firm’s internal controls, pro forma earn-
     stupendous blunder later on, the neg-                             and Ribstein point out, was that in July      ings, and off–balance sheet transactions.
     ative side wins easily.                                           2002, a story emerged in the press about          Fourth, sox attempts to control
        I was reminded of that while reading                           President Bush’s failure to file appropri-    insider misconduct by forbidding com-
     The Sarbanes-Oxley Debacle by professors                          ate notice about a sale of stock in a com-    pany loans to executives and requiring
     Henry Butler and Larry Ribstein. The                              pany of which he was a director back in       the return of incentive-based compen-
     weak affirmative team was played by                               1990. Shortly thereafter, “looking like he    sation in the event that earnings are
     the politicians and “reformers” who                               had been caught with his hand in a            later restated.
     pushed through the Sarbanes-Oxley                                 cookie jar,” the president announced his
     Act in 2002 as a response to the highly                           support for a set of corporate gover-         DIVERSION AND DISTORTION            All of
     publicized collapses of Enron and                                 nance reforms.                                that was done to the chant, “We must
     WorldCom. Unfortunately, in the polit-                               The press was already in a feeding         stop fraud!” Butler and Ribstein cor-
     ical environment of that time, there was                          frenzy over a string of business corrup-      rectly observe, however, that the opti-
     no negative team. The hasty, far-reach-                           tion cases and President Bush’s trouble       mal amount of fraud in business is not
     ing regulatory changes in sox (as the                             created the perfect storm in Washington.      zero. Trying to stamp out every possi-
     authors refer to it) were enacted into                            The legislation moving in the House and       ble instance of fraud would cost more
     law without much opposition or even                               Senate became almost impossible to            than the losses from fraud, and there-
     discussion.                                                       oppose and the chairmen of the com-           fore it is not what shareholders would
        This book is Butler and Ribstein’s neg-                        mittees holding hearings stacked the pro-     want. The core of their argument
     ative case against sox, and they do exact-                        ceedings with witnesses who favored           against sox is that whatever marginal
     ly what an adept negative team does.                              additional regulation. Opponents could        benefit it might have in ferreting out
     They tear the affirmative side to shreds.                         only land a few op-ed pieces.                 and preventing future business fiascos
                                                                          On July 25, 2002, sox passed the           is dwarfed by its costs.
     WONDERFUL OPPORTUNITY          After the                          House by 422 to 3 and the Senate 99 to 0.         To use an overworked phrase that is
     implosion of Enron, Washington was                                The authors call it a case of “Sudden         truly applicable here, the “bottom line”
     gripped in what the authors call a regu-                          Acute Regulatory Syndrome.” That syn-         assessment of sox by Butler and Rib-
     latory panic. With headlines blaring and                          drome often grips politicians after some      stein is that it “has diverted attention
     pundits opining that Congress had to do                           market panic — the 1929 stock market          from the hard work of maximizing
     something to prevent business fraud and                           crash being a good example.                   shareholder value and distorted execu-
     George C. Leef is director of the John W. Pope Center for High-
                                                                          What Congress did in sox was to sub-       tives’ incentives and investment deci-
     er Education Policy and book review editor of The Freeman.        stantially increase federal control of cor-   sions.” For an estimate on its cost in lost
     He may be contacted by e-mail at georgeleef@aol.com.              porate governance, something that had         market value, they point to a study by

46   R EG U L AT IO N F A L L 2 0 0 6
Professor Ivy Zhang that puts the total lead to a great deal of ruinous litigation Constitution’s appointments clause. If
at $1.4 trillion. Political frenzy leads to the next time there is a major market the courts agree, the whole law would
prodigious mistakes.                          downturn. Prosecutors and private liti- fall because it lacks a severability clause.
    So just what is wrong with the full- gators will have strong incentives to Therefore, it is possible that Congress
court press that sox demands against search for managerial failures to spot may have to return to this issue.
the possibility of corporate fraud? But- opportunities for fraud, which will then          If that were to happen, the authors
ler and Ribstein count the ways. There be blamed for the fall in share price. would recommend that the whole statute
are explicit costs of having to produce Such litigation will not protect share- be junked. They do not think that is like-
more reports and implicit costs of com- holders, but it will further divert ly, though, and advocate that if sox is to
pelling management to focus far more resources from productive uses into be amended, the most important provi-
attention on regulatory compliance. In legal bills. It is an ideal breeding ground sions to change would be:
the face of the law’s vague new standard for litigation blackmail.
of “significance” (the old sec standard          Butler and Ribstein offer this overall ■ Defuse the litigation bomb by
of “materiality” was at least fairly well assessment: “These changes are more             making violations not subject to
understood), managers are apt to adopt likely to deter honest people from engag-          private suits.
an attitude of caution. The authors ing in risky but productive businesses
                                                                                        ■ Exempt smaller corporations and
write, with reference to the internal than they are to prevent dishonest people
                                                                                          foreign firms.
controls mandated by Section 404, that from circumventing the law.”
“sox clearly penalizes change and inno-          They also point out the irony that it ■ Eliminate the criminal penalties.
vation. Any upgrades, new software, or was earlier federal meddling that
                                                                                        ■ Scale back the liability threshold
acquisitions would have to be evaluat- removed the strongest impediment to
                                                                                          for internal controls reports to a
ed as ‘significant changes in internal managerial misconduct, namely the
                                                                                          reasonable business judgment
controls or in other factors that could prospect of a hostile takeover. The
                                                                                          standard that would be assessed at
significantly affect internal
                                                                                                   the time of the report, not
controls.’ The safer course,
when in doubt, is to do noth-        Many businessmen might prefer to have in light of subsequent  events.
ing.” The problem of induced
timidity is greatly exacerbat-              a federal nanny who tells them                            If Congress does not kill
ed by the fact that the law                                                                        sox or at least whittle it down
imposes severe criminal                     what they should do instead of                         substantially, Butler and Rib-
penalties for violations.                                                                          stein fear that the next round
    The high cost of compli-
                                       living in a world of dangerous liability                    of regulatory panic will have
ance will not fall equally on           if their own decisions turn out badly.                     Congress looking at more dra-
all firms. Smaller companies                                                                       conian ways of trying to
will bear a disproportionate-                                                                      restore (or, to be more accu-
ly high cost compared to large ones. Williams Act, with its strong deterrents rate, giving the public appearance of
Butler and Ribstein argue that sox is to takeover bids, weakened the market for restoring) investor confidence. They cite
therefore an impediment to entrepre- corporate control. When managers do a recent paper in which the author sug-
neurial ventures — at least public ones not have to worry that their sloppy or gests that the government might have
formed in the United States. There is self-serving actions will depress the stock “monitors” from the sec embedded with
already strong evidence that firms are and therefore invite the attention of firms to oversee management.
avoiding sox by going private (not pub- “raiders,” they are more likely to forget          Would American business not resist
licly traded) or “going dark” (firms with that their obligation is to run the business that, tooth and nail? Not necessarily. Many
fewer than 300 shareholders). Also, ini- for the shareholders.                          businessmen might prefer to have a federal
tial purchase offerings that used to be so                                              nanny who tells them what they should do
common in the United States are now REFORM Congress very rarely revisits its instead of living in a world of dangerous
being done much more often in London regulatory blunders, except to com- liability if their own decisions turn out
or other financial centers. sox is there- pound them. The defenders of sox seem badly. That is a frightful prospect.
fore driving small and startup firms to be impervious to evidence of its                   The Sarbanes-Oxley Debacle is clearly
away from the benefit of the U.S. capi- harmful results, but there is one reason written and argued, leaving no doubt that
tal market.                                   for hope in this instance. In February the enactment of sox was a terrible blun-
    Besides the high explicit and implic- 2006, a lawsuit was filed by the Free der. If Congress ever does get around to
it costs imposed by the law, it also con- Enterprise Fund. The essence of the suit revisiting its handiwork, Americans who
tains a “litigation time bomb.” The is that by having the members of the care about the vitality of our markets
authors contend that the new causes of Public Company Accounting Oversight should get copies of the book, read it, and
action created by sox for shareholders Board appointed by the Securities and then insist that their political representa-
who have suffered a loss of value will Exchange Commission, sox violates the tives do the same.                                  R

                                                                                                            R EG U L AT IO N F A L L 2 0 0 6   47

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