Friday, July 12, 2002
Well, another horrible week in the market is over. And on that note, I would like to register a vote of support for much of what Senator John McCain called for in his speech on corporate governance.
President Bush continues to confound my expectations. During the campaign, I was impressed with his proposals for domestic policy, particularly on Social Security and secondarily on education. He seemed genuinely committed to free trade, entitlement reform, tort reform, and education reform. I wasn't crazy about the tax cut, but I appreciated that the main focus was on marginal rate cuts rather than social engineering. What I worried about was his inexperience and ignorance in foreign affairs. I agreed with his positions, but I felt his character hadn't been tested.
Well, like I said, my expectations have been confounded. Bush has been, while not perfect in foreign affairs, generally quite strong. I'm still withholding judgement until we deal militarily with Iraq (and Lebanon), and until we come up with a strategy for dealing with Iran and Saudi Arabia. But so far, strong marks. On domestic policy, Bush has been a mess. Social Security reform is not being discussed. Ditto tort reform. The tax cut was comprehensively hijacked by special interests. The education bill was handed to Ted Kennedy for a re-write. And trade! Oy! Bush has been absolutely awful on trade, setting back years of hard work and shocking those of us who thought that this was one issue that Republicans could be trusted on. About the only way in which Bush has matched my expectation is on the "social" issues: as I expected, he's been basically moderate.
What's most disappointing is the degree to which Bush has turned into a pro-management President instead of a pro-market President. This is always a risk with Republicans, but I expected better. Now, with corporate scandal running rampant, it is really critical that Bush get out in front and take real steps to eliminate the rampant conflict of interest plaguing our markets. But he's flubbing it, deliberately, focusing on criminal-law rather than structural problems. This is bad for two reasons: if Bush succeeds, the problems will not be solved; and if he fails, the Democrats will enact regulations that aggrandize power for the government rather than regulations that improve the functioning of markets.
McCain has a 12-plank plan for corporate reform. I think his effort to have stock options expensed is particularly worth promoting, since it's a technical issue that will otherwise get little attention. (I've blogged about this before here.) One thing he has not advocated is the sensible market-oriented solution to the problem of conflict-of-interest in audits proposed in The Wall Street Journal here. To whit: the purchase of financial-statement insurance by public corporations should be mandated. If the corporation gets sued for their accounting, the insurance will pay out any settlement or penalty. This would give the insurance company a strong incentive to hire its own auditors to examine the books, and those auditors will have every reason to be conservative, not aggressive, in accounting matters. And require the disclosure of the cost of insurance in financial statements. Then investors could see, by the cost of insurance and the deductible, who is being more aggressive in accounting (or who is doing business in a murkier area of accounting) and who is being more conservative (or operating in better-establishing areas).
The likely alternatives to such reforms are either (a) more shareholder lawsuits and restrictions on stock ownership (the Democrats' favored solution) or (b) a one-time orgy of prosecutions and changes to specific accounting rules (the Republicans' favored solution). Neither is likely to improve market confidence because neither will solve the underlying problems of conflict of interest. Bush needs to address this. If he doesn't, McCain has no reason to be gentle with him.