It's midterm-election timeand the politicians are in full swing. Businesses are the scoundrels du jour and the proposals are flying fast and furious to regulate their behavior. Taxation, oversight, restriction, etc. Any adjective that reigns in freedom of activity is fair game.
Okay let's be in agreement that lack of regulation led to some of the excesses we have seen over the last several years. It's apparent that letting business operate in a way that ignores systemic risk can be dangerous. Fannie Mae, AIG, Lehman Brothers, are all examples where lack of transparency and in some cases excessive risk-taking not only doomed these companies but brought peril to the overall economy.
But just because we live in an era where excesses caused massive problems, that does not mean that any and all regulation is acceptable or desirable. It is becoming apparent that the current environment in Washington favors a regulatory perspectivewhich could very well be detrimental to business innovation and job creation. The blunt tool called regulation is a tempting stick to wave at businesses. But it is a reaction that can negatively impact business growth and profits. And hurt Main Street America as well.
Restricting creativity and risk-taking with transparency is counterproductive to economic growth. Regulation in general negatively impacts GDP expansion. Businesses seek profit and that's the free enterprise system. Any effort to rein in creativity will likely result in mediocrity and lower corporate profits. Dampening economic growth is the last thing we need now as the economy struggles to move forward from the great recession of 2008. And though elections prompt the usual spate of lofty promises, we should take more seriously proposals that might derail this fragile recovery that is still finding its legs.
As is usually the case, a balanced perspective makes sense. Constraints are not necessarily evil; even Adam Smith in his book "The Wealth of Nations" argued that some discipline was necessary even in a free market economy. But whether we be Republican, Democrat or Independent, perspectives on regulation are not merely philosophical arguments. The outcomes of these debates are real and the stakes are high as regulation becomes more acceptable and less demonized.
Moderation in regulation means that controls are placed on business behavior that can be destructive. But care must be given to assure that the level of regulation is both reasonable and accomplishes the goal of protecting constituents (not killing companies). Regulation for the sake of the almighty regulation tends to be destructive.
As investors, it is important to consistently assess the environment as one invests towards a portfolio strategy. And in today's environment the drumbeat of regulation portends a mixed bag of potential outcomes. Governmental forces as well as grass-root populist movements should carefully assess the issues at hand and avoid gross overreactions.
Yes, it is tempting to tar and feather businesses that take risk but we think that is misdirected anger. And history is full of examples where punishing businesses just made for more pain for Main Street. Yes, dramatic proposals may grab headlines and a few votes, but we should be very careful not to embrace ideas that might harm what has made America great; the ability to innovate and be creative.
Yes. its election time. And time to find a common villain. Business is this year's target. Remember, regulation in moderation provides protections and that's a positive outcome. But excess regulation drives down corporate profits. Let's hope that cooler heads prevail and any regulation recommendations are assessed carefully prior to adoption.
Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top 100 investment advisors in the United States for 2009 and 2010 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at firstname.lastname@example.org.