Professor Paul G. Mahoney, whose thoughts on corporate topics are far more authoritative than mine, emailed some comments:

Many thoughtful observers have concluded that U.S. disclosure rules (for both accounting and narrative disclosures) have become excessively rule-bound and we should replace them with a set of general principles that instruct companies to tell investors all material information in a format that makes sense given the company's business.

There is a delightful irony here--that system is precisely what we had before 1933. The stock exchanges required their listed companies to disclose financial results and other material information but the exchanges did not micromanage those disclosures. The subsequent history is an ongoing application of the "there oughta be a law!" phenomenon--every time something goes wrong, Congress or the SEC writes a set of detailed rules designed to prevent the same thing from happening again.

The other irony is that, when it is out of the political spotlight, the SEC is capable of thoughtful deliberation about these issues. Its recent reforms of the public offering process--although several decades overdue--remove many of the mindless restrictions on pre-offering publicity highlighted in my article. In fact, the SEC had proposed a different version of the reforms before the Enron storm hit. But the post-Enron political climate delayed a set of sensible and mostly uncontroversial changes for 5 years. Whenever Congress turns its attention to the financial markets, bad things happen.

A central premise of the New Deal was that the common law method of providing general guidance ex ante and determining whether specific conduct meets that guidance only if a dispute arises ex post -- was hopelessly inadequate to the task of "managing" a complex modern economy. That task required a bureaucracy staffed with experts who could channel behavior into desired channels before the fact rather than relying on courts to apply incentive-altering sanctions after the fact.

The New Dealers were certainly wrong in their premise--a modern economy does not require central planning any more than does a primitive one. There is also a decent argument to be made that they were wrong about how best to set the rules of the game. Once a bureaucracy is in place, it is hard to convince it to stop writing more rules even if we have reached a point where the marginal value of the next rule is negative.

posted by James DeLong @ 10:35 AM | Accounting

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