How the NY Times Got the JOBS Act Wrong


One of the great dilemmas in the modern economy is balancing risk and reward, cost and benefit. That is true for investors, corporate managers, citizens, and elected officials. The financial crisis was caused by excessive risk taking by almost every player in the system. Investors stretched for return but didn’t understand the risks to which they were exposed. Corporate managers, particularly in the financial sector, engaged in activities that had limited upside but almost unlimited (lose your company) downside. People bought houses in deals that would only work out if house prices kept going up, the economy boomed, and they could refinance at ever more attractive terms. And, politicians played the same game, betting, for example, that having government-sponsored entities like Fannie Mae and Freddie Mac guarantee over $5 trillion in loans with under $100 billion in equity would work out. Meanwhile, regulators were pressed to let the good times roll; and, they couldn’t even catch Bernie Madoff, whose all return-no risk model was ludicrously implausible.

Inevitably, the pendulum goes the other way and everyone today is fleeing risk. Investors are hunkered down in one-day T-Bills. Corporate managers are sitting on piles of cash. Banks are loath to lend. The public has increased savings and decreased consumption. Regulators are intently focused on making sure no one will ever lose money and that excessive risk taking is squeezed out of the system.

It is in this context that the recent New York Times editorial casting aspersions on new legislation that is designed to make it easier for smaller companies to raise capital (The JOBS Act) seems almost plausible. After all, didn’t deregulation cause “the dot-com crash, Enron, the mortgage meltdown?” Didn’t each of these episodes cause “mass joblessness?” I believe the only correct answer to these questions, respectively, is “no” and “no, ” and by implication the author’s conclusions are deeply flawed.

Take the dot-com bubble and subsequent crash. Yes, most valuations at the peak in early 2000 were absurd. Yes, many investors lost money. Yes, people lost jobs. The overall impact on the economy of the Internet “over-investment” era, however, was remarkably positive. Ultimately, a massive amount of (sustainable) value and many high-paying jobs were created. Consider companies like eBay, Amazon, Google, LinkedIn, and, more recently, Facebook. Even Apple’s success can be attributed in part to the explosion in content, storage, processing, bandwidth, and business model variations that were the direct result of the Internet “bubble.”

To lump the dot-com era in with Enron and the mortgage crisis is patently absurd, and dangerous. The distinguishing feature of the American economy that makes entrepreneurship possible is our tolerance for failure. Smart people constantly scan the environment for opportunities; they can get other people to join them; they can raise capital; they can adapt as new information comes in; they can sell their business; and, yes, they can fail. As long as they don’t lie, cheat, or steal, they are considered experienced, not fatally flawed. Oh, and the investors can lose money, too, which professional venture capitalists do in over 50 percent of the investments they make.

Now imagine a world in which we preclude anyone from making an investment in which they might lose money. Or, imagine a world in which we legislate that accountants double-check every transaction in every company. Or, imagine that we put in place draconian penalties for all errors, after-the-fact, intentional, or unintentional. That’s a world in which FedEx, Apple, Intel, Genentech, and Facebook, just to name a few prominent American success stories, wouldn’t exist. Neither would Wal-Mart or IBM.

Of course, this “It’s a wonderful life” vignette, in which the unintended consequences of decisions are disastrous, is as unlikely to occur as the “mass job destruction” the author foretells in his editorial. We need regulation just as we need laws. We also need common sense. The JOBS Act does not dismantle existing regulation. Instead, it is based on the premise that the benefits of having more new companies formed and able to go public outweighs the potential costs of bad behavior. History suggests that fraud in newly public companies is not a problem, which makes sense given the intense vetting process by lawyers, accountants, the SEC, underwriters, and investors.

When you lower the cost of doing something, more of it gets done. That’s simple economics, and that’s the thrust of the JOBS Act. The other caustic comments by the author also reflect a lack of understanding about the actual provisions in the ACT. There are safeguards against unscrupulous people taking advantage of unsophisticated investors. Again, if we take the author’s argument to its illogical conclusion, and try to keep everyone safe from everything, then the economy will crash and the inevitable result will indeed be mass joblessness.

A final note: the author makes the implicit assumption that legislation like Sarbanes Oxley provides the right level of protection against fraud and bad behavior. That faith is misplaced. Sarbanes Oxley did not protect the economy from a loss measured in the $ trillions in the financial crisis. I suspect Sarbanes Oxley resulted in us having a more accurate count of the chairs on the deck of the Titanic, not recognizing that an iceberg was approaching. Moreover, had our existing laws been enforced, people like Bernie Madoff would never have been able to inflict such a large cost on the capital markets. If common sense (and decency), as well as better governance, had prevailed, we would never have allowed Enron to get so far out on a rotten limb.

We desperately need more entrepreneurial ventures in this economy. We need more capital allocated to this part of the economy. By implication, we need more failure. We also need common sense assessments of the benefits and costs of regulation. And, as the comment about the Madoff and Enron suggest, we need common sense and competence in our regulators and regulatory framework. Of course, we also need organizations like the New York Times to be more thoughtful about presenting a balanced view of any new legislation, not one that dogmatically asserts that all deregulation is bad and all existing regulation accomplishes some important goal.

William Sahlman is the Dimitri V. D'Arbeloff – Class of 1955 Professor of Business Administration at Harvard Business School. The d'Arbeloff Chair was established in 1986 to support teaching and research on the entrepreneurial process. Follow @

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