Jens 'n' Frens
Idle thoughts of a relatively libertarian Republican in Cambridge, MA, and whomever he invites. Mostly political.

"A strong conviction that something must be done is the parent of many bad measures."
  -- Daniel Webster

Monday, April 05, 2010 :::

Glenn Reynolds:
Hayek's insight into economics and regulation is often called "The Knowledge Problem," and it is a very powerful notion. But recent events suggest that it's not just the economy that regulators don't understand well enough -- it's also their own regulations.

This became apparent when various large businesses responded to the enactment of Obamacare by taking accounting steps to reflect tax changes brought about by the new health care legislation. The additional costs created by Obamacare, conveniently enough, weren't going to strike until later, after the November elections.

But both Generally Accepted Accounting Principles and Securities and Exchange Commission regulations require companies to account for these changes as soon as they learn about them. As the Atlantic's Megan McArdle wrote:

"What AT&T, Caterpillar, et al did was appropriate. It's earnings season, and they offered guidance about , um, their earnings."So once Obamacare passed, massive corporate write-downs were inevitable.

They were also bad publicity for Obamacare, and they seem to have come as an unpleasant shock to House Energy and Commerce Committee Chairman Rep. Henry Waxman, D-Calif., who immediately scheduled congressional hearings for April 21, demanding that the chief executive officers of AT&T, John Deere, and Caterpillar, among others, come and explain themselves.
Reynolds goes on to point out that, given the vast complex of regulations, there's no way any member of Congress, or even all of them together, could know and understand them all.

But the requirement that firms write down the value of impaired assets on their financial statements isn't terribly obscure; while it might not have been something members of Congress were considering before they voted on the recent bill, they shouldn't have to conscript the heads of large companies to spend time explaining basic accounting to them. In other words, even if members of Congress hadn't considered the consequence, it shouldn't have been hard to understand once it happened. If Waxman himself didn't get it, surely one of his staffers could fill him in.

Dan Riehl notes that the media haven't been covering this properly and that Waxman's theatrics might work as he intends instead of properly making him look like a belligerent idiot. I don't have the time to read a large variety of news sources, so I don't have a good sense of what kind of coverage has been typical. But I do have to acknowledge that we can't infer from this incident that Henry Waxman is as smart as he is handsome; if he can successfully portray adherence to Generally Accepted Accounting Principles as a political act, playing dumb could be the smart thing to do. Which is just another reason to listen to Hayek and avoid concentrating decision-making among those who have neither the proper knowledge nor the proper incentives.


::: posted by Steven at 12:55 PM

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Idle thoughts of a relatively libertarian Republican in Cambridge, MA, and whomever he invites. Mostly political.

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