The in­no­va­tion de­stroy­ers

Most politi­cians praise in­no­va­tion but they cre­ate reg­u­la­tions, taxes and agen­cies that kill it

The Washington Times Daily - - OPINION - By Richard W. Rahn Richard W. Rahn is chair­man of Im­prob­a­ble Suc­cess Pro­duc­tions and on the board of the Amer­i­can Coun­cil for Cap­i­tal For­ma­tion

Which gov­ern­ment agency has done the most to de­stroy in­no­va­tion? The Amer­i­can Founders tried to cre­ate an en­vi­ron­ment to fos­ter in­no­va­tion, be­cause they un­der­stood new in­ven­tions would in­crease the well-be­ing of the cit­i­zens. And that is the rea­son the Con­sti­tu­tion en­abled Congress to cre­ate patents of lim­ited du­ra­tion.

Most politi­cians say they fa­vor in­no­va­tion, but at the same time they cre­ate reg­u­la­tions, taxes and gov­ern­ment agen­cies that hob­ble or pro­hibit that same in­no­va­tion. One of the most no­to­ri­ous in­no­va­tion killing agen­cies is the Se­cu­ri­ties and Ex­change Com­mis­sion (SEC), whose mis­sion is to “pro­tect in­vestors, main­tain fair, or­derly, and ef­fi­cient mar­kets, and fa­cil­i­tate cap­i­tal for­ma­tion.”

In re­al­ity, it far too of­ten de­nies in­vestors the op­por­tu­nity to in­vest in new and promis­ing tech­nolo­gies and in new com­pa­nies — all which un­der­mine pro­duc­tive cap­i­tal for­ma­tion and eco­nomic growth.

Last week, ac­cord­ing to The Wall Street Jour­nal, the SEC “moved to re­strain a hot new fundrais­ing method in­volv­ing sales of dig­i­tal coins.” The method is known as ICOs, (ini­tial coin of­fer­ings), and more than a bil­lion dol­lars has been raised this year through ICOs. Af­ter the an­nounce­ment, Bit­coin lost 7 percent of its value and Ether (another dig­i­tal coin) lost 12 percent of its value. So, here again, we have the SEC, in its lust for con­trol and power, not pro­tect­ing con­sumers, but de­stroy­ing wealth for in­vestors in the whole new field of dig­i­tal coins.

The SEC, rather than pro­tect­ing and pro­mot­ing com­pa­nies that of­fer their stock to the pub­lic through IPOs (ini­tial pub­lic of­fer­ings), has been de­stroy­ing them through over-reg­u­la­tion. The num­ber of IPOs has dropped by 65 percent from 2014. There has also been a dra­matic de­cline (37 percent since 1997) in the num­ber of pub­licly listed com­pa­nies.

Com­pa­nies are choos­ing to re­main pri­vate rather than go pub­lic be­cause of the costs and pa­per­work try­ing to com­ply with the SEC — which is far more in­ter­ested in form rather than sub­stance. The re­duc­tion in the num­ber of listed com­pa­nies is bad for savers and in­vestors, and for cap­i­tal for­ma­tion, job cre­ation, and eco­nomic growth.

The folks at the SEC ra­tio­nal­ize their ac­tions by claim­ing that some in­vestor might lose money by in­vest­ing in a com­pany that does not do well — as if the bu­reau­crats, most of whom have never run a com­pany, let alone worked in the pri­vate sec­tor, have a clue about the po­ten­tial suc­cess of any new or ex­ist­ing busi­ness. There are plenty of statutes on the books to deal with fraud or mis­rep­re­sen­ta­tion — so what the SEC does is re­dun­dant.

If the folks in gov­ern­ment were se­ri­ous about their state­ments that they want to pro­tect peo­ple from bad in­vest­ments, why do they pro­mote state lot­ter­ies, which take ad­van­tage of the poor and uni­formed? Over the long run, the stock mar­ket pro­duces very nice, pos­i­tive rates of re­turn for most in­vestors — while state lot­ter­ies re­sult in 100 percent losses for most peo­ple. Please spare us the hypocrisy.

In ad­di­tion, the SEC makes it al­most im­pos­si­ble for peo­ple who do not have more than a mil­lion dol­lars in liq­uid net wealth and high in­comes to in­vest in IPOs — all in the name of “con­sumer pro­tec­tion.” The real ef­fect is to only al­low those with some wealth to par­tic­i­pate in in­vest­ing in promis­ing new com­pa­nies — which, of course, leads to more in­come dis­par­ity — which, again, the hyp­o­crit­i­cal po­lit­i­cal class de­cries.

Be­cause the SEC has made it so costly, time con­sum­ing, and re­stric­tive for en­trepreneurs to is­sue stock, they, of course, try to find other ways to raise cap­i­tal. The rapid rise of ICOs is merely a mar­ket re­sponse to over-reg­u­la­tion.

All of this leads to a fun­da­men­tal ques­tion, as to why so many are try­ing to build dig­i­tal al­ter­na­tives to the U.S. dol­lar like Bit­coin and Ethereum. The an­swer is that the gov­ern­ment, through the Fed­eral Re­serve, has de­stroyed much of the value of the dol­lar and is al­most cer­tain to con­tinue with its de­struc­tive ways.

The Fed­eral Re­serve was cre­ated back in 1913, and, as part of its char­ter, it was sup­posed to pre­serve the value of the dol­lar. A 1913 dol­lar could buy al­most the same amount as the dol­lar in 1792 — i.e. there had been al­most no sus­tained in­fla­tion over that 120 year pe­riod.

The dol­lar is now worth about 1/24 of what it was in 1913, af­ter the cre­ation of the Fed. That is, the Fed has de­stroyed about 95 percent of the value of the dol­lar — which meets the def­i­ni­tion of grand theft. Fed Chair­man Yellen has been com­plain­ing that in­fla­tion is not high enough. She wants 2 percent per year or more — i.e. more theft. Again, the Fed was sup­posed to pre­serve the value of the cur­rency, not steal more.

Many smart techies are try­ing to de­velop new pri­vate dig­i­tal monies and pay­ment sys­tems to get around the gov­ern­ment theft and tyranny. Ever-in­creas­ing reg­u­la­tory costs for banks force them to in­crease fees on things like in­ter­na­tional money trans­fers. The re­sult is that the techies are also de­vel­op­ing global money trans­fer sys­tems that go around the over­reg­u­lated banks.

What need to be abol­ished are not ICOs, but the SEC and the Fed, which are un­nec­es­sary dead weights on both our eco­nomic well-be­ing and lib­erty.


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