Never, Ever Forget Why Regulators Became Regulators

It’s regularly pointed out that a very small, single digit percentage of applicants to schools like Harvard, Yale, Princeton and Stanford is actually admitted to those schools. Interesting about this is that difficulty when it comes to gaining admission has traveled well beyond the schools mentioned. No doubt some of those reading this piece attended schools 10, 20, 30 or 40 years ago that they wouldn’t stand a chance of getting into today.

The reality of college admissions seemingly speaks to a lot of factors, but an obvious driver is that the popular lament about stagnant wages stateside since the 1970s is a monumentally absurd myth. There’s been great economic liberalization since the ‘70s, and earnings for American workers have soared. The world’s producers don’t eye U.S. market share excitedly because Americans are stagnant, but because their earnings continue to grow. This truth has plainly factored into even greater demand for limited seats at the palaces that we call American universities.

After that, there’s been a rapid liberalization of global economic activity too. The world is becoming more well-to-do by the day, and this helps explain why those same U.S. universities more and more resemble a Benetton ad: global demand for the palaces that we call American universities is soaring. China alone can claim over 300,000 nationals attending U.S. universities, and that number will only grow.

Some claim easy federal loans have driven a supply/demand imbalance at U.S. colleges and universities that has led to soaring tuition and applications, but it says here the bigger driver has been economic liberalization that signals less government. Economic freedom begets wealth, and one major way those with means tend to express their status is through college.

Interesting about the massive demand for limited university spots is what it plainly means for businesses. The proliferation of the degreed from around the world has logically revealed itself through growing interest among graduates in top corporations. If demand for a spot at Harvard, Yale, Princeton and Stanford is high, one can only conclude that demand is similarly high among the graduates of those schools for spots at the top corporations that those schools have historically sent graduates to. It’s not unreasonable by extension to assume that hiring rates at the best companies more and more resemble acceptance rates at elite U.S. universities.

Which brings us to a recent piece by Wall Street Journal columnist John D. Stoll. Though it’s possible he was merely looking for an irreverent way to begin his column (“To These Firms, Rules Are Golden”), Stoll’s approach was careless. He observed that “Few things can make a chief executive break out in hives as quickly as the word ‘”regulation.”’ Such a statement is true in a sense, but it seems Stoll hasn’t thought much about why it’s true.

To understand why it may be useful to think again about acceptance rates at top U.S. schools, and hiring rates at top U.S. companies. Only the best of the best gain admittance, and this includes athletes who’ve long been coveted by U.S. businesses; Wall Street businesses most notably. While some will say academic standards are sometimes relaxed for athletes, they forget how intensely cerebral are some of the sports these athletes play, not to mention how mentally taxing it is to play them. Translated, an individual who learned football at the knee of Nick Saban, and who did so in grueling fashion, brings skills and remarkable mental toughness to a university and business that the typical college and job applicant doesn’t.

So “regulation” causes CEOs to “break out in hives”? Well, of course it does. While education itself is beyond overrated, acceptance at the top schools says something about the individual. Regulators are those who mostly didn't rate acceptance at elite instiutions, plus it cannot be stressed enough that for the most part those who presume to regulate are the ones who couldn’t get jobs in the industries regulated.

Imagine then, what the above means to chief executives? While the businesses they run aim to achieve greatness by hiring the best of the best, they’re suddenly being “advised” on how to run their businesses, and most often being told how to run their businesses by individuals who could never hope to work for them in a normal world. It’s the equivalent of Goldman Sachs facing a requirement to hire a failed math student for a position on the arbitrage desk, or Saban being forced to play at quarterback someone who was a backup in high school.

After which one imagines that most executives blanch at regulation simply because the very idea brings new meaning to superfluous in a largely free economy. If readers doubt this, they need only drive down any busy, or not-so-busy city street. If one restaurant has a surly staff, another a less than clean kitchen, and another has lousy food, there are countless other restaurants on the same street aiming to meet the needs of the underserved.

Is a local business treating you poorly, or seemingly taking your business for granted? No problem, online stores like Amazon are experimenting daily in search of ways to improve your shopping experience. Considering the internet more broadly, any attempt by a vendor to overcharge you will quickly be exposed through easy searches made by you online. The internet is pricing transparency personified, plus it’s the personification of quality control. Thanks to this source of copious information, bad vendors will be exposed in seconds. In short, regulations cause CEOs to break out in hives simply because they’re a worthless, superfluous, but very expensive add-on to what free markets already do exponentially more effectively.

But wait a second some say, regulations are about safety, or about the protection of businesses from themselves. Implicit here is that regulators exist to see around the proverbial corner in order to help businesses avoid the consequences of their worst instincts. Except that if they could see around corners, they would be extraordinarily rich investors, not salaried regulators. Or they’d have actual, much higher-paid jobs within the companies they regulate.  Except that they don’t. Remember, they’re regulators not because they’re good at what they do. They're regulators because they generally can't. 

All of which brings us back to the true problem with regulation: it’s a problem of low-quality talent being foisted on corporations thick with the best and brightest. Worse is that the low-rated talent has power to dictate how corporations operate. Is it any wonder the word “regulation” gives CEOs hives? Too bad John D. Stoll doesn’t know why.