THE PUBLIC POLICY: Financial Job Flight

...securities firms...

...financial markets—concerns heightened by recent cases of perceived extraterritorial application of U.S...

...t H e P u b l I c P o l I c y Financial Job Flight NAFTA-bashing Democrats don’t seem at all upset that the American financial industry is seeing a growing number of its jobs go overseas...

...companies would feel it necessary to offer their shares to the public for the first time in a foreign market speaks volumes about conditions in the United States today...

...One of the most stunning statistics in the report is the proportion of all initial public offerings by U.S...

...Of course, many of these cases addressed the legitimate claims of investors and consumers in situations of notable corporate wrongdoing...

...Tcratic Campaign Committee, which collects - o e D e t a n e t s ad e e u S r a n e S here t o may c h be m an r h additio h nal S e explanat m ion...

...Obvi ously, if the Democratic Congress were to take some action that restrained securities class actions, these contributions would dry up...

...The December 2007 report, focusing on the public securities markets, shows that the trend away from the United States began in 2005—as the costs of the highly regulatory, post-Enron Sarbanes-Oxley Act were sinking in—and is growing more pronounced...

...the SEC could invoke Section 36 of the Securities Exchange Act of 1934, which effectively allows it to exempt companies from certain onerous regulations where it deems such exemptions to be in the public interest...

...recovery of its former position...

...If greater regulation of the securities business does, in fact, result from the Bear Stearns case, it will only increase the costs and reduce the innova- The Bloomberg-Schumer report, of which Senativeness of U.S...

...7 4 t H e a M e R I c a n s P e c t a t o R J u l y / a u g u s t 2 0 0 8 Peter J. Wallison is the Arthur F. Burns Fellow in Financial Market Studies at the American Enterprise Institute...

...It is hard to avoid the conclusion, then, that the Democrats are highly sensitive to domestic job losses when one of their major interest groups—in this case trade unions—is adversely affected...

...For example, “Legislative reform is needed to address the long-term, structural problems that underpin the trend toward increasing litigation in the securities industry...

...capital markets, with particular effect on New York...

...financial dominance...

...the U.S...

...This is especially odd in light of the fact that Senator Clinton is one of the senators from New York, the state where the financial industry is centered, and the other senator from New York, Charles Schumer, is one of the most power ful members of the Democratic majority in the Senate and a member of the Senate committee 7 2 t H e a M e R I c a n s P e c t a t o R J u l y / a u g u s t 2 0 0 8 P e t e R J . W a l l I s o n that has jurisdiction over the financial industry in the United States...

...These studies note that the United States is losing its preeminence in the world’s financial markets because of excessive regulation and the high litigation risks associated with private class actions...

...In truth, this is special interest politics, since job losses have been disproportionately in union jobs while the gains from free trade have been in sectors that are not unionized...

...Wallison in the preparation of this article...

...substantial contributions from the trial lawyers— a group that would be hurt by any curb on the pri vate securities class actions which account for most of the litigation risk faced by foreign companies that offer their shares in the United States...

...Although 7.2 million jobs were created in the United States between January 2000 and January 2008—a growth of about five and a half percent—these three states have not benefited from the economic boom...

...In 2006, for example, lawyers contributed $85.6 million to Democratic political committees or candidates and $35.3 million to Republican committees...

...2 pub e e g a r e v a h c i h , s t e r a m e t i r p . S . U e h i s r e u s i hy have these losses occurred...

...Other data in the committee’s report are equally worrisome: The U.S...

...In Ohio, Pennsylvania, and Indiana, which together control 371 pledged delegates—almost 10 percent of the Democratic delegate vote—many voters’ chief concerns involve the exodus of jobs from the region over the past decade...

...The increasing pace of innovation and new product development in financial services has meant that responsiveness and flexibility have become ever more important features of regulation...

...equ k ity ra w ised by foreig li n d c - the Financial Services Roundtable, the Committee cent in 2006...

...While nobody should attempt to discourage suits with merit, the prevalence of meritless securities lawsuits and settlements in the U.S...

...Karen Dubas of the American Enterprise Institute assisted Mr...

...During this period, Pennsylvania, Indiana, and Ohio lost a net 37,300 jobs, gaining service sector jobs but losing a total of 609,200 manufacturing jobs...

...share of global market capitalization, which had been an average of 43.6 percent between 1990 and 2005, was 37.9 percent in 2006 Studies note that the United States is losing its preeminence in the world’s financial markets because of excessive regulation and the high litigation risks associated with private class actions...

...financial markets as a result of the Bear Stearns collapse will only exacerbate the adverse trends that these reports highlight...

...markets in 2007, compared to an Schumer (who sponsored a report with New York average of 5.2 percent between 1997 and 2005...

...The American Association for Justice, the successor to the American Trial Lawyers Association, contributed $2.7 million (95 percent) to Democrats and $120,950 (4 percent) to Repub lican candidates...

...Both are cited as factors in the growing trend away from U.S...

...Often ignored is the fact that NAFTA has benefited certain industries and even the states with net job losses: last year, for example, the top export markets for Ohio, Pennsylvania, and Indiana were Mexico and Canada...

...Not surprisingly, the vast majority of interviewees and survey respondents strongly believe that the pendulum of regulation in the United States has swung too far in recent years...

...But the job losses in the financial industry are not union jobs, and the financial industry is not one of the interest groups that is clustered around the Democratic Party...

...Yet against this need for speed comes regulators’ obligation to protect investors and customers, which has hampered efforts to respond quickly to the everchanging needs of business and the rapidly evolving nature of risk in the markets...

...An increasingly heavy regulatory burden and a complex, cumbersome regulatory structure with overlaps at the state and national levels is causing an increasing number of businesses to conduct more and more transactions outside the country...

...With all this data demonstrating the flight of capital out of the United States, one would expect that the Democratic candidates would be as worried about the wave of job losses that seem to have resulted from excessive regulation and litigation risk as they claim to be about the job losses associated with NAFTA and free trade...

...From March 2006 to January 2008, the financial industry in the United States lost a net 69,000 jobs, more than the net loss of jobs in Pennsylvania, Indiana, and Ohio over the past eight years...

...All these studies point to e xcessive regulation of securities issuers—not brokerdealers like Bear Stearns—or substantial litigation costs of securities issuers as the source of the loss of U.S...

...The SEC should make use of its broad rulemaking and exemptive powers to deter the most problematic securities-related suits...

...employees, the Democratic Party and Democratic politicians have little interest...

...That tells you something about whom the trial lawyers see as buttering their bread...

...But when the interests of another Democratic Party interest group, the trial lawyers, would be hurt by a change in policy that would help a U.S...

...and 12.4 percent of foreign companies on Capital Markets Regulation, and even Senator delisted from U.S...

...Accord ing to the new report, it was slightly over 4 percent in 2007...

...For many executives, London has a better regulatory model: it is easier to conduct business there, there is a more open dialogue with practitioners, and the market benefits from high-level, principles-based standards set by a single regulator for all financial markets...

...tor Schumer was a co-sponsor, contains some of the most forceful and persuasive statements in any of the reports about the twin threats of costly regulation and severe litigation risk...

...The current turmoil in the financial markets has little to do with this issue...

...In the a s nd 35 .2 n p t ercent in 2 va 007...

...legal environment are driving growing international concerns about J u l y / a u g u s t 2 0 0 8 t H e a M e R I c a n s P e c t a t o R 7 3 t H e P u b l I c P o l I c y participating in U.S...

...The Democratic candidates’ attachment to the narrow interests of the unions becomes very clear when one compares their flailing against NAFTA with their apparent lack of concern about the loss of jobs in the financial industries, which are largely not unionized...

...While the United States has struggled to balance rapid innovation with consumer and investor protection, other financial markets—most notably London—have grown faster and been nimble enough to adapt their own regulatory regimes to be responsive to businesses, while still safeguarding customers and investors...

...Legislative reform is also needed to address the long-term, structural problems that underpin the trend toward increasing litigation in the securities industry...

...Although there is little data to indicate exactly why manufacturing jobs are disappearing, NAFTA has become a perennial scapegoat...

...companies that were made solely overseas (primarily in London...

...industry and U.S...

...City mayor Michael Bloomberg)—have warned about the gradual loss of financial business to foreign markets...

...securities firms, creating further obstacles to a U.S...

...Lately…the regulatory environment that has served the United States so well in the past has begun to work against itself...

...Yet there has not been a word about these losses from the Democratic candidates or influential Democrats in Congress...

...Indeed, the inevitable loss of confidence in U.S...

...But the Democratic Party’s refrain for many years— following the lead of its union constituency—has been to attack free trade for the losses it creates, but not to recognize the gains...

...The fact that U.S...

...If greater regulation results from the Bear Stearns case, it will only increase the costs and reduce the innovativeness of U.S...

...Congress should thus consider legislative means of addressing concerns around the quantity and unpredictability of litigation relative to other countries...

...by Peter J. Wallison As their primary campaign moved to the Rust Belt states, Hillary Clinton and Barack Obama directed much of their rhetoric against the North American Free Trade Agreement (NAFTA) and free trade in general...

...The most up-to-date information about the current trend away from the United States comes from the report of the Committee on Capital Markets Regulation, a group of academics and market experts assembled by Hal Scott of Harvard Law School...

...has driven up the apparent and actual cost of business—and driven away potential investors...

...Empirical evidence certainly suggests that litigation has become an important issue: 2005 set a new high for the number of securities class-action settlements in the U.S., and for the overall value of these settlements...

...Many of these job losses reflect global reallocations of manufacturing under well-known principles of comparative advantage...

...W r p . 1 3 t a s a , 5 0 0 2 – 0 0 0 2 s r a e y e t r o f s t e k r a m e c r e m m o C f o r e b m ha . S . U e h t — s p u o g p r ast few years, fo C ur reports by respected , 6.8 percent o h f the equity raised in w the U.S...

...The number was negligible before 2005 and a little over 1 percent in 2006...

...However, in aggregate, some of the unique characteristics of the U.S...

...Among the most trenchant points are these: • “The legal environments in other nations, including Great Britain, far more effectively discourage frivolous litigation...

...is losing manufacturing jobs but gaining jobs in other sectors—mostly the knowledge industries—where it can produce most efficiently in comparison with other countries...