Business Protections Need an Expiration Date
Jordan Weissmann, a writer at Slate, has an interesting article about Republican proposals to replace entitlements with private savings accounts. He says that these programs are big giveaways to money managers, who would collect hefty management fees. Weissmann says that the GOP is "trying to rewrite the social contract in such a way as to maximize the profits of the financial services industry."
That would fit with President Donald Trump's decision to review the Obama-era fiduciary rule, which prevents asset managers from intentionally directing retirement savers to high-fee products when cheaper alternatives would do.
But instead of concluding that Republicans are in the pocket of asset managers, I think we should see this move as part of a larger trend -- the demand for protection of existing business models against disruption.
This trend isn't really all that new. In New Jersey and much of Oregon, drivers are not allowed to pump their own gasoline. In many states, it's illegal for carmakers to sell directly to consumers. Self-service gas stations and direct-to-consumer sales are hardly new technologies. But the advent of the internet and mobile computing is accelerating the threat to many traditional business models. For example, credit cards might be rendered obsolete if mobile payments become ubiquitous. State laws forbidding merchants from charging higher-prices to customers who use credit cards -- which typically have large transaction fees -- may in part be a way of protecting the credit-card industry from being undercut by new, cheaper technologies.
The asset-management industry is definitely ripe for technological disruption. Exchange-traded funds offer a cheap method of diversification without sacrificing liquidity. Why pay a huge chunk of your lifetime wealth to a financial adviser or money manager if you can just buy a diversified portfolio with the touch of a button and sit on it for a decade or two? The rapid rise of passive investing shows the power of this disruptive business model:
In this context, a shift in government policy toward money managers looks like just another job protection program for an industry under threat.
This is, essentially, a modern form of Luddism. That's not necessarily a slur. Using laws to prevent disruption saves jobs in the short term. Economies don't adjust instantly to changes in technology and business conditions. Workers who have spent their whole lives selling cars, managing money or pumping gas can be severely hurt when the sudden death of their business model renders their human capital worth far less than before. It's difficult and expensive for older workers to retrain -- many may never make as much money or enjoy as much status as before. Even at the economy-wide level, major technological disruptions may take decades to start increasing prosperity for the average worker. Using laws to block new business models can let today's workers finish out their careers with dignity.
The problem is that as time goes on, these restrictions pile up. Each new innovation represents another threat to existing business models. As new laws are put in place to ward off these threats, the landscape that entrepreneurs have to navigate becomes ever more twisted and torturous. The eventual result is a reduction in both dynamism and the forward march of technology.
We may already be seeing this in action. Productivity growth has slowed markedly during the past decade. And as economist John Haltiwanger has documented extensively, the rate of startup formation has fallen substantially in the U.S. during that same period and now is lower the the rate of business failures.
In the long run, restricting new business models is a much bigger danger than allowing workers to be displaced. But in the short run, too much career uncertainty and disruption could lend strength to populist political movements. How can policy makers steer between these two dangers?
One idea is to introduce automatic sunsets into regulations. If you're going to ban direct auto sales, only ban them for a decade instead of for eternity. That will give older car dealers time to finish their careers on a high note, while allowing younger car dealers ample time to retrain for other occupations, and warning young people away from going into the car-dealing business. This is the exact opposite of the message sent by a permanent ban, which lures young people into an industry they believe will always be sheltered by the government.
The Trump administration can also apply this logic to the money-management industry. Instead of blocking the fiduciary rule, delay its implementation, to give salespeople time to make the transition. That's better than using quasi-privatization of entitlements to carve out a permanent niche for these workers. Even if workers are protected for a while, in the long run disruption should prevail.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
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