Magazine

The High Cost Of Corruption


The cost of regulation is high, but the cost of corruption may be higher. Nov. 15 marked the implementation deadline for a key section of the Sarbanes-Oxley Act for companies with fiscal years ending on or after that date. Under Section 404 of the law, publicly traded companies must have new financial monitoring controls in place, certified by auditors. Many chief executives are complaining loudly that implementing "Sox" is costing their companies heavily in time and money. But we should all be indignant at the broader economic "tax" imposed by corporate corruption on America.

Corruption makes markets less efficient, more costly, and less innovative. Take the latest insurance scandal unearthed by New York State Attorney General Eliot Spitzer. Bid-rigging and secret payoffs among insurance brokers have undermined much of the competition in the insurance market. Instead of analyzing different policies and bringing the best and cheapest to their clients, major brokers gave the business to those who paid them off.

Think about this for a moment. We now know that Corporate America is paying far more than it should for property and casualty insurance. We have just learned that both companies and employees are paying more than they should for disability, life, and other insurance in the employee benefits market. The next uproar may well be in medical insurance, which has been in a crisis for years. Doctors find it increasingly impossible to pay high premiums and are dropping out of the profession. Expensive medical malpractice lawsuits are partly to blame. But is this crisis due to rigged markets for medical insurance as well?

The truth is economists don't usually compute the tax that is imposed on economic growth by corruption. They should. In the past few years, we have witnessed conflicts of interest and manipulation within the initial public offering, mutual-fund, investment banking, and insurance markets. These rigged markets stifle innovation, erode discipline in the markets, channel money into less productive activities, add expense, and undermine national competitiveness.

We know that government regulation places a heavy burden on America's companies. We should recognize that market corruption may place an even heavier burden on the nation's economic growth.


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