Unemployment and the JOBS Act

Let’s start with an analogy to the federal deficit. Both the political Left and the Right talk about the deficit. There are two basic approaches. One is zero-sum: to increase taxes (favored by the Left). The other is positive-sum: to cut spending (generally favored by the Right, but few specific program cuts have any real support).

It is similar with unemployment. The Left (and the Right) favor the zero-sum approach: cutting the number of job seekers, via curbing immigration. The positive-sum approach is job creation. While everyone from Bill Clinton to Ben Bernanke has an opinion about how to create jobs, obviously it hasn’t been working. Hint: no act of government can durably increase employment.

Two things should be clear: when a new company is started and when it grows, it hires people. Starting and growing a company takes capital.

Unfortunately, capital formation is heavily restricted. Prior to the JOBS Act, entrepreneurs were barred from openly soliciting for investors. All investors had to be “accredited” (an SEC term that basically means “rich”). Non-rich people could buy all the bonds of bankrupt cities like Detroit they wanted, all the overhyped and overpriced stocks they wanted, and many other products made on Wall Street. But they could not invest in startups.

The recent JOBS Act was supposed to ease this regulatory burden. Indeed it does reduce one little regulation in one corner of the capital markets. It allows entrepreneurs to openly solicit for investors. But what Congress can give, the SEC can taketh away. Under the new rules, investors that are openly solicited must meet a higher burden of proof. A signed statement is no longer sufficient. Now they must either provide their tax returns, or a letter by their lawyer, accountant, or broker.

Would you be willing to give your tax forms to a startup company in order to be allowed to have the privilege of giving them your money? Would you want to pay your accountant or lawyer for a letter?

Qui bono? The beneficiaries of this regime are the big corporations and the lawyers. Big corporations have no problem getting access to capital (indeed they are drowning in a flood of unlimited liquidity from the Fed).

Just as a free market does not regulate what size soft drink you can buy (even if drinking 44oz of sugar soda is bad for you), it does not regulate what you can invest in (even if losing your money in a startup is bad for you).

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