Opinion

What Carl Icahn doesn't get about regulations

This corporate raider shouldn't be slashing government

On Wednesday, Wall Street legend Carl Icahn was picked as a "special advisor on regulatory reform" to President-elect Donald Trump.

Critics were quick to pounce. The 80-year-old activist investor (or corporate raider, depending on who you ask) is yet another billionaire plutocrat on Trump's team. Nor will Icahn have to divest his holdings, though he'll have huge influence over regulations that govern the industries he's invested in.

But there's a more basic problem. Icahn's entire philosophy of regulatory overhaul is fundamentally confused about what regulation does.

Icahn "will be a leader in helping American entrepreneurs shed job-killing regulations that stifle economic growth," Trump's team announced. "It's time to break free of excessive regulation and let our entrepreneurs do what they do best: Create jobs and support communities," Icahn himself added. Cut down on the rules, and there will be more jobs. Or so the thinking goes.

But ultimately, government regulations are no different than obstacles thrown up by geography, by technology, or by the laws of physics. Figuring out how to comply with a regulation is a question of problem solving, just like figuring out how to drill shale gas deposits or how to build longer-lasting batteries. Businesses clever enough to figure out these problems thrive and profit. Those that don't, don't.

For instance, there's a long history of energy companies insisting they'll be destroyed by new environmental rules; then the costs of compliance turn out to be way lower than anticipated. This has happened over and over again, precisely because competition in a market economy is all about experimentation, adaptation, and problem solving. And everyone's heard the jokes about how new regulations are employment programs for lawyers, accountants, and compliance officers.

Point being, regulations don't "destroy jobs" writ large. They destroy particular kinds of jobs, and by implication create or force businesses to create other, different jobs. Regulations don't determine how much work is out there, they determine what sort of work people do: Do their jobs pollute or not? Do they risk the well-being of workers and customers? Do they use fossil fuel energy or green energy?

Yes, regulations can be destructive. Even in a world where unemployment is zero, government rules could still destroy innovation in technology, health, energy, and everything else that raises living standards. A decent salary is only as beneficial as what it can buy.

But how many jobs are created is fundamentally a question of distribution: Are you spreading the money around evenly enough to give everyone a decent wage and something to do?

It's important to understand the distinction between the two goals. Because you can run around scrapping rules right and left — as Icahn and Trump clearly want to do — but you won't create anymore jobs if you don't get the distribution right. You'll just funnel more money to the already wealthy.

Icahn's personal story is a big example of this. Over a multi-decade career spanning Marvel Comics, Phillips Petroleum, Yahoo, Viacom, Time Warner, Lions Gate Entertainment, and more, Icahn's strategy has been pretty consistent: Buy up companies' shares when their stock is in the tank. Then use that position to gain leverage over corporate governance. Then demand wholesale changes to the board, to upper management, and to strategy. And finally, make tons of money as parts of the company are scrapped, sold off, or liquidated.

Modern corporate thinking basically assumes big payoffs for shareholders are ipso facto proof of productive business practices that raise living standards collectively. But there are actually all sorts of ways shareholders and investors can game the system, bleeding companies for tons of money without actually making them more innovative or creating employment. In fact, the whole theory that what's good for shareholders is good for everybody coincided with the rise in inequality and the chronic failure of the U.S. economy to create enough jobs for everyone.

Companies can definitely become fat and lazy, and to his credit Icahn is a long-time opponent of bloated CEO pay. But while Carl Icahn's philosophy may have made him personally better off, there's little evidence it's improved the lot of most American workers. He remains himself a shareholder, so all the money that goes to him is by definition money that can't also go to more jobs and higher pay.

There's one other problem with confusing rule changes that improve productivity with distributional changes that create jobs: It probably means you're a terrible judge of what rules actually need to be changed.

Icahn is a ferocious critic of the Environmental Protection Agency (EPA) and its regulations, for example. But what does the EPA do? It conserves ecologies for future enjoyment and use; it protects our fresh water supplies for drinking; it fights the pollution that makes American workers sick and thus less productive; and it tries to cut down on the carbon emissions that could wreck the global ecosystem and destabilize human civilization.

"I'm not anti-regulation. I'm anti the stupidity of some of these regulations and it has just run amok," Icahn told CNN. Someone should ask him just which of the EPA's goals he thinks are stupid. Because, as it turns out, one of Icahn's investments is in oil refining.

Getting off of oil and onto solar and wind may be a great idea for American society collectively. Furthermore, we could easily employ everyone in an economy and run entirely on green energy — it would just take the deliberate wealth redistribution and ambitious government industrial policy that's so often verboten in U.S. politics.

But all of that wouldn't be so great for Carl Icahn's pocketbook. And when it comes to judging what is and isn't stupid regulation, that seems to be Icahn's primary metric.

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