Regulatory Sneak Attack
*Presentation prepared for the Mises Institute's conference, "Austrian Economics and the Financial Markets," Toronto, Canada, September 16-17, 1999.
In 1978 Michael Jensen and William Meckling, writing in the Financial Analysts Journal, offered an extraordinarily gloomy prediction for the future of capitalism: "The most spectacular period of economic growth in our history is over," they wrote, because "government is destroying two vital instruments of that growth -- the system of contract rights and the large corporation." Constitutional and electoral constraints on political plunder have proven ineffective, Jensen and Meckling wrote, as the courts, politicians, and regulators have revoked or attenuated property and contract rights and have attacked the freedom of association as well, "especially in the civil rights arena."
With regard to the stock market, Jensen and Meckling forecast that because of the instability of property rights caused by government intervention,investors have become much less certain that any contract they enter into now will be subject to the same rules and regulations in the future. An early consequence of the erosion of property rights will be a reduction in the capitalized values of corporate securities, with many corporations able to remain in business only so long as they can finance their operations from internally generated cash flow or [government] subsidy.
Their argument is certainly well taken. Government regulators exert enormous influence over every corporate executive's power to make decisions regarding hiring, firing, promoting, and compensating his employees, not to mention dealing with unions. There are several thousand Securities and Exchange Commission regulations in the U.S.; the Federal Trade Commission claims "authority" to regulate virtually every business practice, from how orange juice is labeled to the kinds of contracts a business may enter into with its suppliers. Every law firm that practices labor law must have access to hundreds of thousands of pages of laws and regulations that affect every aspect of the employment relationship and must spend tens of thousands of dollars annually just to keep up with new laws and regulations.
The so-called Justice Department must be "consulted" on all mergers and acquisitions; and the IRS demands mountains of bookkeeping, even for the smallest businesses.
The Occupational Safety and Health Administration, which researchers generally acknowledge has had no discernible effect on job safety (other than to make it worse), has over 4,000 regulations that it enforces, which even include the permissible shape of toilet seats and the height of ladders.
Many corporations are absolutely terrified by the dictatorial powers of the Environmental Protection Agency, the biggest government bureaucracy in the world now that the Soviet Union no longer exists. Land use is restricted and regulated by federal, state, and local governments, and the Food and Drug Administration demands that its permission be granted before any new drugs are placed on the market. The Fed, FDIC, and Comptroller of the Currency regulate all aspects of banking, and operate and extortion racket known as the "Community Reinvestment Act" (discussed below) which forces banks to make bad loans and grants to politically-connected "community groups."
State and local government regulation is frequently more pervasive and onerous than federal regulation is. In Montgomery County, Maryland, for example, even "inappropriate hand gestures" while driving an automobile are outlawed.
All of this regulation existed in 1978, when Jensen and Meckling first issued their dire warnings, and has worsened ever since. In 1980 the budgets for federal regulatory agencies in the U.S. totaled about $6.2 billion, but had grown threefold to $18.5 billion by 1999. This is a 57 percent increase in constant (1982) dollars. There are 10,000 more federal regulators today than there were in 1980.
The Dow Jones Industrial Average is about 15 times higher than it was in 1978, when Jensen and Meckling issued their dire warnings. But this doesn't mean that they were wrong about the effects of the American regulatory state on stock prices. The Dow Jones average would be even higher yet were it not for the large degree of governmental control of the means of production that is exercised through regulation. And the stock market is surely much more volatile because of the great uncertainties created by myriad regulatory "sneak attacks." It is not out of the question that overzealous regulators may even cause the market to crash. As discussed below, it was proposed regulation and taxation of corporate takeovers that likely precipitated the 1987 U.S. stock market crash.
Although regulators are usually blamed for the economic and social harm inflicted by regulation, it is politicians who are ultimately responsible. The U.S. Department of Labor may enforce the minimum wage law, for example, but it is Congress that passed it. And it is Congress and the executive branch who have given us the Americans with Disabilities Act, which has forced the hiring of 400 pound bus mechanics who cannot fit under buses, half-blind school bus drivers, wheelchair-bound little league third-base coaches, and the building of wheelchair ramps on stage at strip joints, just in case a disabled stripper applies for employment. Politicians, not bureaucrats, are primarily responsible for the regulatory state that we all suffer under.
Regulation is just another form of pork-barrel politics whereby politicians dispense regulatory favors to special interest groups, at the expense of the rest of society. Corporations are particularly susceptible to attacks by politicians pandering to special-interest groups because of the fact that corporate ownership is relatively invisible, widely dispersed, and politically incohesive, as a rule. Moreover, the stock market is so volatile and complex that the owners of corporations (i.e., shareholders) would find it difficult, if not impossible, to identify declines in their asset values to specific governmental actions. In contrast, special-interest groups are, by definition, more focused and politically well organized.
Politicians are not merely passive bystanders who go on "listening tours" of their constituencies and then faithfully enact the kinds of laws that the public wants. They are "entrepreneurs" who are experts at either creating genuine economic and social crises, or the perception of crises, and then offering their "services" in resolving the crises. The most obvious example of this phenomenon is war. War provides politicians with myriad rationales for controlling and regulating economic activity, and few of the controls are abandoned once the war is ended.
This is why politicians are inclined to label virtually all of their domestic policies as "wars" -- on drugs, poverty, unemployment, drunk driving, etc., etc., and to always claim that the nation is in the midst of a "crisis." Former president Jimmy Carter even declared that there was a "crisis of confidence" when he ran out of more plausible-sounding crises to talk about.
To politicians, losing one of these policy "wars" is really success. For the worse things become -- the higher the poverty and unemployment rates, for example -- the better off the politicians are, for they use their failed policies as reasons for even more taxes, government spending, and regulation to "solve" the problems that they have created with their previous interventions.
Of course, politicians never admit that they are the source of the problems. They usually blame corporations in particular, or capitalism in general. Hence, we witness a constant recitation of "crises" manufactured by the state and blamed on capitalism. In the agricultural sector, for example, it has been government policy ever since the Hoover administration to simultaneously pay farmers to grow more (with price supports)andless (with acreage allotments), and to subsidize thousand of failing farm businesses with farm welfare in the form of low-interest loans and grants. The agriculture industry is thereby made weaker and more volatile, which of course is reflected in the prices of publicly-traded corporations in agriculture and agriculture-related industries. Government intervention is the source of these problems, but the blame is always placed on "agricultural markets."
The U.S. Department of Commerce publishes fraudulent poverty statistics in order to make poverty look worse than it actually is and to "justify" such economically destructive policies as increases in the minimum wage or tax increase for the ostensible purpose of redistributing income to the "poor." For example, in its published poverty statistics the Commerce Department does not subtract taxes from the reported income of the more affluent Americans, thereby artificially inflating their income, while at the same time not counting any welfare benefits as income of the "poor," which artificially deflates their income. This, perhaps, can explain why the same government that claims that there is a poverty crisis in America claims that there is also an obesity crisis -- especially among the less affluent.
In the environmental arena, countless capitalistic bogeymen have been blamed for everything from cancer to the destruction of the planet. This list of phony environmental scares is so long, that any rational, thinking person should routinely assume that everything the organized, political environmental organizations say as a lie. Among the more infamous phony environmental "scares" have involved acid rain; asbestos; DDT; the hole in the ozone layer (which has always been there); global warming; global cooling; the fruit preservative Alar; electromagnetic fields; "cancer-causing" cellular phones; chlorine which, according to the Discovery Channel and environmental groups like the Sierra Club, has caused a "crisis" of shrinking Alligator penises (this is no joke -- first the gators, then us, is the message); and hundreds of other beneficial chemical products.
The federal government has been warning of an impending energy crisis ever since the dawn of the oil industry -- roughly 1866. In that year the U.S. Revenue Commission warned that the nation may run out of oil at any moment. In 1885 the U.S. Geological survey forecast no chance of oil being discovered in California; some ten billion barrels have been pumped from that state since then. By 1914 the U.S. Bureau of Mines was predicting that only 5.7 billion barrels of oil were left; more than 50 billion barrels have been pumped since then. In 1947 the U.S. Department of State warned that "sufficient oil cannot be found in the United States;" in 1948 more than 4 billion barrels were discovered -- the largest discovery in history up to that point and twice the volume of U.S. consumption. In 1951 the U.S. Department of Interior forecast that oil reserves will last only until 1964.
All of these gloomy (and false) forecasts were (and are) accompanied by proposals for more government control of the energy industry to "assure" a more adequate rate of development.
The fundamental effect of this regulatory/propaganda regime on stock markets is to convince more and more investors that the rights of corporate managers to use the assets of corporations in the best interests of stockholders and creditors (i.e., to pursue the goal of profit maximization) is tenuous, if not abrogated completely. The politicization of corporate decision making via regulation causes an overall decline in capital values as corporate decisions become more and more designed to pander to the whims of politicians and bureaucrats rather than satisfying consumers and earning income for shareholders.
POLITICAL BLACKMAIL AND THE STOCK MARKET
Government regulation is often a crude form of blackmail. For example, federal regulators routinely show up at corporate headquarters and accuse a corporation of being out of compliance with regulations that no humans could possibly be in compliance with. The EPA requires that corporations that handle "hazardous materials" -- which even includes Windex, according to the EPA -- must keep a written record of where each and every container is located at every moment. Former New York state environmental protection commissioner Thomas Jorling described this particular regulatory practice as "a kind of extortion." EPA regulators will enter a corporate office and impose huge fines on corporations that could not possibly maintain the EPA's huge paperwork burden, even if they wanted to. Threatened criminal indictments assure payment of the fines.
In a recent book published by the Harvard University Press, Cornell University law professor Fred McChesney has argued that blackmail and extortion are inherent features of the modern regulatory process. In short, political "entrepreneurs" threaten legislation and regulation that will either impose price controls or increase costs (both of which would reduce profit margins) unless the "targeted" companies and industries compensate the politicians with campaign contributions or other kinds of private payoffs (i.e., speaking "honoraria," jobs for relatives, subsidized travel to luxurious vacation resorts, etc).
Politicians call legislation that is intended to extort campaign contributions from a business or industry "milker bills" or "cash cows." As explained by one California legislator, a politician "in need of campaign contributions, has a bill introduced which excites some constituency to urge [the legislator] to work hard for its defeat (easily achieved), pouring funds into his campaign coffers . . . "
Other names politicians have given to such legislation is "juicer bills," since they are designed to "squeeze" cash out of corporate coffers in return for not harming the corporation with proposed legislation and regulation. So-called "fetcher bills" are also said to be capable of "fetching" gobs of campaign cash.
Rep. Jim Leach quietly introduced a bill a few days ago aimed at reducing speculation in financial futures. Barely 24 hours later, the Iowa Republican learned that Chicago commodity traders were gunning to kill his proposal. Rep. Leach said one Illinois lawmaker told him the bill was shaping up as a classic "fetcher bill" . . . . Sure enough, one of the first to defend the traders was Rep. Cardiss Collins of Illinois, recipient of $24,500 from futures-industry political action committees.
Examples of Political Blackmail
One recent example in the U.S. of a proposed regulation that seems to have been purely designed to "fetch" perpetual campaign contributions is the battle over reducing the legal blood alcohol content (bac) level from .10 to .08. The federal government's Office of Substance Abuse Prevention has declared that its goal is to eventually have .04 as the legal limit, which can be attained by an adult male who consumes one or two beers. Congress failed to pass such a law in 1998; the law that it did pass, however, creates a slush fund of highway grant money that can be used to bribe states into passing laws that reduce the legal bac level. However, the law is to be renewed every year, which guarantees that the alcoholic beverage industry will be forced to make campaign contributions indefinitely in order to defeat this neo-prohibitionist legislation.
In 1992 Congress authorized the Federal Communications Commission to impose price controls on cable television. Ever since then, the cable industry has poured millions of dollars of campaign contributions into Washington annually in an apparently fruitless effort to eliminate the price controls.
One of the more notorious examples of political blackmail in recent years involved the Clinton administration's proposals to impose price controls on doctors, hospitals, and the pharmaceutical industry as part of its failed plan for socialized medicine. Once price controls were proposed, reported the New York Times, members of Congress and the president were . . . receiving vast campaign contributions from the medical industry, an amount apparently unprecedented for a non-election year. While it remains unclear who would benefit and who would suffer under whatever health plan is ultimately adopted, it is apparent that the early winners are members of Congress. Representative Jim Cooper, who proposed legislation that was slightly less onerous than Clinton's, received nearly $1 million in campaign contributions in the first four months of 1994; overall, campaign contributions in 1993 were about one-third higher than in the previous non-election year of 1991.
It was also widely reported at the time that the handlers of Hillary Clinton's not-so-blind trust were selling her pharmaceutical stocks short every time she would make a highly-publicized speech demonizing the pharmaceutical industry, which she did quite often. In his book,In Defense of the Corporation, Robert Hessen documented how Ralph Nader has long engaged in the same practice -- shorting the stocks of companies that his numerous think tanks and organizations routinely demonize with highly-publicized "studies" alleging corporate wrongdoing.
During the Clinton health plan fiasco of 1993-1994 the value of pharmaceutical stocks dropped by over $40 billion according to one account. After the pharmaceutical industry poured millions of dollars into the coffers of Washington politicians the price control plan was defeated.
Politicians also play a role that is essentially no different from the role played by organized crime in demanding protection money from businesses in return for "protection" from being robbed or beaten by the thugs. Rather than threatening to break anyone's kneecaps, however, Congressmen frequently demand campaign contributions and personal payments in return for the granting of a business license.
For example, after access to long-distance telephone markets was closed to the "Baby Bells," the companies made almost $10 million in campaign contributions during the 1984-1993 period and "hired scores of former federal officials" as lobbyists to help them gain governmental permission to compete in the long-distance telephone market.
The "tobacco settlement" reached between the state attorneys general, the federal government, and the companies, might well be considered to be the Mother of All Political Shakedowns. In return for being allowed to stay in business, American tobacco companies are being forced to pay almost a quarter of a billion dollars to trial lawyers and federal, state, and local governments. The media have already begun reporting on how the initial installments of this money is being spent on anything and everything by state and local governments, not only "health care costs," as was promised.
Even this record may someday be broken, however, if the government succeeds in destroying the Microsoft Corporation. Just a few years ago the Washington Post was writing sneering articles about how naive Bill Gates was for believing that he could focus his energies solely on producing better computer products without being a "player" in Washington, i.e., caving in to the Washington establishment's legalized extortion racket. Since then, Gates has hired dozens of Washington lobbyists and lawyers and has spent the required millions in campaign contributions.
Regulation is perhaps most effectively used as a tool of extortion when it threatens to sharply increase the costs of doing business, which it always does. Again, the name of the game is for politicians to propose the issuance of regulations that would drastically increase the costs (and subsequently reduce the profits) of successful companies with "deep pockets."
For example, the banking industry spent millions in campaign "contributions" to stop a 1982 regulatory requirement that they withhold taxes on interest and dividends -- a paperwork nightmare for the banks. In 1983 and 1984 the life insurance industry spent more than $2 million to defeat legislation that would have banned the granting of gender-based rates and benefits.
For most of the twentieth century, legislators have periodically extorted bribes (i.e., campaign "contributions") from the alcoholic beverage industry by threatening to increase excise taxes. The myriad industries now engaging in electronic commerce are undoubtedly concerned about all the proposals to tax e-commerce, and will be diverting more and more of their profits to Washington in the future, if they are not already doing so.
During 1986, the year of an historic "tax reform," members of the tax-writing House Ways and Means Committee tripled their "take" from the previous year, as industry groups sought to defend themselves from punitive tax treatment.
Perhaps the most egregious example of all of regulatory blackmail is enforcement of the so-called Community Reinvestment Act (CRA) in the U.S. The CRA was enacted in 1978 under a patently false pretense -- that banks made fewer loans to residents of low-income neighborhoods not because there were fewer creditworthy borrowers there, but because of allegedly pervasive "discrimination" against the residents of those neighborhoods, primarily black residents.
Banks do -- and should -- "discriminate" against less creditworthy borrowers, but in doing so they run the risk of regulatory extortion. An entire industry of sometimes federally-funded "community groups" has sprung up, with names like "Center for Community Change" and Association of Community Groups for Reform Now (ACORN), which essentially extort money from banks with the following ruse: Whenever a bank proposes a merger, expansion, or building of a new branch, it is subject to regulation by the Fed, the Comptroller of the Currency, and the FDIC. If anyone files a complaint to any of these agencies accusing the bank of making too few CRA loans, the merger or expansion is halted. So-called community groups frequently lodge such complaints and do not withdraw them until the banks give them or other groups which they designate large sums of money, sometimes in the tens of millions of dollars.
For example, the "Neighborhood Assistance Corporation of America (NACA)," led by self-described "urban terrorist" Bruce Marks, has "won" loan commitments totaling $3.8 billion from Bank of America Corp., First Union Corp., Fleet Financial Group, and others. These monies are lent to borrowers favored by Mr. Marks, and his organization usually gets a lump-sum fee or a percentage of each loan. NACA plans to operate in all 50 states by 2001 when it expects its annual budget to be in the $80 million range.
Regulatory extortion via the CRA was on display on national television during Bill Clinton's summer 1999 "poverty tour." One of the corporate executives who accompanied Clinton on his tour of economically depressed areas was the CEO of NationsBank, which was at the time in the process of merging. Before granting NationsBank permission to merge, Clinton required the bank to commit to $150 million in low-interest loans to individuals and businesses in areas chosen not by the bank, but by the Clinton administration. One can be sure that the areas chosen for such favorable treatment will be ones in which Al Gore is in need of votes for his presidential bid.
A staff member of the U.S. Senate Banking Committee recently told me that approximately $100 billion in CRA "loans" have been extended in the past twenty years, and that there is currently a concerted lobbying effort afoot to extend the CRA to credit unions and the insurance industry.
The CRA is a welfare program financed by (legal) regulatory extortion. It is bound to have a negative effect on the capital values and stock prices of banks in particular and and on the entire economy in general, because it socializes a portion of the capital markets. The major negative effect on the economy is the diversion of capital from economically sound to politically popular but economically dubious uses. A moral hazard problem is also created, in that a signal is sent to lower-income people that one does not necessarily need to become creditworthy (by working regularly, paying one's bills, and saving part of one's earnings, for example) to have access to credit, but to become politically connected instead.
The Clinton administration has been budgeting over $100 million per year in federal subsidies for "community development banks," which are another (similar) way of politicizing lending. This, along with the expansion of the CRA, possibly into credit unions and the insurance industry, is a recipe for another savings-and-loan-type financial disaster in the future.
REGULATION AND THE STOCK MARKET CRASH OF 1987
Economists Mark Mitchell and Jeffrey Netter have provided powerful evidence that regulatory sneak attacks were responsible for the U.S. stock market crash of 1987, wherein the Dow Jones Industrial Average fell 508 points (22.6%) on October 19 of that year. Their thesis is that proposed changes in the tax treatment of corporate takeover transactions which would have made such transactions much more costly triggered the crash.
It is important to recognize the importance to the economy of the market for corporate control, or the takeover market. This market is a keystone of any capitalist economy, for it is the very means by which capital is continually reallocated to those who will make the best use of it. A vital and free capital market, in the opinion of Ludwig von Mises, is the keystone of capitalism and the one thing that most distinguishes a capitalist economy from a non-capitalist one. Unfortunately, that is also why politicians are forever proposing more and more regulatory control of it.
Laws and regulations that restrict corporate takeovers are protectionist, pure and simple. The essential idea behind a corporate takeover is that a group of investors has determined that a particular company is being mismanaged. They seek, through a proxy battle or other means, to take over control of the board of directors and, subsequently, of management. They may fire some or all of the existing, poorly-performing management, replace them with better managers, and make more profit for themselves and the other shareholders.
No one has perfect foresight, so many takeovers do not work out. But nevertheless, the only way to learn who can make the best use of corporate resources is to allow the free market to tell us, including the free market for corporate control.
Laws and regulations that would restrict takeovers or make them prohibitively costly are invariably the result of lobbying efforts of incumbent managers who have bribed politicians into enacting the protectionist provisions -- provisions that only benefit the incumbent managers, at the expense of their shareholders and of the consumers of their products.
In early October of 1987 the Congress waged a full-scale assault on corporate takeovers by: ·
- Eliminating deductions for interest expenses exceeding $5 million per year on debt incurred to acquire a majority of another firm's stock; ·
- Eliminating the ability of an acquiring firm to use mirror subsidiaries to dispose of assets of the target firm without a recognition of the corporate level gain; ·
- Prohibiting interest deductions on any debt used to finance a hostile takeover attempt of over 20% of a target's stock or assets; ·
- Requiring an acquiring firm to treat an acquisition of stock as a purchase of assets with an immediate corporate taxable recognition of the difference between the target's basis in its assets and the purchase price; and Imposing a 50% nondeductible excise tax on profits from "greenmail" payments.
Mitchell and Netter calculated that these tax law provisions would have reduced the value of acquiring a company through a takeover by about 25 percent, which would also cause a decline in the stock price of the acquiring company. Typically, the stock price of an acquiring company increases by 25% - 35% as the result of a takeover. Moreover, such a dramatic anti-takeover bill would have reduced stock prices overall by generally weakening the market for corporate control, a major source of efficiency in capital markets.
Mitchell and Netter's very careful analysis, published in the prestigious Journal of Financial Economics, came to the following conclusion:
"The stock market crash on October 19, 1987 began the preceding three trading days, October 14-16, when the market fell by more than 10%, the largest three-day decline since 1940. . . . we provide evidence that the takeover-tax bill introduced on the evening of October 13 by Democrats on the House Ways and Means Committee had a major impact on security prices.
"We find a negative reaction by the stock market to the news the bill was progressing and a positive reaction by the market to the news Congress was backing off from the proposal . . . in-play firms were more sensitive than the overall market to the news about the bill's progress [and] U.S. markets moved significantly when the bill was proposed [while] international markets did not. This . . . suggests that a U.S.-specific factor affected trading on the event dates."
THE REGULATORY ATTACK ON MICROSOFT AND STOCK PRICES
In a forthcoming article in the Journal of Financial Economics Thomas Hazlett and George Bittlingmayer demonstrate that, for the past seven years, international investors have been solidly behind Microsoft and against the U.S. Federal Trade Commission and the U.S. Justice Department in their regulatory assaults on Microsoft. These authors surveyed all articles announcing news of the investigations/litigation published in the Wall Street Journal from 1991 through 1997 and gauged the reaction of the stock markets to it.
Microsoft's critics, such as Janet Reno, claim to believe that what is bad for Microsoft (i.e., an antitrust prosecution) is good for the rest of the computer industry and vice versa because of Microsoft's allegedly "exclusionary" practices. Microsoft is supposedly "a threat to everybody in the industry," according to Alan Ashton, president of WordPerfect, which has lost almost all of its market share to Microsoft Word.
But Hazlett and Bittlingmayer have found this to be a myth. Categorizing all news stories about the regulatory assault on Microsoft as "positive," "negative," or "ambiguous" for a seven-year period, they found that:
"[W]hen Microsoft receives good news, its stockholders experience average market-adjusted returns of 2.4%. But the news is also good for the industry as a whole, which sees average returns of 1.2% over the same dates. (Both returns are significantly greater than zero at standard levels of statistical significance). "During negative events . . . . Microsoft stockholders incur average returns of minus 1.2% per event, while the non-Microsoft computer portfolio declines 0.6%."
The returns of a few companies, such as Netscape, which is leading the lobbying and public relations attack on Microsoft, enjoy increased stock prices whenever the news is bad for Microsoft, which explains why they are instigating the political assault on their rival. They are merely attempting to achieve through politics what they have failed to achieve in the competitive marketplace.
The results obtained by Hazlett and Bittlingmayer are not at all unexpected. Following the antitrust attack on Standard Oil in the early twentieth century, the Standard and Poors stock index fell by 38 percent. When Theodore Roosevelt launched 44 antitrust cases the stock market did not return to its 1908 level until 1924.
Government bureaucrats also benefit from political/regulatory assaults like the one on Microsoft. A number of state attorneys general, who are all gubernatorial wannabes, have filed their own lawsuit against the company, which will give them notoriety and publicity. Federal regulators such as Joel Klein, the head of the Antitrust Division of the U.S. Justice Department, tend to be publicity-seeking egomaniacs; suing the most successful American company of the twentieth century ought to satisfy their urges.
Perhaps most significantly, the regulatory persecution of Microsoft is yet another example of regulatory extortion or blackmail. The political establishment is busy extracting "protection money" from Microsoft in return for its promises to allow the company to exist.
CONCLUSIONS: THE TOBACCO-IZATION OF INDUSTRY?
The so-called tobacco industry "settlement" between the state governments, the federal government, trial lawyers, and the industry has ominous implications for all industries (and consumers). The modus operandi of the American anti-smoking movement is already being utilized in attacks on other industries, especially firearms manufacturing and retailing. The model is for a government-funded attack on specific industries, complete with volumes of junk science and taxpayer-funded lobbyists who lobby for advertising bans and other regulations that make it difficult to sell the product, along with higher excise taxes. The industry's management is demonized and portrayed as corporate outlaws. The notion of individual responsibility (for smoking, drinking, reckless driving, firearm use, etc.) is totally abandoned as "responsibility" is socialized. Once this is done and it is established that no one is responsible for his or her own irresponsible behavior, then it is relatively easy to plunder an industry at will through the vehicle of "taxation by litigation."
Florida, Vermont, and Maryland actually rewrote the laws to strip the tobacco industry of long-standing common law defenses, which guaranteed that those states could win their lawsuits against the industry. There is no reason to believe that politicians will not do the same to other industries now that the precedent has been set. The state governments cleverly hired private trial lawyers to bring the cases and paid them enormous sums -- in the tens of millions of dollars each in some states.
Tort lawyers are now touting plans to utilize the tobacco-litigation/extortion model against the producers of lead paint, pharmaceuticals, beer, wine and liquor, chemical additives, fatty foods, sports utility vehicles, and myriad other products. These industries will be demonized, more and more severe regulatory restrictions and excise taxes will be imposed on them, and their stocks will tumble. No industry is safe from the greedy hand of regulatory extortion.