Late last month, The Economist published an article, “Jail bait,” arguing that the increased pursuit of criminal charges against white-collar workers is merely a symptom of America’s populist desire to vilify the wealthy. The article further asserts that not only is charging individuals costlier than charging firms, but also that individuals should not be held liable for their actions due to a system that promotes white-collar crime. Finally, the article claims that heightened enforcement can prove detrimental to innovators like Uber and Steve Jobs, who often walk the line of legality and morality when creating new businesses in the face of outdated regulations.
These arguments fail to acknowledge the potential benefits stemming from the punishment of white-collar criminals. Through stronger enforcement, both consumers and businesses can gain from an economy in which individuals are held accountable for breaking laws. Improved consumer trust in sellers of financial products is more conducive to economic well-being than allowing white-collar workers to skirt laws without consequences.
Calls for the increased punishment of white-collar criminals should not be mischaracterized as seeking “punishment simply because they are rich and successful.” In fact, criminal punishment actually holds the potential to improve the economic well-being of white-collar workers. This results from greater trust and transparency in white-collar industries, as consumers believe that rules and regulations are being adequately enforced to ensure fair dealings. Consumers are willing to pay a premium for products they trust, increasing both the quantity they demand and the price they are willing to pay due to the obvious benefit of knowing that they will not be victims of fraud or other crimes.
Contrary to what the article suggests, the economy may in fact benefit from the increased enforcement of white-collar crime, as taxpayers would face lower costs. While the actual costs of enforcement would likely be higher due to the greater number of cases brought against individuals, deterrence should also be weighed in the decision of which method to employ. In my last article, I referenced a study from Cindy R. Alexander showing that criminal charges can be a stronger deterrent to illegal behavior than fines. As a result, the savings from avoiding the damaging impact that white-collar criminals can have on the economy may offset the greater costs of pursuing these punishments in court. For example, the recent financial crisis – due in part to misleading information on the riskiness of mortgage-backed securities – greatly hurt consumer demand and hampered economic growth for years to come. Therefore, deterring future white-collar crime and its potentially damaging economic consequences should be factored in when assessing the true costs of enforcement.
It is also a dubious claim that punishing white-collar criminals would deter innovators driven to violate obsolete regulations. Though it may be true that entrepreneurs like Steve Jobs and Bill Gates engaged in activities that brought them into conflict with enforcement agencies, this does not prove that these actions were necessary to the success of their societally beneficial companies. In fact, these anecdotes do not provide any causal evidence that punishing white-collar crime will stifle the innovations of the entrepreneurial process. It is reasonable to call for changing regulations when they are outdated and inhibit innovation, but this should be decided through proper legal channels.
Nor can the blame be shifted entirely to a corporate culture or business environment that promotes wrongdoing. Fiduciary duties hold corporate managers accountable to the best interests of shareholders and to the laws regulating the operations of their businesses. Thus, unlike the article suggests, corporate managers, not just firms, would be liable when in violation of these duties. To fail to punish white-collar criminals in these instances would enable those individuals to escape accountability to their fiduciary duties.
By reducing the trend of increased punishment for white-collar crime to a bitter, populist movement, The Economist’s article fails to acknowledge the potential benefits of such a policy. Ultimately, more studies should be conducted to analyze the impact of increased enforcement on rates of innovation to determine whether there is a causal link. Even if an impact is found, though, it merely suggests a need to update regulations with greater speed to account for changing economic conditions. To realize the potential economic gains from greater trust in financial firms, punishments for white-collar criminals must be adequately enforced. Such an effort extends beyond populism in its intent to improve the economic well-being of all parties, consumers and businesses alike.
I am a second-year student at USC, majoring in Economics-Mathematics. On this blog, I will share my take on the technology issues the world currently faces.