How Legal Complexity can Block Job Growth

Generally,  I am proud to be a lawyer, and to live in a country governed under laws, and to serve in a legal system that does pretty well overall at enforcing those laws in an even-handed way.   Though the occasional stories of corruption do crop up from time to time, and though wealthier people and companies generally can hire great legal talent to advocate for their interests (and poorer folks don't have the same ability), the system in the US has worked pretty well over the 200 plus years that the American republic has existed, flexibly adjusting to changing mores. 

Our system of law has also allowed us as a nation to build a great economy, utilizing our country's many natural resources and investing in our people.   It's not perfect (as with many other powers, our ancestors did many unspeakable things in the name of law to their competitors, enemies, and in particular many racial, religious and other "minority" groups -- and nothing in this entry is intended to excuse their behavior), but no system run by humans is perfect.  And over the course of our history, our law seems to have become generally fairer, requiring more inclusion of diverse groups over time, and extending equal protections of the law to more people over time.  

Key to our legal system is the concept of property rights:  the idea that certain rights to use property (whether intellectual property, or personal property, or my favorite, real property) belong either to an individual or other entity (private property) or to the community at large (public property).  A person or company with rights to private property can essentially do what he or she wants with that property (use it, lease it, sell it, etc.) -- subject to governmental regulations for the good of all, and, of course, to any other rights of third parties that he or she has already given away or sold. 

Various thinkers, including the Peruvian economist Hernando de Soto, have suggested that when the protections of property law are extended to more people,  greater economic success follows, because the protections of property law allow members of a society to engage in economic activities confidently.  

In particular, access to legal systems allows people to quantify, value, use and protect their own property -- and to document what they do with it so that their rights can be enforced.  For example, if you want to start a business, you might borrow money secured by a home equity line of credit to get started -- many computing and other technical companies in California have started that way.  But you can't do that unless you have the right to pledge your interests in your home as security for your loan.

Such access to the legal system also allows third parties to do business with you:  because they can verify that you own certain rights in property, and can structure deals so that those rights are pledged to secure your performance (for example, by providing a loan in exchange for a mortgage on your property -- which means either that you have to repay the loan as agreed, or the lender gets the property). 

Bottom line, if you are pretty sure that your contract will hold up in court if your counterparty breaches it, you'll be more willing to do business with a wider range of people.   If you don't think a court will uphold your contract, it's human nature to only do business with those in your own clan, tribe, or other small group where the informal strictures (rather than explicit laws) are expected to keep your counterparty from jerking you around.  (Much of the world still operates under such implicit arrangements, which preclude or hamper much potential economic growth.)

But sometimes well intentioned laws governing the use of property can be ineffective or can even hurt the economy of the region they are designed to protect.   A case in point is cited in a recent LA Times article:  MIT Professor Yet-Ming Chiang has apparently invented a breakthrough battery for cars that he has installed in his own Toyota Prius and wants to manufacture in America -- one of the sort of high-tech, green products that many Americans see as vital to our nation's economic future and energy independence. 

"Safer and longer-lasting than conventional lithium-ion car batteries, the 52-year old MIT professor's invention packs 600 cells into a case the size of an airplane carry-on bag. His technology has transformed the batteries used in many cordless power tools.

So why are Chiang and his company, A123 Systems, having trouble moving to full-scale commercial production and creating thousands of new American jobs with his better mousetrap?"

Bluntly, because most battery factories can be built in one-third the time (9 months instead of 27) in China, and because supplies are easier to get there (because there's already what economists call an "industry cluster" there, which allows for battery companies to share ideas, suppliers and skilled workers), A123 Systems had to build its first plants in China.  That way it could move into production quickly to show potential automobile industry customers that it would be able to deliver on future contracts.  (Part of this decision was apparently pushed on the company by its sources of capital -- so its decision to begin manufacturing in China was not solely caused by the overcomplexity of laws related to building a factory here, nor by the related delays.)

But here's the rub:  by starting its manufacturing operations in China, A123 Systems was not able to hire Americans to do the manufacturing of its batteries.  In addition, it also had to provide access to its know-how used to create its batteries -- even though it knew such intellectual property would probably not be well protected under Chinese law.

This is a tragedy in three ways.

First, since manufacturing jobs are some of the highest paid American jobs, with the highest "multiplier" effect, this decision cost the US jobs and benefitted Chinese workers instead.  (While manufacturing jobs may not seem glamourous, they are the mainstay of the American middle class, generating on average an annual salary of over $53,000 in Los Angeles County.)

Second, loss of its intellectual property must almost certainly have an adverse effect on the long term prospects of A123 Systems.  Having to build in China means that A123 cannot have the protections that it otherwise would have in the US, which has enforceable and rather vigorous intellectual property laws.

Third, this story suggests that some of the laws intended to protect all of us from inappropriate development have become so complex that they are hampering our economic recovery and job growth.   The interconnected system of federal, state, county, municipal and other local laws governing development and its impact on the environment can be wildly complex, and can add significant cost and time -- and litigation risk -- to a project. 

While we all want clean air, clean water and generally environmentally clean working facilities, the complexity of the laws in this area rivals the complexity of tax laws.  This sort of complexity leads to unintended consequences:  the loss of clean jobs by the US in favor of other countries.   When this scenario is played out over and over again, we need as a polity to consider whether the cures intended by the laws we've passed have become problems on their own. 

In addition, a certain level of humility about the unintended consequences of laws is needed.   For example, here in California a well-intentioned law known as CEQA -- the California Environmental Quality Act -- was originally supposed to make sure that the governmental agencies in charge of providing planning permission for new developments considered the impact of proposed developments on the surrounding environment.  However, CEQA has been abused and has become a major source of delay:  the law is frequently used as a sword to block competitors' projects, or to extract concessions or payments for local interest groups, lawyers who challenge every project and unions, rather than to actually incentivize better land use decisions.

These sorts of unintended consequences suggest that, at a minimum, laws should be systematically re-examined from time to time to make sure they are working to do what they are intended to do, with the least amount of collateral damage to our people's other interests, including our economic interests.

A final note:   in contrast to the depressing story reported above, the Los Angeles Economic Development Corporation, its President, Bill Allen, its subsidiary, the LA-Long Beach World Trade Center and its President, Vance Baugham, and Los Angeles County Supervisor Michael Antonovich and his wife, Christine, among others, were instrumental in convincing BYD Company Limited, a leading Chinese manufacturer of electric cars, to locate its North American headquarters in Los Angeles County.  The LAEDC, WTCA and Supervisor and Mrs. Antonovich worked for 2 years to attract this business to LA County.  BYD officials estimate that initially the company will create 50 - 100 jobs in LA County, and expect to expand operations to up to 2,000 jobs in the region in the next 3 years as it starts selling electric cars here.  (Disclosure:  I have just been elected to be the Chairman of the Board of the LAEDC.)  

Why, when we need to attract jobs here, do we not demand that our politicians simplify the legal processes for developing jobs-creating industrial plants here in the US?