February 20, 2009

What Really Drives the Debate Over Regulation

Although initial progress in dealing with the current, historically-proportioned recession has been made with the passage of President Obama's stimulus bill and the announcement of a plan to help homeowners avoid foreclosure, the question of what to do with the tremulous banking industry remains. At least so far, the White House seems unwilling to take the drastic step that the George H.W. Bush Administration took in addressing the savings and loan crisis of the late 1980's: temporarily nationalizing banks whose failure would further damage our reeling economy. Even conservative icon Alan Greenspan - as well as much lesser lights like Senator Lindsey Graham - are now saying this is, more likely than not, a necessary step.

My guess is that, underpinning this reluctance, there is concern on the part of the president that such a move might send ideological debates about government involvement in the market to such heights as to put any progress whatsoever at risk. With that in mind, as these arguments simmer, I want to highly recommend an article in Boston Review by economist Dean Baker called Free Market Myth. [h/t NewsTrust.net]

While Dr. Baker's observation that there is no such thing as the free market will come as little surprise to many, where his essay shines is in the dissection of the "more versus less" conflict in regard to regulation:

In general, political debates over regulation have been wrongly cast as disputes over the extent of regulation, with conservatives assumed to prefer less regulation, while liberals prefer more. In fact conservatives do not necessarily desire less regulation, nor do liberals necessarily desire more. Conservatives support regulatory structures that cause income to flow upward, while liberals support regulatory structures that promote equality. “Less” regulation does not imply greater inequality, nor is the reverse true.

Framing regulation debates in terms of more and less is not only inaccurate; it hugely biases the argument toward conservative positions by characterizing an extremely intrusive structure of, for example, patent and copyright rules, as the free market. In the realm of insurance and finance over the last two decades, calls for deregulation have been cover for rules tilted starkly toward corporate interests. And the recent change in bankruptcy law, hailed by conservatives, requires much greater government involvement in the economy.

Dr. Baker supports this proposition with well-stated examples of strong and intrusive regulation backed by conservatives, most notably around concerns such as copyrights, patents and professional licensing - and observes that the real crux of this issue is not about the extent of government intrusion, but the specific constituencies such involvement benefits:

Like conservatives, liberals generally acknowledge that people get ahead as a result of their skills and hard work, with some luck thrown in. The main difference in the liberal and conservative views of the economy is that liberals are more likely to believe that many people face serious impediments to their success and do not get the same chance as people from wealthier backgrounds. Liberals are also likely to feel guilty about the difference in opportunities and therefore support political measures that will reduce the gap and help those at the bottom. However, most liberals still accept the proposition that the distribution of income is fundamentally determined by the market rather than political decisions embodied in regulations such as patents, copyrights, and bankruptcy law.

But what if we accept a view that virtually every facet of the economy is shaped by policies that could easily be altered? Investment bankers get incredibly rich because the government gives them the shelter of too-big-to-fail but doesn’t impose any serious prudential regulation in return. Bill Gates gets incredibly rich because, through copyright and patents, the government gives him a monopoly on the operating system that is (or was) used by 90 percent of the computers in the world.

Doctors are well-paid because, unlike less politically connected workers, they enjoy protection from international competition. The same is true for lawyers and other highly paid professionals. The six-figure salaries depend less on skill and hard work than on being able to structure labor markets in ways that autoworkers, textile workers, and cab drivers cannot.

Dr. Baker concludes with what I think is a very sound basis for examining regulations specifically, and political action in general:
The less-versus-more framing of regulation supports the premise that there is in principle an unregulated market out there and that some of us wish to rein in this unregulated market while others would leave it alone. This is consistent with the idea that large inequalities in income distribution just happen as a result of market forces. But as the above examples illustrate, no one is really talking about an unregulated market - rather we are all just talking about whom the regulation is designed to benefit. Distribution of income has never preceded the intervention of government.
Free Market Myth is an incisive look into the fundamentals of the argument about the regulatory environment in this country, the forces that shape it, and the very real effects it has on the structure of our society. If you can spare 15 minutes, please check it out.

1 comment:

lokywoky said...

Thanks for a really good post on re-framing the issue of regulation. I agree that the more vs less argument does a disservice to really good regulation that levels the playing field for all. You can do that with really good regulations, a few really good regulations. Or you can have huge books full of really bad ones that just confuse everyone and don't do much of what was actually intended (see the Tax Code overhaul that was supposed to simplify filing for taxes - and the result that almost no one can seem to get this right!)

I appreciate the beginning of this discussion. Thanks!