Arnold Kling  

When Capitalism Ran Amok

In Defense of the Obvious... Important Economic Drivers of ...

David Leonhardt writes,

For three decades now, the American economy has been in what the historian Sean Wilentz calls the Age of Reagan. The government has deregulated industries, opened the economy more to market forces and, above all, cut income taxes.

Three decades. 1978-2008. I can remember airline deregulation and trucking deregulation--they happened under President Carter, who left office in 1980. There was a lot of restructuring of bank regulation--fewer interest rate regulations, better capital regulations--following the S&L crisis of the early 1980's.

What else are we talking about here? Over the past fifteen years, what are the great acts of deregulation that have taken place? What did President Clinton deregulate? What did President Bush (either one) deregulate?

The narrative of capitalism run amok seems to be based on the Bush tax cuts and the allegation that Bush is cozy with the evil plutocrats. Is the narrative based on any other specific policy change?

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COMMENTS (19 to date)
Patrick writes:

Umm... Telecommunications? Power Transmission? Banking/Insurance?

liberty writes:

Welfare reform during Clinton's term (deregulate the poor) and telecom deregulation also under Clinton; and airline deregulation, tax simplification and cuts, the end of price controls, some reduction in tariffs, and various other deregulations and privatizations under Reagan; Bush introduced private health accounts and spoke about privatizing social security -- what he has actually accomplished in those areas is a lot less, his major work has been on taxes and even that is not much.

Those are my thoughts - I'm sure others can give you more and better specifics.

mgroves writes:

Yes, don't forget the "deregulation" of Power Transmission that supposedly caused the blackouts in California.

saifedean writes:

Perhaps what contributes to a stronger perception of deregulation is the fact that non-regulated (or less-regulated) parts of the economy have grown tremendously faster and bigger than the regulated parts and become a bigger share of the economy. Think of the internet. Of course, this could be down to technology, but could also be down to the fact that they are not regulated.

Perhaps the way the economy will get rid of the choking of regulation is simply through the non-regulated sections growing so tremendously large without Senators even realizing what's going on, leaving the government regulation stuck to lesser, smaller and trivial aspects of the economy.

rkaz writes:

I keep an RSS feed of this site on my browser; there are interesting articles sometimes, decent writers, worthwhile ideas. And then there's Caplan and Kling, the worst excuses for economists I've seen in a long time.

"What was deregulated in Clinton?" was an actual question. Wow. If you ask any remotely intelligent and up-to-date American musician, he'll speak of 1996's dereg. of the Telecom industry. And that's musicians, not the world's greatest source of widespread knowledge of current affairs.

Maybe Kling's been doodling on the kazoo and hasn't been telling us.

What a joke...

Snark writes:

The Telecommunications Act of 1996 was deregulation in name only:

...the 1996 act is not really a piece of deregulatory legislation at all. By most accounts it adds more than eighty new items to the FCC's “to do” list. Most importantly, it opens the door to a massive new federal entitlement program in the form of enhanced universal service.

I certainly wouldn't be enthusiastic about serving it up as an example of Clinton deregulation.

maximus writes:

What did President Clinton deregulate?

Seems to me Clinton deregulated the financial industries by lifting the interstate banking laws and repealing Glass-Steagall. Both made US banks more competitive in the global markets.

Les writes:

I am disappointed to see ad hominem attacks on our hosts, Drs. Kling and Caplan.

This site should be dedicated to attacking issues, and not persons. Attacks on persons are a gutter tactic, indicative of having nothing of value to add to the debate, and not worthy of any place in serious discussion.

Carl Oberg writes:

I think people tend to lump in the increasing number of contractors doing the work our military used to do, as a form of deregulation. Or at least of "privatization."

Victor writes:

"opened the economy more to market forces" ...

Are NAFTA and various free trade initiatives part of their narrative?

8 writes:

This is an article written by a journalist, not an economist, for one of the most economically illiterate demographics in America, NYTimes readers. You would do better to consult astrologers, as Reagan did, since they are at least trying to be accurate.

spencer writes:

Regulation Q was removed under Carter in 1980 before the S&L problems. The removal of regulation Q was the dominant cause of the S&L crises.

Now who is trying to rewrite history?

You have repeatedly made this false claim while at the same time asserting you have a special expertise in housing.

Stuart Buck writes:

The 1996 Telecom Act wasn't "deregulation" by a long shot. To the contrary, it introduced what I'd say was the most intrusive and far-reaching federal regulation ever invented: Sections 251 and 252 (47 U.S.C. 251 and 252), which mandated that local incumbent carriers (like BellSouth or Southwestern Bell) lease their equipment and networks to their own competitors, at prices determined by state regulatory commissions.

Brad Hutchings writes:

The mindset of telecom regulation after the breakup of AT&T has changed profoundly. When AT&T was a regulated monopoly, they needed decisions from PUCs to offer different color Western Electric phones for rent. Fast forward to 1990/1991 when caller ID was a hard fought battle at state levels between phone companies and so-called "privacy advocates" (typically professors at universities that had email with From fields at the time). As of now, the biggest regulatory thorn is probably E-Rate (aka Gore Tax) service. The rest, such as area code overlays, is noise.

The biggest "threat" of regulation on the horizon is Net Neutrality, and none of the proponents of it can demonstrate that they have brains proportional to the tinfoil hats they wear.

Lord writes:

Under Bush it has been not deregulation but nonregulation, a lot of hand sitting.

diz writes:

Let me also lodge a quick protest to the claim that "The government has above all cut income taxes".

In 1980, Carter's last year, personal income taxes totaled $244 billion. In 2007, they were $1,163 billion. If personal income taxes had risen at the inflation rate over the period, they would be closer to $580 billion.

Lauren writes:

spencer said:

Regulation Q was removed under Carter in 1980 before the S&L problems. The removal of regulation Q was the dominant cause of the S&L crises.

You are right about the facts: that Regulation Q, which limited the interest rates banks could pay depositors, was removed in 1980 under Carter.

However, your analysis that removing it was the dominant cause of the S&L crisis inverts cause and effect. The S&L crisis was well underway before Reg Q was removed.

The long-term existence of Regulation Q over a period that went from no inflation into high inflation was one of the dominant causes of the S&L crisis. It enabled S&Ls to look on the books to unsuspecting depositors as if they were sound and profitable when they were not by enabling S&Ls to get away with not paying their depositors market rates of interest. Under the pressures of rising inflation and higher interest rates available elsewhere, depositors ultimately figured it out and took their money out of S&Ls, parking it anywhere that interest rates were better--from overseas to newly popular mutual funds that did not have regulatedly low interest rates. With no depositors and unable to compete for depositors by offering higher interest rates, as well as being disallowed from offering competitive alternatives such as non-S&L banks were allowed, S&Ls were failing left and right in the late 1970s.

From Savings and Loan Crisis, Concise Encylopedia of Economics:

Regulation Q, under which the Federal Reserve since 1933 had limited the interest rates banks could pay on their deposits, was extended to S&Ls in 1966. Regulation Q effectively was price-fixing, and like most efforts to fix prices (see Price Controls), Regulation Q caused distortions far more costly than any benefits it may have delivered. Regulation Q created a cross-subsidy, passed from saver to home buyer, that allowed S&Ls to hold down their interest costs and thereby continue to earn, for a few more years, an apparently adequate interest margin on the fixed-rate mortgages they had made ten or twenty years earlier. Thus, the extension of Regulation Q to S&Ls was a watershed event in the S&L crisis: it perpetuated S&L maturity mismatching for another fifteen years, until it was phased out after disaster struck the industry in 1980.

The combination of inflation with Regulation Q was a doomed, untenable mix that fundamentally exacerbated the demise of S&Ls. Removing Regulation Q didn't cause their demise. Removing it was the only thing that gave them a fighting chance at the end of their dying reign. Had it been removed sooner, they might even have found ways to survive.

In fairness to your point and to the original question addressed in the post, I believe Carter only gave in to last-ditch efforts like appointing Paul Volker in Aug. 1979 and then to some of Volker's recommendations, including removing Regulation Q and other interest rate controls, only because of massive public pressure about the effects of double-digit inflation on their daily lives, savings, and borrowings. If you are inclined to attribute that all to Reagan, who was ultimately elected a year later in 1980 and took office in 1981, you may kind-of have a case. It may not have been the choice Carter would have made had there been no double-digit and increasing inflation. Carter did it under the pressures of popular demand in the extreme situation of double-digit inflation and with the upcoming election in mind. Had Carter won the 1980 election, he'd still have had to continue the deregulations he began. Popular sentiment about double-digit inflation and the effects of regulation in limiting their abilities to deal with it were overwhelming.

JohnR(DC) writes:

Maximus mentions that President Clinton deregulated the banking industry, citing the interstate banking and Glass-Steagall reforms.

As someone who was there for the former, I can testify that the main role of the Clinton White House was to get out of the way. The young-pup domestic advisers in 1993-1994 were unenthusiastic about deregulating banking structure. Through the good offices of Hugh McColl, the North Carolina banking baron, and an avid Clinton supporter, the young White House pups were held at bay. The principal movers and shakers that got interstate banking legislation passed were Rep. Steve Neil (D., N.C.) and Sen. Chris Dodd (D., CT). They pushed the bill through a generally disinterested Congress and overcame a lot of congressional (and banker) inertia. Support from the Senate Majority leader at the time, Sen. Bob Dole (R., NE), also was crucial.

Clinton's role, and that of his Treasury Department, were totally superficial. However, it is true Clinton did fulfill his presidential duty by signing the bill, at a ceremony in the Treasury's "Cash Room" where the President had McColl stand and take a bow. I own one of the extant copies of the signed legislation, which I keep as a memento.

g writes:

The Interstate Commerce Commission was formally abolished under Clinton.

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