David R. Henderson  

Too Much Deregulation?

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In the latest issue of the Cato Institute's Policy Report, I have the lead article. It's title: "Are We Ailing from Too Much Deregulation?"

In it, I quote from articles by Los Angeles Times reporter Peter Gosselin and Washington Post reporter Stephen Pearlstein. Both reporters argue that a major cause of our current economic problems is deregulation. I quote specifics and analyze the specifics, showing that since the early 1980s, regulation has increased and there has been little deregulation.

One excerpt from my article.

Consider some specifics. Pearlstein writes: For the past 25 years, the United States has put its faith in open, unregulated and lightly taxed markets, and there's little doubt that, over time, that model has expanded economic output and improved economic efficiency. But what Americans have also come to realize is that the same model is less adept at providing other things that we value highly--things like safety, fairness, economic security and environmental sustainability.
There are two main problems with that two-sentence paragraph: the first sentence and the second sentence.

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CATEGORIES: Regulation

COMMENTS (12 to date)
Jacob Oost writes:

We cannot sit by and let history be rewritten as it was during the Great Depression, all to justify greater government expansion, quasi-socialism, and loss of liberty both economic and otherwise. We must repeat, loudly and often, that the financial sector and the health care sector are two of the most highly regulated and tightly controlled sectors of the economy, and THAT is why we see so much trouble in them.

Already Obama is talking about a massive public works program to "lift us out of the recession." I don't see how economists who still espouse totally discredited Keynesian remedies can live with themselves.

Maniel writes:


I like your article; well researched and well-written. I think of regulation as friction in the free market. For example, the minimum wage is a regulatory policy that primarily serves to suppress entry-level workers and prevent work from getting done (legally).

The illustration that comes to mind is that you want to hire me to mow your lawn and you offer me $10 to do the job. Just as we are concluding the deal, someone from the minimum-wage police arrives to explain that it would be illegal for me to do the job for less than $20.
Result: you don't get your lawn mowed; and I don't earn $10.

Best of all, we both pay for the privilege of being regulated.

David R. Henderson writes:

Dear Jacob and Maniel,
I agree with you both. Jacob, we do need to keep talking about this or else it doesn't get talked about. And, Maniel, I like your simple and correct story about the minimum wage. The one thing I would add is that I think the various Keynesians can live with themselves because they are not as convinced as we are of the errors of their ways. We need to talk to them too.

Matthew Schone writes:

If only there were enough time to debunk all the false economic principles outlined by political journalists during a recession. Everyone's an expert when the free market is believed to be turning sour and these falsities only "enlighten" the misinformed.

El Presidente writes:

Until we define a goal, a measure, and a benchmark, however incorrect we might be, we have no logical basis for quantitative verdicts. Too much regulation? Too much deregulation? What does that mean?

If we can't agree on the goal, we talk past each other when arguing over the means. How is that helpful?

El Presidente writes:

I was gonna let it go, but I don't think I will.

"Free markets have done much better than governments at providing safety, fairness, economic security, and environmental sustainability."

May I see your regression model that validates the causal claim in this statement?


". . . [W]hen no one owns a resource, it will be overused because no one has much incentive not to overuse it. One obvious solution is to transform, to the extent possible, the commons into private property."

A sovereign monarch may dispose of all property in their realm, by right. This neither prevents destruction of common resources nor secures the liberty of anybody but the sovereign. If all we need is property rights, a king would suffice. I don't suppose you'd advocate monarchy, so I guess we'll need to look for another solution besides exclusive property rights.

DWG writes:

El Presidente:

Modify the statement to when "no one owns property, or one person owns all property, resources will be over used or under utilized because no one has much incentive to maximize utilization."

This suggests that it is a diversity of ownership by people with a stake in the outcome (both the up- or down-side) that produces the dynamics favoring more optimal utilization of resources. Single-entity ownership, whether a sovereign or a centralized planning regime, leads to less than optimal utilitization, because of the absence of any stake by the persons with stewardship responsibilities.

In retrospect, our recent financial crisis appears to bear this out. In a situation where neither managers of financial institutions nor purchasers of property have anything at stake because of government mortgage guarantees and the resulting granting of essentially no-recourse 100% mortgages, an abyssmal utilization of resources until the bubble breaks.

El Presidente writes:


We can say that central planning leads to suboptimal utilization, or that something else is closer to optimal, but only if we are willing to define optimal. I await a definition. Do you have one?

Jacob Oost writes:

I'll give you one pres. Optimal allocation of resources is reached when as much demand as possible is met.

In a centrally planned economy, the only demand we can safely say is being met is that of the planners. People have enough socks but not enough underpants, and line up for eight hours to get more. They have cars but no gas.

You need prices based on supply and demand so resources can get to where they are most valued. Not to where some planner thinks they need to be, but where millions of individuals who make up the economy by engaging in voluntary transactions that both parties have decided benefit them....think they need to be. That's optimal allocation.

El Presidente writes:

Jacob Oost,

Ah, yes; maximum consumption. Are we speaking strictly of goods and services?

Jacob Oost writes:

No, not "maximum consumption." If somebody wants to live on water and pond scum and never buy anything, that's fine.

I only meant that where there was demand for a particular thing, the price would be at equilibrium, meaning there is minimal MISallocation of resources.

I suggest studying more real economics, and less pseudoeconomics like Schumacher.

El Presidente writes:

Jacob Oost,

"Optimal allocation of resources is reached when as much demand as possible is met. . . . No, not 'maximum consumption.' If somebody wants to live on water and pond scum and never buy anything, that's fine."

It sounds like you are focusing on the gap between supply and demand. I take it then that you would consider declining per capita demand as progress toward optimality, ceteris paribus, since it would narrow the gap between what is demanded and what is supplied. Is that correct? This assumes, of course that demand currently exceeds supply; a pretty safe assumption. Or, as "real" economists have been known to say, resources are limited but wants are unlimited.

If this is a fair characterization of your definition of optimality, there are at least two other ways to achieve this end:

1. Increase average productivity while decreasing average fertility (increasing Y/L)

2. Reduce profit expectations in order to raise the quantity of exchange at a lower price level

Does that sound about right?

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