With the market meltdown of the past year those of us who are long-time supporters of the freedom of markets have by now heard the refrain: “What do you say now?” or “So much for your mighty market economics” and especially “See, deregulation doesn’t work.”
Let’s dispense with the “deregulation” myth right here. The list of new regulations called the Federal Register averaged 72,844 pages during the Carter administration, 54,335 pages during Reagan’s presidency, climbed to 59,527 pages for Bush the First, escalated during the Clinton years to 71,590 pages, and set an all-time record during Bush the Second at 75,526 pages, supposedly the era of deregulated markets run amok. So much for the Republicans as the party of government nonintervention.
It gets worse. The number of full-time U.S. government employees in regulatory agencies increased 63 percent between 1980 and 2007, from 146,139 to 238,351, while U.S. government spending on regulating the market tripled from $13.5 billion in 1980 to $40.8 billion in 2008 (in year-2000 dollars for the comparison). During that time the population of the United States rose from 226.5 million to 301 million, an increase of 33 percent (compared to the 63 percent increase in regulatory employees). One final comparison: spending on regulation increased from 0.26 percent of GDP in 1980 to 0.35 percent of GDP in 2007, an increase of 35 percent.
By now your Baloney Detection Devices should be going off. “Hey, wait a minute Shermer, you’re throwing out figures for general regulation and we’re talking about the regulation of the financial industry.” Okay, fair enough. In point of fact, the biggest growth in regulatory spending came in the form of national defense — so called “homeland security” — where spending quintupled from 1980’s $2.9 billion to 2007’s $16.6 billion (again, in year-2000 dollars for comparison).
But the second-largest rate of growth in regulation was in finance and banking, where regulatory spending increased from $725 million to $2.07 billion from 1980 to 2007 (in year-2000 dollars), nearly triple. And there is a cry for more regulation? Please!
If deregulation is not the problem, then what is? The current economic collapse is due to a concatenation of natural business cycles, black swan contingencies, and government intervention into the housing and financial markets — most notably the Clinton administration’s drive to achieve an “ownership society” that forced Freddie Mac and Fannie Mae to lower interest rates on high risk loans — which triggered the collapse of the housing and financial markets, and with them the rest of the economy.
The good news is this: In time the economy will recover. It always does. Don’t regulate. Be patient.