Posted by
on Monday, January 14, 2008 6:32:16 PM
I can't stand when knowledgeable politicians who should know better exploit the public's lack of understanding of very complex problems for political gain. In yesterday's Financial Times, Rep. Barney Frank (D-MA), chair of the House Financial Services Committee, did just that, arguing that America needs more--not less--regulation:
"As we prepare for this autumn’s
election, the results are in on America’s 30-year experiment with
radical economic deregulation. Income inequality has risen to levels
not seen since the 1920s and the collapse of the unregulated portion of
the mortgage and secondary markets threatens the health of the overall
economy."
Rep. Frank was telling the truth in that excerpt, but not the whole truth. Yes, the results are in on America's 30-year experiment with much-needed economic deregulation, but they are decidedly positive. Yes, income inequality has risen to levels not seen since the 1920s, but whether that's a bad thing is less clear, and what, if anything, the government should do about it still less. Yes, the unregulated portion of the mortgage market is threatening the health of the overall economy, but Congress and the Federal Reserve are likely more responsible than any mysterious market excesses.
Libertarians love deregulation, and I'd be lying if I said I was an exception. I have a sneaking suspicion that we could privatize the U.S. Postal Service and see massive improvements in service and long-term reductions in the real price of service. My sense of government education is much the same. If we want to look at an example of an industry that we actually deregulated, however, then the airline industry is a good case in point. Service improved and fares fell. Admittedly, larger airlines still engage in flagrantly anti-competitive practices, but only because earlier over-regulation protected them and gave them the unnatural size necessary to do it. Over time, however, bloated companies like Delta will fail and nimble companies like Southwest will prevail. Without deregulation in the airline industry, we would all be a lot worse off.
But let's forget about the libertarian causes celebres and turn our attention to Rep. Frank's own backyard. I wonder what Rep. Frank would say about how successful Sarbanes-Oxley (SOX) has been in forcing publicly traded companies to delist from the major American exchanges? The Securities and Exchange Commission now requires companies to meet such high auditing standards before they can list on the major exchanges that for many companies, SOX has become a prohibitively high barrier to entry into capital markets. That's a problem because when companies cannot leverage capital markets, they are forced to pay higher interest rates on loans because they cannot spread risk across as large a pool of investors. They cannot expand and innovate as quickly and economic growth and increases in the standard of living slow. Is it any wonder that the London Stock Exchange now boasts more initial public offerings a year than the New York Stock Exchange?
It's awfully convenient for Rep. Frank to argue that the market is leaving some people behind while his committee's laws restrain the income-boosting potential of the market, but some day I would like to hear a liberal make a compelling argument as to why income inequality is a bad thing. There is a compelling argument to be made, but all I ever hear from liberals is that it isn't fair for some people to have more than others. That's nuts. Bill Gates makes a lot more money than I do, and that may be unequal, but it's completely fair because he's a much more productive individual than I am. He produces software that makes people's lives better while I produce blog posts, so he has earned his money, and I don't begrudge him that. Complaining that someone has more than me simply because he does sounds a lot like, "Mommy, Daddy, he has more than me! She has more than me! Give me more!." It's a childish waste of time.
Here's the argument liberals like Rep. Frank should be making. When an individual amasses such a fortune that he has the market power to distort price signals, then income inequality may be a problem. Mr. Gates, instead of engaging in meaningful philanthropic work, could have offered all the homebuilders in America tons of money to build a Tower of Babel in the middle of the state of Washington. The result would have been higher building costs for very useful homes for the average American relative to costs for the useless second Tower of Babel. The conclusion, however, is not more regulation but less. Should we tax away all of Mr. Gates' wealth and discourage others from innovating and becoming more productive? Of course not. Instead, we should deregulate government education, from kindergarten on up through graduate school, so the real price of an education falls over the long term and more people have the opportunity to become as productive as Mr. Gates.
Finally, blaming the housing crisis on market excesses is one of the greatest cop-outs ever. In Alan Greenspan's new book, The Age of Turbulence, he describes the Federal Reserve's decision to leave interest rates low throughout the late 1990s. The Fed thought that increases in information technology were increasing productivity to the point where the country might actually need and be able to absorb a larger monetary base. Mr. Greenspan admits that leaving rates too low, however, carried with it the risk of creating a housing bubble but that he thought the benefits of broad homeownership to democracy outweighed that risk.
This is one of few times when I must respectfully disagree with Mr. Greenspan. Yes, broad homeownership is a very good thing, but when we leave interest rates artificially low, we are deceiving buyers into thinking they can afford homes when they really can't and setting them up for failure. A much larger housing bubble developed before the Great Depression because the Fed left interest rates artificially low to help prop up the overvalued British pound. When inflation picked up, the Fed raised rates and people lost their homes. The same thing is happening today. Rather than using interest rates to micromanage the economy, the Fed should concern itself simply with controlling inflation and protecting the value of the dollar. Refusing to indulge irresponsible lawmakers on Capitol Hill with an accommodative monetary policy would force Congress to pay down the national debt, stop running deficits and reduce the size of government over the long term. The result would be lower and more stable interest rates, making confusing and opaque lending vehicles like adjustable-rate and interest-only mortgages less risky for buyers and therefore less attractive to lenders, and probably fewer foreclosures, too. Rep. Frank can regulate the housing market and the lending industry all he likes, but all that amounts to is a refusal to take responsibility for Congress's own actions.
I am very apprehensive about the coming election because I think Democrats might be able to ride the waves of the perfect storm. Mr. Greenspan was right that market capitalism increases anxiety because it exposes us to creative destruction and forces us to innovate constantly, but in exchange for that anxiety, we all enjoy a higher standard of living. Tapping into that anxiety and leveraging it to produce more regulation and less freedom will only hurt us all. Rep. Frank wants to do just that in the capital markets, and all the Democrats want to do it in health care. It's irresponsible and experienced policymakers like Rep. Frank should know better. Centralized, one-size-fits-all regulation at the federal level is the essence of arrogance. Why on Earth would we ever want to make it illegal for anyone else in the room to have a better idea?