Ask the Libertarian
Doesn’t the economic crisis argue in favor of a greater regulatory role by government?
March 16th, 2009, 2:09 am · 18 Comments · posted by Tibor Machan
Q: I think I know the answer is going to be “no,” but I’m still interested. Doesn’t the economic crisis argue in favor of a greater regulatory role by government?
A: Government regulation of the American economy–with the implication for all economies–is back in favor with politicians, bureaucrats and, most importantly, certain outspoken economists. (Nobel Laureate and Princeton University professor Paul Krugman, who is a regular columnist for The New York Times and a very frequent talks show guest is a good example, as is political scientist James Galbraith of the University of Texas at Austin.) These and a lot of other people have lamented the very moderate deregulatory efforts under the Reagan and subsequent Republican administrations. Their refrain goes, “If only there had been more government regulation, the current economic fiasco would never have happened.” A couple of matters need to be said in response to the mania for government economic regulation.
First and foremost, government regulators are no Gods, nor angels, but human beings every bit as susceptible to making mistakes and even being corrupted as are all those folks who work in the market place. The question, “And who will regulate the regulators?” hasn’t ever been answered satisfactorily because no one will. It is an irreparable situation–something for which Professor James Buchanan received the Nobel Prize when he and Gordon Tullock identified the problems with public choice. The gist of this theory is that all persons, in or outside government, tend to promote their own agendas. I would add that this is especially the case in government where accountability and budgetary constraints are minimal and where the very loose, vague idea of the public interest is impossible to follow as a guide to forging policy.
There is also a serious problem with government regulation that is rarely mentioned, namely, that it involves something inimical to the free society, namely, prior restraint. In the criminal law it is well recognized that no one may be incarcerated or otherwise punished unless he or she has been convicted of a crime. But government regulations impose burdens on millions in the market place who haven’t been convicted of any crimes! This is unjust. Not that matters of injustice figure heavily in contemporary political thinking which is now proudly pragmatic, unprincipled, and thus allows for arbitrariness.
Third, government regulation is very, very costly and removes resources from the market place that could generate economic growth, employment, and deposits that could be used to provide loans for starting business enterprises. I am not here in the position to recount the enormous cost of government economic regulations but there are many works that demonstrate it clearly and convincingly, including such popular fares as John Stossel’s early special on ABC-TV, “Are We Scaring Ourselves to Death?” Stossel showed, with concrete numbers, that the cost of government economic regulation actually results in extensive poverty, something that is the major cause of misery in a society.
Arguments for government regulation are plenty but they aren’t good ones. One is based on the phenomenon of market failures (the cause you cite, David, as a reason for a “greater regulatory role”) but omits the fact that there is a far greater hazard from political failures when governments regulate the market. Another is based on the myth of positive human rights, duties everyone owes to others to take care of them, a position that encourages impermissible involuntary servitude in society.
The only slightly credible support for government regulation, identified in an article by Kenneth J. Arrow, another Nobel Laureate in Harper’s Magazine back in 1984, comes from what Arrow called judicial inefficiencies associated with air pollution and other negative externalities or harmful side effects of economic activities such as manufacturing. But even this is unnecessary when one considers that such bad side effect could be dealt with through public health laws that prohibit defiling the air mass and other public realms.
All in all, the case for government regulation is weak and those who promote the idea seem more convinced of their own invincibility as managers of the economic lives of the rest of us than of any positive elements of the process. It is time to stop the expectation that government regulators can solve our problems.
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I consider myself a libertarian, but the argument that regulation is bad has always raised my antennae. It’s like arguing that we don’t need laws or police — It seems untenable the more one thinks about it. Tell that to the people who have been the victims of criminals and crime.
Maybe it should, and could, be argued that too much regulation is a bad thing and then cite legitimate reasons why this might be so. We all know the police state can be a bad thing. We also know about bad cops and overzealous laws and their enforcement, etc. Of course, we also can imagine the extreme alternative of no laws and no enforcement.
Consider the cost of what lax regulation and oversight have cost the average American recently. This as a result of our current financial meltdown that is really multifaceted and doesn’t just deal with bad mortgages, but with corrupt players who are oozing throughout the system. A little more oversight here would not hurt the system, let alone the credibility of libertarians.
I don’t believe the non producers at AIG deserve both a government bailout and a $165 million bonus package, too. My guess is that a little regulation here would have cost us much less and perhaps prevented us from spending billions of dollars to shore up those who were let out on an extremely long leash.
That my comment needs “moderation” is a little telling, don’t you think? I can only bring to mind a word that describes someone who advocates one thing and does another. Use a little liberty guys; it looks like you need it
I’ve been struggling with this, too. But I can’t get past the fact that those doing the regulation are always inherently motivated by self-interest. How can they not be, even just a smidge? The result, it seems, is regulations that swing left and right with the politics of the day, while those operating under the regulations become motivated to seek creative and/or predatory ways to maximize profit.
I’m not an economist or a political scientist. I don’t have a good solution to this problem, and I’m probably not very articulate here, but I just can’t help but think that a regulated system is unlikely to be any more just or stable than an unregulated one. In theory, a completely unregulated system would require that everyone operate with a much greater degree of caution when they take their investment risks. And risks would be very well understood to be just that, risky. Mistakes would be made, but much would be learned from them. I think there is potential for much greater transparency and stability in such a system.
But I do “think” this, I’m not entirely sure. I reassess my opinions almost daily lately.
P.S. I don’t think a private website has any obligation to let comment threads go unmoderated, no matter their opinions about government regulation. They have every right to establish their own regulations here, and you have every right to take your comment business somewhere else. Besides, have you seen how unproductive comment threads get? I’ll take a well-moderated site any day.
If you follow the path of regulations over the past three decades relating to the financial meltdown you will easily see that it is government interference, manipulation and re-regulations that are solely resposible for the current crisis that we are in.
I believe there can be a satisfactory medium between a regulated and unregulated system. We just need to be diligent and figure when and where regulation is required or not required based on experience. If experience shows, for example, that companies are going to be deemed too big to fail and that both Republican and Democratic administrations are going to bail them out at taxpayers’ expense regardless, then there is an example where regulation can be justified. Their behavior is no longer a matter of private investors taking risks, but becomes the business of everyone who pays taxes in this country.
But I still identify myself as a libertarian and was brought to this conclusion based on a large volume of literature, most of which I agree with, by and large. Let’s just say I was against the bailout of AIG and others. If the bailout had not taken place and had not involved all taxpayers, then the argument about individual risk in an unregulated environment carries much weight with me.
I am a Conservitive! But, I also believe that Government shouldn’t tell a business how to run their Company. The Government is suppose to be run by the people. Not the people run by the Government.
It seems some libertarians are making an error in logic. It does not follow that if the State stopped regulating markets that there would be no regulation. Just because the State regulates markets does not then mean that only the State can do so. There would still be regulation in a free market, however, such regulation will not be provided by a monopolist. This means the regulations will be much more efficient than what the State provides. It also means if the regulators fail to detect fraud, the regulators wil also suffer.
Since the State receives its money through taxation, it cannot be penalized when the regulators fail. In fact, the State receives more money and power when it fails. Just look at the increase in the power of the State which failed miserably in this case. This means the State actually has the incentive to fail as a regulator so that it will receive more power and money to then regulate the market. Only the State receives more power and money for failure.
Also, opposition to governmental “regulation” (hopefully) does not entail a lack of enforcement of certain fundamental criminal provisions. If, as in the case of Bernie Madoff, an individual or firm is committing fraud, that ought to be investigated and prosecuted by the State under all but the most anarchical libertarian theories.
Personally, I’m not so worried about regulatory malfeasance as I am with incompetence or even impossibility. There was no law against the subprime mortgage packaging that precipitated the Wall Street meltdown–would a bigger SEC have prevented it from happening? And if someone wants to argue that it should have been illegal, how are we (or anyone) to make these ex ante risk assessments? Apparently some of the best financial minds in the world didn’t think it to be excessively risky, or else they would not have engaged in the practice in the first place.
Hayek warned us since the 40s about the effects of socialism and collective control.
Our wannabe leaders would be well-advised to read “Road to Serfdom”.
Government interference in the market caused the problems. How is MORE government meddling going to fix it?
Zorn,
Read “road to serfdom”. It was made into a pamplet and distributed by GM, by the thousands. So much for “Reaganism”. Ask GM employees who trusted their corporate leaders that are now going to the gov. trough. A tad hypocritical don’t you think?
McManigal,
Lack of regulation led to creative financing. Same thing occurred in the 30′s. Regulation was put in place to keep this from happening again. But whoops, it did. So lets listen to pols who decrease taxation and at the same time increase spending to start a war that we can never win. Sounds like Vietnam to me. Socialism, communism, who cares when you are unemployed and starving?
It was not lack of regulation that led to our current debacle, it was a mix of too much cash in banks from the stock market profits made during the Clinton years crossing with a growing recession caused by the tax and spending cuts of the Bush Administration. It was all that sudden cash put into FDIC insured accounts by savvy investors when Bush got elected that caused that creative financing by the lending institutions. However there was a fixed amount of that cash but the recession just kept on growing so when the cash ran out the growing recession revealed itself big time! And world wide. The USA is the biggest marketplace in the world and when we quit spending or run out of cash the whole world suffers.
This also reveals a widespread lie that we all get shoved down our throats all the time, that the capitalist system runs on capital. It is now self evident that this is not true. The capitalist system runs on credit, not on the capital furnished by the rich elite. A good credit reputation is worth more than cash in the bank.
Also revealed proofwise is that the US govt controls the economy of the whole world. When it spends heartily the world’s economy booms and everyone benefits economically. When it gets stingy the worlds economy goes into the toilet and millions suffer.
Now why would the republicans want so many to suffer. In this world where slavery is controlled by poverty, ignorance, and terror? Think about it..
Brutus and Cyrano make some good points which I have independently considered myself, and I am loath to argue their validity.
Brutus wrote:
“Since the State receives its money through taxation, it cannot be penalized when the regulators fail. In fact, the State receives more money and power when it fails. Just look at the increase in the power of the State which failed miserably in this case. This means the State actually has the incentive to fail as a regulator so that it will receive more power and money to then regulate the market. Only the State receives more power and money for failure.”
Cyrano wrote:
“Personally, I’m not so worried about regulatory malfeasance as I am with incompetence or even impossibility. There was no law against the subprime mortgage packaging that precipitated the Wall Street meltdown–would a bigger SEC have prevented it from happening? And if someone wants to argue that it should have been illegal, how are we (or anyone) to make these ex ante risk assessments? Apparently some of the best financial minds in the world didn’t think it to be excessively risky, or else they would not have engaged in the practice in the first place.”
Brutus points out roundly that the failure of regulation brings about more regulation and more power for the State.
While Cyrano points out that regulation may be a mute question on account of the fact that, in this case, the packaging of subprime mortgages was beyond the purview of regulators in the first place. Most minds did not see a problem
Both of these points of view provide us with some evidence that more government alone is not the answer to what ails us. What these folks’ points allude to is the very real possibility that market risk should not be manipulated for political reasons by politicians.
It seems fairly clear that without government pressure, the private marketplace would not have dabbled in the subprime mortgage debacle in the manner that it happened. It was government backing that allowed the subprime risk to move forward, since it was understood to have the taxpayers’ and their progeny as captive insurers through more taxation.
In the final analysis, however, I suspect another prominent problem – that is that people should not have to be subjected to such creative financing in the first place. People’s livelihoods should, in the majority of cases, provide the means to achieve the American Dream.
That is one my concerns and one that still falls within the libertarian’s concerns. But it will have to wait until another day. Meanwhile, keep plugging away. We’re converging on an answer.
In 1995, the Wall Street Journal shocked Canadians by declaring their country an honorary member of the Third World. “Bankrupt Canada?” was the headline on the editorial.
Canada’s debt at the time was 68.4 per cent of its gross domestic product. Thirty-five per cent of federal revenues were drained by interest payments on the debt. The deficit that year was $30 billion.
Today, of course, Canada runs surpluses, and has for almost a decade. Its debt is now less than 30 per cent of GDP.
The Canadian government cut spending dramatically and raised Canada Pension Plan payroll taxes years ago to deal with the anticipated burden of retiring boomers. The public wasn’t happy, but accepted it.
The U.S., meanwhile, is creeping towards the kinds of debt levels that would qualify it for the Third World status that the Wall Street Journal once applied to Canada. Whistling past the graveyard was one characterization Bernanke agreed with .
You won’t see the Wall Street Journal’s editorial page say that nowadays, of course. But it’s all a frightening prospect, or should be. And yet,that darn socialistic Canada regulates its banks and not one of them fell into financial hell as they did here in deregulated USA….Bad Canadians! You should never trust the government!! Look at us!!
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