Tuesday, October 21, 2008

Freedom just makes Jacob Weisberg sad

Slate editor-in-chief Jacob Weisberg thunders that recent headlines are evidence of "global economic meltdown made possible by libertarian ideas." According to Weisberg, author of a pro-Leviathan snoozer called In Defense of Government, "any competent forensic work has to put the libertarian theory of self-regulating financial markets at the scene of the crime." It's a fascinating thesis, hobbled just a bit by the fact that it's completely unmoored from reality.

There's a lot of finger-pointing going on now in an attempt to put the the blame for the financial mess on the Bush administration's policy of business deregulation. As with Weisberg's petulant essay, the finger-pointing tends to be strident, if only to drown out the puzzled protests from economists asking, "What deregulation?"

What deregulation, indeed.

As Tyler Cowen, a professor of economics at George Mason University pointed out in the pages of the New York Times:

THERE is a misconception that President Bush’s years in office have been characterized by a hands-off approach to regulation. In large part, this myth stems from the rhetoric of the president and his appointees, who have emphasized the costly burdens that regulation places on business.

But the reality has been very different: continuing heavy regulation, with a growing loss of accountability and effectiveness. That’s dysfunctional governance, not laissez-faire.

In fact, the Bush administration did take some regulatory action -- it increased the burden of business regulation, particularly in the form of Sarbanes-Oxley, which was an ill-considered reaction to the Enron disaster. Intended to toughen financial reporting requirements, Sarbanes-Oxley so enmeshed many companies in red tape that they took their business -- and their money -- overseas. The International Herald Tribune reported last year:

Two studies have concluded that excessive regulation was making the United States an unattractive place to sell new stocks. One study was conducted by McKinsey for the mayor of New York, Michael Bloomberg, and U.S. Senator Charles Schumer, also of New York. The other was done by a group of executives and academics. In particular, the reports single out the Sarbanes- Oxley Act of 2002, the anti-fraud law passed after the debacle at Enron.

Both studies point to figures that show initial public offerings are migrating to Hong Kong and London, where underwriters charge half of what they do in the United States. If IPOs flee, the thinking goes, trading, investment and jobs will follow.

When money leaves the country, financial firms are just a bit less flush, a little less stable -- and that matters when times get tough.

But those are paper regulations. Did they have any teeth under President Bush? Have there been, over the past eight years, actual offices and warm bodies to make sure that companies adhere to red tape, for good or ill?

As a matter of fact, the answer is a big, fat, "yes." A study performed by Melinda Warren of Washington University in St. Louis's Weidenbaum Center and Susan Dudley of George Mason University's Mercatus Center, found a 42% real increase in federal regulatory spending just between 2001 and 2005. By this year, according to a follow-up study from the same organizations, that had turned into a 65% increase in regulatory spending.

Deregulation? Really?

So if regulations and regulatory enforcement increased, and that resulted in some capital fleeing the country, who was to blame?

Well, the answer is, no doubt, one we'll be pursuing for years to come. But the culprit may be ... well ... standing in the shadows behind folks like Weisberg. Professor Tyler Cowen, quoted above, fingered ineffective regulation along with a loss of accountability under President Bush, which could only have made the administration's heavy-handed regulation worse. But he continues in his Times piece:

It would be unfair, however, to blame the Republicans alone for these regulatory failures. The Democrats have a long history of uncritically favoring expansion of homeownership, which contributed to the excesses at Fannie Mae and Freddie Mac, the humbled mortgage giants. ...

As late as this spring, Congressional Democrats were pushing for weaker capital requirements for the mortgage agencies. The regulatory reality was that few politicians were willing to exchange short-term economic gains — namely, higher rates of homeownership — for protection against longer-term financial risks.

Jacob Weisberg is no dummy. He knows that there has been no deregulation over the last eight years. He knows that there has been, in fact, increased regulation and enthusiastic enforcement of the same. And, at the same time, politicians substituted political preferences for sound business practice through the medium of government sponsored enterprises such as Fannie Mae and Freddie Mac. These are policies Weisberg favors. But the financial crash came anyway. So rather than reconsider the expanded state interference in economic life that he has long favored, he tries to place the blame on advocates of smaller government, who haven't been near the reins of power in recent memory.

Frankly, this is like a tribal witch doctor blaming western medicine for the epidemic that wipes out his village after his fathful flock exclusively relied on rattles and chicken bones to maintain good health.

This matters, because government intrusion into human life in all areas, whether business, sex, gambling, marriage, guns, abortion or the funny substances you favor to take the edge off a long workday, all tend to produce nasty unintended consequences. People like Weisberg then try to deflect the blame for those nasty side effects from the policies they favor to people who have long warned against such state interference in people's lives. If Weisberg and company are successful in their attempts to place blame for the witch doctors' errors on the physicians, we get another round of intrusions with new unintended consequences and ...

And so it continues.

So, when you hear apologists for greater state involvement in your life like Jacob Weisberg screaming that the problem is that you have too much freedom, take a peek around to see just which poorly thought out big-government programs might actually be at the center of the mess.

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