Can the Left be Losing Faith in Regulation?

Ewe Reinhardt, usually regarded as a “big government” man, says in the New York Times piece below that regulation is part of the economy’s problem.

How could that be? Doesn’t Reinhardt believe in regulation?

The professor explains himself. It isn’t the idea of regulation that is at fault. If markets are left unregulated, all sorts of mischief ensues. The problem arises when special interests get into Congress and the upper reaches of the administration and twist regulatory legislation out of shape. After the special interests do their dirty work, we can’t expect the regulation to do its work properly.

Oh. It isn’t regulation that is at fault. We need it. The difficulty is getting it past the special interests.

This analysis could be worse.  At least it recognizes that crony capitalism, the toxic brew that governments and special interests work up, is doing us in. That recognition is a start. But there are gaping holes in Reinhardt’s story.

In this worldview, the only thing worse than special interests is the messy democratic political process that brings special interests to the table. If only an apolitical elite, a corps  of “experts,” could run the economy, the needed regulations would make sense and everything would run well. In keeping with this view, Reinhardt is careful to blame Congress and the upper levels of the administration, not the bureaucrats in the federal agencies, for the regulatory messes that make it harder and harder for the economy to function.

This is a bit of a deception, perhaps a self-deception, since Congress and the administration only write the statutes. Even when a bill is as massive as the President’s health “reform” measure, most of the rules and regulations are written after passage by the agency bureaucrats, who are supposed to be experts of sorts. Most people understand that these people are just as likely to be corrupted by special interests as Congress or the administration. For a prime example, one need only look at the Food and Drug Administration, which controls one seventh of the economy and has just been given control over farmers under the recent Food Safety Bill. This agency seems to owe its allegiance to big drug and food companies (Big Pharma and Big Farma), not the public.  But Reinhardt doesn’t want to admit that these “experts” may be, indeed often are infiltrated by special interests.

The truth is simpler than all this. Government will never, ever be free of special interest influence. This is true whether government is run by elected politicians or by so-called experts. Even if government in an imaginary world were free of such influence, it wouldn’t know enough to run an economy. Markets are themselves a form of massive information sharing, and most of the information is communicated through prices and profits. No one expert or group of experts can collect, much less use all the information that is generated and simultaneously acted on by market participants.  Laws we need of course, especially laws against the use of force and against fraud. But providing such laws is far different than trying to run the economy day to day which is what the government is now doing in economic sector after economic sector.

In addition, as we have noted before, markets are themselves a regulatory device. They regulate our behavior with the carrot of profit and the stick of bankruptcy. These are the most powerful regulators ever invented. When government does add its own regulation, it must be very careful not to interfere with the price and profit system underlying market regulation. Yet today not just some, but most, regulation undermines the price system and often leaves it in a shambles. The most important example is what the Federal Reserve does. It sets price controls on the cost of money, on interest rates, and no market system can function for long with money prices controlled. Currency prices are also controlled. But so are medical prices and farm prices and so many others in one way or another. Almost everything the government does as it intervenes more and more deeply into the economy acts as a price control of one kind or another and it is no wonder that the economy is doing so poorly.

Ewe Reinhardt is right that regulation has become part of the economic problem. Indeed, taken as a whole, it is destroying the market and thus destroying the economy.  But he isn’t right in his proposed solution.  More bright ideas from more government experts will only make matters worse

To make things better, just start getting rid of the all the price controls.

Click here for the story.