Topic: Regulatory Studies

Does Harper Support Regulation of Gambling and Financial Services?

My post yesterday regarding Members of Congress who voted to exempt financial derivatives from state gambling laws created a firestorm of controversy. Well, two people asked me about it, anyway …

(A new WashingtonWatch.com post on the presidential candidates who didn’t help create our economic problems is available for your perusal, by the way.)

“Why would a libertarian think it’s bad to exempt anyone from regulation? Do you support gambling laws? Do you support financial services regulation?”

These are all fair questions, given my objection to preempting state gambling laws in this case. So let me expand on this observation from my earlier post:

Many gambling laws are nanny-statism, of course, but if they’re going to go away, they should be repealed by the legislatures that wrote them. This federal preemption gave special permission to certain parts of the financial services industry to run a huge gambling operation masquerading as a market in real assets.

I’m quite a bit less a fan of preemption than many of my colleagues. There are fair-minded people who believe that national markets call for national regulatory regimes to replace the states’. As commerce has become national, the Commerce Clause has become a grant of authority to regulate national markets, they appear to believe.

I’m not convinced. Given the nation’s experience under the Articles of Confederation, the Commerce Clause was included in the Constitution to prevent states from regulating parochially - that is, for the benefit of local interests over out-of-staters. The Constitution gave Congress authority to regulate commerce “among the states” - which, if words have meaning, is something narrower than just regulating all commerce.

So when state gambling laws interfere with an interest capturing the sympathy of a majority in Washington, D.C., that doesn’t necessarily empower Congress to withdraw state authority. Congress is supposed to prevent only state parochialism, not every bad idea coming out of a state legislature.

If we are to have a healthy political economy, debates about state gambling regulations should be taken to each state that enacted them. The merits of freedom and personal responsibility should be made clear there so they win majorities once again.

The alternative preferred by many is a shortcut: trumping states by moving power to the federal level. This is not a felicitous trend, and its end-point - a remote national government with plenary power - is not good for liberty.

Gambling regulation is nanny-statism, but I wouldn’t go and kick the legs out from under state anti-gambling regulation through federal preemption - especially not for one narrow part of the financial services industry. This is not a game, where any loss for regulation is a gain for liberty.

If responsibility for self-protection against gambling is going to be restored to people in a given state, the legislature of that state should repeal the anti-gambling laws, signaling people that they are once again responsible for themselves. What happened here was that Congress trumped state power and withdrew the protection of state anti-gambling regulation without signaling to anyone that there were risks to be encountered. What looked like asset-based financial services to all but a few was in fact gambling.

The Congress helped perpetrate a deception about what was going on with financial derivatives - and just because some regulation went under the tires, that isn’t a victory for liberty.

Deregulation and Inequality

Matt Yglesias has been doing some great blogging lately about the negative effects of certain kinds of government regulation on ordinary consumers:

The fact that Joe is not a licensed plumber would be a great opportunity for an enterprising politician to try to make an issue out of the growth of occupational licensing requirements in the United States and the barriers to economic growth and opportunity they create.

And occupational licensing is hardly the only such example. Lots of America’s land use and business licensing regulations are, likewise, measures that do much more to entrench existing privilege than to promote any kind of public interest…

The original wave of deregulation was promoted by conservatives, but also liberals like Ted Kennedy, Steven Breyer, and Ralph Nader. I think we see now that that wave went too far in some respects, but in other areas it hasn’t gone nearly far enough. This is a good cause for progressives to pick up, but also one that would be completely open for a conservatism that was interested in helping the little guy rather than mocking efforts to help him as the second coming of Josef Stalin.

Matt is getting some criticism from his mostly left-of-center readers for this, but he’s right. Even if you think some recent deregulation went too far (personally I think a lot of what was labeled “deregulation” in recent years wasn’t), the deregulation of the airline, trucking, and telecommunications industries in the 1970s was unambiguously good for consumers and economic growth. Liberals like Ted Kennedy and Stephen Breyer understood this and were key architects of the deregulation effort. A similar wave of deregulation at the local level could do a ton of good, and it would be a lot more likely to succeed if we had the same kind of ideological buy-in from the left-hand side of the spectrum.

I think there’s a related point here for libertarians: we’re often too quick to reject populist rhetoric and concerns about inequality. Certainly there are good reasons to be skeptical of proposals to redistribute income via the tax code. But there are also lots of ways in which government policies widen the gap between rich and poor. So when people express concerns about inequality, the most effective response is not to dismiss those concerns out of hand, but to turn the conversation to the many ways that bad government policies have increased inequality. Liberalization of occupational licensure, business licensing, and land use regulations, restrictions on eminent domain, school choice, and a reduction of corporate welfare are all policies that deregulate and reduce inequality. Libertarians and liberals ought to be natural allies on these populist, deregulatory issues, and such a coalition is more likely to emerge if libertarians take liberals’ concerns about inequality more seriously.

Gods That Fail

Harold Meyerson in the Washington Post has a column titled “Gods That Failed.” He’s referring to a famous book:

In 1949, a number of famous writers, among them Arthur Koestler, André Gide, Richard Wright, Stephen Spender and Ignazio Silone, wrote essays explaining why they were no longer communists. The essays were collected in a volume entitled “The God That Failed.”

And then he makes this analogy: “Today, conservative intellectuals might want to consider writing a tome on the failure of their own beloved deity, unregulated capitalism. “

Where to begin? Certainly we haven’t had any unregulated capitalism lately. As I put it the other day, the kind of capitalism that has encountered the current crisis is “the kind in which a central monetary authority manipulates money and credit, the central government taxes and redistributes $3 trillion a year, huge government-sponsored enterprises create a taxpayer-backed duopoly in the mortgage business, tax laws encourage excessive use of debt financing, and government pressures banks to make bad loans.”

As for conservative intellectuals, some of them may wish for some form of “unregulated capitalism,” though plenty of them – from Russell Kirk to David Brooks and Michael Gerson and that Arkansas Aristotle, Mike Huckabee – have been pretty darn skeptical about capitalism. But whatever the more free-market conservatives may have dreamed of, they didn’t get laissez-faire. Nor did they ever make capitalism their deity, the way communists truly did make the workers’ state their god.

But let’s think about the comparison that Meyerson is making. Some intellectuals once supported communism, and that failed. Some intellectuals, we’ll concede for the moment, were just as enraptured with capitalism; and that system, too, in Meyerson’s view, has failed. Are these equivalent failures?

Communism’s failure involved Stalin’s terror-famine in Ukraine, the Gulag, the deportation of the Kulaks, the Katyn Forest massacre, Mao’s Cultural Revolution, Che Guevara’s executions in Havana, the flight of the boat people from Vietnam, Pol Pot’s mass slaughter – a total death toll of 94 million people, according to the Black Book of Communism. Prominent American leftists – from Lillian Hellman and Dalton Trumbo and lots of other writers to Alger Hiss of the State Department and FDR speechwriter Michael Straight, who became the publisher of The New Republic – were members of the party that did these things. And that party had total control in the countries that it ruled. There were no opposition parties, no filibusters, no election-related maneuverings that prevented the party in power from getting what it wanted.

What the Communist Party wanted, it got. Communism in practice was communist theory made real.

In the United States, on the other hand, economic and political outcomes are always the result of jockeying between parties and interest groups. So even if Ronald Reagan and his advisers wanted to give Americans “unregulated capitalism,” they had to deal with Tip O’Neill and the Democrats, and with critics in the media, and with many other players. As these forces played out, in the late 1970s and early 1980s some deregulation did occur, along with some tax-cutting. And indeed there was some financial deregulation in the Clinton years as well.

And what is the ”failure,” as Meyerson puts it, of this semi-deregulated capitalism? Does it involve mass starvation? Does it involve terror-famines? Does it involve millions of deaths? No, so far it involves a sharp decline in the stock market from record levels. Taking 1980 as the starting point for Meyerson’s nightmare vision of “unregulated capitalism,” here’s what has happened to the S&P 500. It’s had some dips, but it still reflects vast wealth creation, and vast increases in the assets of our IRAs and 401(k)s.


(click for larger version)

The “failure” of capitalism and the failure of communism are not morally equivalent, and Meyerson should be embarrassed to even imply such a comparison.

Missile Defense and the Banks

Many argue that the demand for public goods justifies government spending and taxing.  Defense spending is a classic public good. The New Times offers an interesting case study of how the federal government actually spends money on defense.

The story recounts the activities of Michael Cantrell, a Defense Department employee who turned into a lobbyist for various projects connected to the missile defense program. According to the story, Cantrell “extracted nearly $350 million for projects the Pentagon did not want, wasting taxpayer money on what would become dead-end ventures.”

Cantrell is awaiting sentencing on corruption charges related to taking kickbacks for defense contractors. But his violations of the law did not start until 2000. Much of the $350 million wasted on defense projects happened before he started taking a cut of the action.

Read the whole story. Here is my summary: Pentagon officials did not want the projects Cantrell pushed, but powerful members of Congress did support such outlays. DOD had missile ranges around the world, but Ted Stevens thought another one was needed in Alaska. Acoustics research might have been conducted many places, but Trent Lott preferred the work done by the University of Mississippi in Oxford and a Huntsville defense contractor that had a branch office in Oxford. And so on.

In other words, members were directing the DOD budget to benefit their constituents in exchange for votes on election day. “Vote for me and I will give you $1,000” is not limited to presidential elections.

Gordon Tullock once wrote of campaign finance:

It should of course be kept in mind that [campaign contributions] are not actually for the purpose of buying votes. The votes are bought by the bills passed by Congress, or the Legislature, which benefit voters. But the campaign money is used to inform the voters about what their congressman has done. Since the voters pay little attention, concentrating the message on a narrow scope and repeating it again and again is necessary even though it annoys intellectuals. On the whole it is the actual things done for the voters by the votes of their and other congressmen, which attract voters to elect those congressmen.

The Cantrell story confirms Tullock’s insight. The reporter mentions campaign finance contributions by defense contractors, but by and large, the story is one of constituent service (that is, the creation and maintenance of vote purchase schemes).

There are several interesting questions here. Can Congress actually provide public goods efficiently? Isn’t Cantrell’s story one of earmarking without the earmarks? If so, won’t the practice of earmarking continue even if Congress gets rid of earmarks? The story shows Congress in a poor light, but don’t we want the legislature to control its agents (like the Pentagon) instead of simply delegating authority to spend to them?

One final lesson. The Cantrell story shows what happens when Congress has money to spend on national defense. In coming days, the federal government may come into ownership of many banks. How do you think Congress will spend the capital of those banks?

If Anyone Blames the Market, I Swear I’ll…

Right now, it’s very popular with politicians to blame the free market for our mortgage-driven economic woes. It’s also, as with most things popular among politicians, utter nonsense: Fannie and Freddie are Dr. Washington’s monsters, and DC has practically forced lenders to float loans to high-risk borrowers.

Of course, it’s not just in mortgages that the feds have been superheating the market, only to proclaim that they’re saving it every time they do something that will just make matters worse. They’ve been doing that in higher education for decades, delivering or guaranteeing loans targeted at high-risk borrowers, and the current credit “crisis” has done nothing to curb their enthusiasm. Heck, it’s emboldened them to do more.

You might recall something I wrote back in April about the Ensuring Continued Access to Student Loans Act, a fast-moving piece of legislation intended to shield any college student from the possibility that he or she might not be able to get a loan. Among other things, the act increased limits on several federal loans so that students could borrow even more, and loosened the eligibility guidelines for PLUS loans so that parents in significant mortgage arrears could still borrow college cash. It easily passed Congress, pushing significantly more money at ever-greater risks – and Congress has just extended it to 2010.

And people wonder why lenders make loans to obvious credit risks, and college costs keep on skyrocketing?

Unfortunately, some people in Washington never learn, or worse, know full well that pumping ever more money to big risks is a huge, dangerous distortion, and just don’t care. Case in point, this quote from Michael Dannenberg, senior fellow with the New America Foundation, lauding Senator Obama in a new AP article for proposing a new tax credit program—which includes a make-work “community service” payback piece—on top of all the other federal aid programs:

Michael Dannenberg, senior fellow with the New America Foundation and a former adviser to Sen. Edward Kennedy, D-Mass., says Obama’s proposals take the problem of college affordability more seriously than McCain’s. And he calls the tax credit a significant innovation.
“McCain’s message when it comes to increased tuition is, ‘You’re on your own,’” said Dannenberg, who has not worked for Obama’s campaign. “Obama’s message to families is, ‘We’ll give you more financial aid to help you with college costs, but your kids are going to have to help others.’”

Notice what taking a problem “seriously” means? Offering even more bankrupting government largesse! And who cares about the ultimate bill…until, that is, the reality of “no free lunch” ultimately forces it to come due.

In light of this, nobody, and I mean NOBODY, in Washington had better blame “market forces” for huge cost problems, inefficiencies, or just plain wasted money in higher education. Federal politicians, with their constant bribery of voters and special interests, have made our colossal financial messes, and they haven’t got a leg to stand on acting like they are the solution and freedom is the problem.