Dean Baker, Free Market Myth, in Boston Review (Jan/Feb 2009)  (hat tip to Angry Bear) is certainly worth reading.  Baker looks at the tendency of both liberals and conservatives to talk about the financial collapse as a failure of regulation, but notes that "blaming regulation is misleading" since the real failure is one of public policy.

Baker uses patent and copyright law as a way into the issue.  We give extraordinary protection to patent and copyright holders, and use the enforcement power of the state to stop infringers.  Yet , he says,this protection tends actually to assist in the establishment of monopolies that actually slow rather than speed helpful innovations.

The list of extroardinay government measures that have been developed to enhance copyright protection is lengthy.  Remarkably, these measures are never described as forms of government regulation.  Theya re treated as enforcement measures necessary to protect copyright.  However, just as patents are not the only way to encourage innovation, a government-granted monopoly with extensive rules and heavy-handed enforcement is not the only way to promote creativity.

***

A final example of excessive government regulation, never discussed as such, is the bankruptcy-reform bill that passed Congress in 2005.  This bill substantially strengthened the conditions imposed on people seeking bankruptcy protection, makin such protection a much less attractive option.  ...The liberal argument [against the bill] relied on sympathy for the people seeking bankruptcy. ... The conservative argument [in favor of the bill] relied on individual responsibility. ...

[This] obscured the real issue that the bill addressed: to what lengths should the tovernment go to collect unpaid bills?  The party seeking the aid of the government in this story is the creditor, not the debtor.  Under the preexisting bankruptcy law, creditors could law claim to most of the debtors' assets and in some cases place liens on future earnings.  The new law hugely expanded the creditors' claims on future earnings.  This means that the government will be far more involved in bill collection in the future than it has been in the past....

The individual-responsibility line could have been applied just as validly to the creditors.... Part of being a successful business involves knowing under what circumstances to extend credit.  No one forced busiensses to extned credit to the people who subsequently declared bankruptcy.  They exercised bad judgment. ... Why should the government step in to help businesses that fail to assess credit risk.  The ideological battle around the bill was a distraction.  It was an effort to get the government more actively involved in helping the banks.  It's that simple.

Baker then turns back to the financial collapse, and notes that regulations designed to protect the public and ensure the stability of the financial system were considerably weakened.  But "the key regulation that remained in place was the "too big to fail" doctrine.  Essentially, the banks and other financial institutions took enormous risks with an implicit guarantee that their creditors could count on the protection of the U.S. government if things went badly."  Given the lax treatment of leverage and the deregulation of derivatives like the $70 trillion credit default swap market, the "too big to fail" doctrine "essentially gave the banks a license to wage with taxpayers' money."

Bill Gates, Baker says, got filthy rich because the government set up rules that permitted him to have a monopoly on the operating system of most computers in the world.  Investment bankers got rich because the government sheltered them under "too big to fail" while letting their speculative activities go unscrutinized.  Doctors are well-to-do- compared to factory workers, because our professional licensing rules protect their jobs from cheap competition, but don't protect auto and textile workers' jobs.

So we shouldn't really be talking about more or less regulation, Baker says.  Nobody wants an unregulated market, but different groups want government's actions to help different sets of people.  "We are all just talking about whom the regulation is designed to benefit."  Addressing that issue up front--does this legislation benefit the haves or does this legislation protect the have-nots--is terribly important. 

Comments

[taxrascal]

It seems pretty tortured to argue that 1) nobody realizes that copyrights are monopolies, and 2) that nobody thinks copyright law is a regulation.

There is also a big difference between the kind of common-law regulation that makes transactions possible (stuff like forcing people to make good on debts) and regulations that try to force people to do things they otherwise would not want to do (like mortgage price guarantees). Most people want a functioning lending system -- very few people honestly wanted highly inflated home prices.

[LindaMBeale]

Well, TaxRascal, copyright is set up in our system as a property right that deserves to be protected. I think Baker is pointing out that the result of the way our laws work is that copyright has the effect of regulating heavy-handedly in favor of copyright holders, as a purported means of encouraging creativity, and that may be the wrong thing to do from a policy standpoint. He wants us, I think, to be careful not to think that all increases in government regulation (understood in this broader way) are good or bad, but rather to think about regulatory regimes more clearly in terms of what the underlying public policy goald is, including a clear understanding of the beneficiary of the regime.in terms of how they serve public policy goals.

I'm not sure how what you say in your second paragraph changes the discussion. I'll agree that most people want a functioning lending system and not inflated home prices. But I think Baker's point is that the deregulation of the financial market benefited those who could make large profits from speculating and who therefore would care less whether there was a truly well functioning lending system or inflated home prices--or at least who would therefore likely lose sight of the fact that there actions might well lead to a non-functioning lending system with inflated home prices.