Not the Fault of Deregulation

There is a growing effort from those on the left to blame our current economic problems on "deregulation."

According to leading Democrats:

House Banking Committee Chairman Barney Frank: "This is the fruit of decades of 'leave the market alone, don’t regulate it. It will take care of itself' ... Clearly we’ve got to get some regulation here."

House Speaker Nancy Pelosi: "The Bush Administration’s eight long years of failed deregulation policies"

House Democratic Leader Steny Hoyer: "A stark failure of the economy and this administration’s laissez faire, take the referee off the field, let anyone do whatever they want to do and everything will be fine"


As the Heritage Foundation puts it though, "The problem with the Democrats' 'deregulation did it' meme is that it didn’t happen – deregulation that is."


Although nowhere near being a socialist "command economy", the United States economy is quite heavily regulated, and a lot of new regulations have been put into place under the Bush administration, like Sarbanes Oxley.

Which is not to say that Bush has deregulated some things, but even far-left Democratic senators like Chuck Schumer have been pro-deregulation in recent times.


Furthermore, government interference with the economy shares a large share of the blame for the mess we are in.

I've stumbled across a number of solid articles that correct the record on this dubious "deregulation caused this" claim, which I think are worth sharing:


First, an editorial titled Is Capitalism Dead? explains the (well intentioned) role the government played in ultimately bringing down the housing market. It begins:

Is this the end of American capitalism? As financial panic spread across the globe and governments scrambled to contain the damage, reality seemed to announce the doom of U.S.-style free markets and President Bush's ideology. But this is wrong in two ways. The deregulation of U.S. financial markets did not reflect only the narrow ideology of a particular party or administration. And the problem with the U.S. economy, more than lack of regulation, has been government's failure to control systemic risks that government itself helped to create. We are not witnessing a crisis of the free market but a crisis of distorted markets.

A Union-Tribute editorial expands on this, beginning with "The mismanagement of Fannie Mae and Freddie Mac is no orphan. It has many fathers, and deregulation of financial markets isn't one of them." and concluding "Appallingly, some Democrats still claim that deregulation fomented by Republicans and greedy investors caused the meltdown. Never mind that the policy of spreading homeownership around to folks who couldn't afford it will cost millions their homes and taxpayers an extra $700 billion."

Finally, I think Don Bourdeaux makes the case extremely well in a letter he sent to the Washington Times:

Your equating George W. Bush with FDR is spot-on ("Franklin Delano Bush," October 20). Both presidents recklessly increased government's role in the economy - a move that proved (in FDR's case) and will prove (in Bush's case) to do nothing but saturate the economy with such uncertainty as to frighten away entrepreneurs and investors.

But popular history will almost surely remember Bush, not as a second FDR, but as a second Herbert Hoover. The myth will be made that Bush was a staunch free-marketeer who was succeeded in the Oval Office by a charismatic saint whose hyperactive interventions saved the economy (even though precious little evidence of economic salvation will appear in the data). History will forget Bush's interventions just as it has forgotten Hoover's - as it has forgotten that Hoover signed the largest tariff hike in U.S. history; as it has forgotten that Hoover tried to create jobs by deporting hundreds of thousands of Mexicans; as it has forgotten that Hoover signed the Emergency Relief and Construction Act, the Federal Home Loan Bank Act, and created the Reconstruction Finance Corporation; as it has forgotten that, with the Revenue Act of 1932, Hoover raised the top marginal tax rate on personal incomes from 25 percent to 63 percent (in addition to raising the corporate-tax rate).

History will repeat itself, blaming capitalism for a problem caused and intensified by government interventions.

Update: Amity Shlaes responds to a critic, and expands on the forgotten history mentioned by Don Boudreaux.

The Worst of All Tax Policies

For decades, voters have had to balance proposed increases in government spending against the necessary increases in taxes they would require. Government growth has been tempered by voters asking "yeah, that sounds nice, but how much will it cost me, the taxpayer?"

There are some who are suggesting Obama's plan to only raise taxes on the top 5% of earners is nothing but a typical empty campaign promise. But let's suppose Obama is telling the truth. That if elected he and the Congress will change the tax laws so that:

No family making less than $250,000 will see their taxes increase [and] the typical middle class family will receive well over $1,000 in tax relief under the Obama plan.

Such a change would turn the temperance of voters asking themselves "how much will government program X cost me, the taxpayer?" completely on it's head because only 1.5% percent of households (which I'll equate with Obama's use of "family") make more then $250,000.

Apparently, no longer would 98.5% of the population need to worry about increased taxes for the increased spending Obama is pushing for.

This shifting the tax burden for new spending to the top 1.5% reeks of "tyranny of the majority" and ominously brings to mind the Alexis de Tocqueville quote: "The American democratic experiment will succeed until the people realize they can vote themselves money from the public treasury. Then it will collapse."


And all this does call into question exactly how Obama will pay for the $430 billion a year of spending increases he proposes.

In 2006, 43% of the government's $2.4 trillion tax revenues came from individual income taxes. (With 15% from corporate income taxes and the remaining 42% from "other taxes").

Let's assume these percentages remain under a hypothetical Obama administration. That would mean Obama needs to raise individual income taxes by $185 billion - all of which would only be paid by the top 1.5% of income earners.

Now I'll be charitable in my analysis here. In addition to the $250,000 figure, Obama has also thrown around the figure of the "top 5%." So, let's actually be more generous and say this $185 billion will all be paid by the top 5% of income earners, not just the top 1.5%.

For 2006, the top 5% paid more than 60% of all personal income taxes - in dollars (rather than a percent), that's somewhere a bit higher than $625 billion. Adding this $185 billion would pump up the total personal income tax revenues by about 15%, from $1.04 trillion to $1.23 trillion. Adding this $185 billion strictly to the burden of the top 5% of income earners would mean that instead of paying 60% of income taxes, they would pay approximately 66%. That means the top 5% (which would include households making $150,000 and up) would be responsible for two-thirds of personal income tax revenue.

That's right:
5% paying two-thirds.

By contrast, let's look at the bottom 40% of households. Allow me to simply quote a recent Weekly Standard article:

The lowest 40 percent of income earners as a group actually receive net payments from the federal income tax system. (They get 3.8 percent of total federal income tax revenues instead of paying any income taxes.) The middle 20 percent of income earners pay 4.4 percent of federal income taxes. Thus the bottom 60 percent of income earners together, on net, pay less than 1 percent of all federal income taxes. (These workers earn 26 percent of national income.)

The data show that the top 1 percent of income earners now pay 40 percent of all federal income taxes, which is almost double their share of the national income. The top 10 percent pay 71 percent of federal income taxes, though they earn just 39 percent of the nation's pretax income.

At what point do even liberals realize this would be grossly unfair?


When you add in the fact that Obama is going to these lower income families a refundable tax credit (meaning that if the tax credit makes you have a negative tax liability, the government gives you the money for the credit, not just reduces your tax burden to zero), what we are really looking at here is, in fact, redistribution. Or, in Obama's words, sharing the wealth.

As Don Boudreaux clarifies, this isn't pure socialism, but:

This "socialism-lite," however, is as specious as is classic socialism. And its insidious nature makes it even more dangerous. Across Europe, this "mild" form of socialism acts as a parasitic ideology that has slowly drained entrepreneurial energy – and freedoms – from its free-market host.

Could it happen in America? Consider the words of longtime Socialist Party of America presidential candidate Norman Thomas: "The American people will never knowingly adopt socialism, but under the name of liberalism, they will adopt every fragment of the socialist program until one day America will be a socialist nation without ever knowing how it happened." In addition to Medicare, Social Security, and other entitlement programs, the gathering political momentum toward single-payer healthcare – which Obama has proclaimed is his ultimate goal – shows the prescience of Thomas's words.

The fact that each of us depends upon the efforts of millions of others does not mean that some "society" transcending individuals produces our prosperity. Rather, it means that the vast system of voluntary market exchange coordinates remarkably well the efforts of millions of individuals into a productive whole. For Obama to suggest that government interfere in this process more than it already does – to "spread" wealth from Joe to Bill, or vice versa – overlooks not only the voluntary and individual origins of wealth, but the dampening of the incentives for people to contribute energetically to wealth's continued production.

Boudreaux on Greed

This is why I wish all politicians, and McCain especially, would stop blaming our economic problems on "Greed":

"Greed" certainly can be unleashed to do harm, but it can also be harnessed to do good. Any compelling explanation of any observed economic reality must take "greed" as a given while identifying the specific incentives provided by prevailing social institutions. If these institutions make serving the needs of others the best path to personal gain, then "greed" is harnessed for human betterment. But if these institutions make predating on others - either through force or fraud, or either intentionally or unintentionally - the best path to personal gain, then "greed" will indeed lead people to act destructively. In either case, though, it is the institutions and their accompanying incentives, rather than "greed," that explain economic reality.

Of Politicians, Toilets and Salt

I've been linking to stuff written by Don Boudreaux over at Cafe Hayek like it's none of my business lately, but he has yet another gem I'd like to point out.

This time it's an opinion piece that ran this past Friday in the Pittsburgh Tribune Review entitled "Sweet Land of Liberty?".

Here's the introduction:

In this sweet land of liberty it is surprising how readily we modern Americans let others rule us. I'm not talking about Americans letting some foreign government rule us. That won't happen anytime soon. There's no risk that, say, we will quietly surrender to an invading army sent from the likes of Moscow or Beijing.

I'm talking about being ruled by homegrown politicians and petty tyrants who butt their noses into the sizes of our toilets, the amount of salt we consume and countless other provinces of our daily lives.

I highly encourage giving the full piece a read.

The Chinese Debt Threat

My good friend Dave left a thoughtful comment on my Faux-live blogging the Iowa Debate post (which I'm surprised anyone actually took the time to read because it was so obnoxiously long). In replying to his comment, I quickly realized I was writing a blog post, not a comment - so here's my reply in the form a brand new post.

Dave took issue with how dismissive I was per the size the US national debt, and the amount of danger that said debt puts us in. Here's his comment in full:

I disagree with you on the National Debt.

The debt that is owed to other countries could really hurt us in the long run. If China really wanted to screw us, all they have to do is sell off the dollar and convert it into other currency. That would trash the value of the dollar and led to unprecedented inflation.

Also, the idea that we can just "not pay back" the debt would be met with international opposition on a massive economic scale. This could lead to heavy tariffs and barriers being put up against the US and destroy free trade. This would led to staggering inflation, good shortages, and a vast economic decline.

At a minimum, China's dictatorship could act unilaterally by blocking all trade. This would led to a huge trade problem with the US. Though China might be hurt worse, they have the political will to take the heat. The American people would not accept the heat...we're pansies. Just look at the Iraq war and why we're "losing."

His position is a common one, and I think is probably the position held by most Republicans, including (I think) all the current Republican presidential candidates.

But it's a topic where my inner-free-trade-libertarian rules the day for me by way of economic philosophy.

I don't worry about damage foreign nations could do to by virtue of their owning some chunk of our national debt because in order for a foreign nation to execute that damage against us, they would need to do a comparable amount of damage to themselves.

Suppose I own 20% of some major public company's stock. I can (temporarily) hurt that company by doing a massive sudden sell off of my stock, but it's going to screw me over too.

Similarly, if China suddenly sells off the dollar-denominated assets they hold (in an effort to decrease the value of the dollar, to harm us), they are going to lose a lot of wealth because, by definition, they'll be selling those dollars off for low values.

Furthermore, as I understand it, China only holds about 4-5% of our debt ^[1]. That could cause noticeable harm, but would hardly be catastrophic.

Moving to the possibility of China cutting off all trade, trade with China makes up about 13% ^[2] of our trade, and 11% ^[3] of their trade. That's more significant than 4%, but I think 13% is recoverable, and as much as it would hurt us to have 13% of our trade blocked off, I can not see a scenario where China would be willing to inflict that harm to us at the cost of 11% of it's own trade.

To quote the Wikipedia article on the (military) theory of mutual assured destruction, "the payoff of this doctrine is expected to be a tense but stable peace".

Finally, on the notion that our refusal to pay back huge chunks of the debt we owe China would result in world wide outrage. I grant this is true, but my counter is that to the extent this is true, I assert that there would be an equal amount of international opposition/outrage if China tried to destroy the dollar or the US economy.

For some more thoughts in a similar vein to mine, but probably better thought out and written, I'll refer (yet again) to a Cafe Hayek blog post by Don Boudreaux: "Should Americans Worry About Foreign-Government Holdings of Dollar-Denominated Assets?".

Boudreaux and I both agree that question is best answered with "probably not."