Russ Roberts on regulation

Russ Roberts has a new post where he takes more of a “glass half empty” perspective.

But even on the level of the simplest of narratives, it’s not clear what the stylized facts are. Let’s look at the United States since 1980. Is the glass half-full or half-empty? Scott points to falling marginal tax rates, and deregulation. When I pressed him on how much deregulation had occurred, he pointed to transportation, communications (the breakup of AT&T) and financial deregulation such as the elimination of regulation Q.

My response was that yes, marginal tax rates are lower. The total tax burden is higher. In the last decade, much higher. On deregulation, how important are the changes in trucking, airlines, phone service and financial competition? Pretty important. On the other side you have an enormous increase in government’s role in health care. You have a large increase in government’s role, especially at the federal level, in education. There is more environmental regulation not less. I would guess that in most places it is harder to start a business than before. The tax code is more complicated. The nanny state has expanded. The government has intervened significantly in the tobacco market. Local zoning has become much more discretionary and interventionist.

In financial markets, you have the repeal of Regulation Q, the repeal of Glass-Steagall and probably a few other changes I’m not thinking of. But you have the relentless subsidization of lending through creditor rescue that increased leverage in the financial sector.

Those are good points, but here’s how I would respond:

1.  We have also seen deregulation of prices in important industries like energy (oil and gas.)

2.  I live close to Cambridge, a city that has been transformed by the elimination of rent controls.

3.  Welfare reform dramatically increased labor force participation of poor women in the late 1990s, and the gains continued during the 2001 recession.

4.  Trade is somewhat freer

5.  There is a bit more competition in education.

6.  I’m not sure taxes actually are much higher.  At the federal level they have remained around 18-19% of GDP.  Perhaps state taxes have risen a bit.  But there are huge gains from moving away from 70% MTRs (which, unfortunately, we are gradually reversing.)

7.  Some environmental regulations (that overcome externalities) are arguably market-friendly. 

8.  Conrail, some highways, and some public services have been privatized.

9.  Stock trading has been deregulated.

All this is not to say that Russ is wrong, maybe on balance things have gotten worse.  But it’s hard to convey the full sweep of changes in a brief talk, so I wanted to add this list.  I would add that my main interest is the comparative effects of neoliberal reforms across different countries.  I don’t have strong feelings about whether the American glass is half full or half empty.  It might have been 60% full in 2000, and 45% full today.  I do strongly believe that neoliberal reforms have made the world as a whole much more market-friendly than in 1980, and much better off.  I imagine that Russ and I would find greater agreement outside of the US.


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18 Responses to “Russ Roberts on regulation”

  1. Gravatar of Sumner on neoliberalism and growth Sumner on neoliberalism and growth
    21. June 2010 at 15:37

    [...] Scott responds with some more examples of deregulation. He also points out that most of the action was outside the [...]

  2. Gravatar of Benjamin Cole Benjamin Cole
    21. June 2010 at 16:33

    Sometimes we forget even relatively recent history.

    Yes, Reg Q–imagine your main financial choices in life were passbook deposits, or expensive rate-regulated brokerages for stock investing.

    Now I can trade online for pennies, and invest globally in ETFs. From home.

    I can call Thailand (from the USA) on a one of a thousand brands of calling cards, for under 2 cents a minute.

    Nixon imposed wage-and-price controls! Who would dare do that today?

    Environmental controls are noisome–but the price mechanism and free market fail in this particular arena. He who excretes for the least cost (to himself) wins in a free market. But not the least cost to the whole economy. So, eco-regs and taxes actually make sense, when done right. I do not think this is a less-free market.

    The top federal tax rate in the 1950s and 1960s was 90 percent.

    Publicly held companies used to be clubs. After Milken, you could only keep your club if it was reasonably well-run (or you might see an LBO). There is more disclosure and transparency, and shareholders have become more active, though more is needed in this venue. But much better.

    Farms? You got me there. Still socialized and regulated and subsidized, the most mollycoddled, knockneed group of economic weaklings on the planet. In fact, rural America sucks down hundreds of billions in subsidies every year–roads, water systems, power systems, telephones, airports, rail stops, crops–all subsidized. This problem is actually becoming worse, as the Red Bloc–Republican rural states–form a powerful block in the Senate (remember, two Senators from every state, no matter the population). Check out Tax Foundation figs–we subsidize rural America.

    The military remains huge, and a burden on taxpayers. Most consumer durables get cheaper every year, but military hardware only gets more expensive.

    Still, all-in-all, I say the USA has earned a “B” in the last 30 years.

  3. Gravatar of Doc Merlin Doc Merlin
    21. June 2010 at 17:42

    Again, it was a good interview, I have one minor thought.

    ’7. Some environmental regulations (that overcome externalities) are arguably market-friendly.’

    How much of China’s growth is environmental regulatory arbitrage from the US and Europe as a result of the environmental policies that are less market friendly?

  4. Gravatar of Jim Glass Jim Glass
    21. June 2010 at 20:17

    To make a poor analogy, the US economy is like the ocean, there are currents in it going in all directions and one can point to the current one wants to illustrate any argument.

    But overall, I’d say deregulation and economic choice and freedom have made major progress in my working lifetime.

    My first real job was for a Wall Street law firm in the late 1970s. People sitting in the office listened to their stocks trading in 1/8ths. If a lawyer going on the road needed travel money a messenger went to the bank on the first floor and came back with a fat envelope of cash. A laywer who took a flight chose between airlines competing by stewardesses (“I’m Angie, fly my big jets!”) rather than price. Their advertising was across all three network TV channels. (Here in NYC, the world media capital, there were *seven* channels overall!) … etc., etc., etc.

    I think it is very easy to take all this change for the better for granted while being very alarmed about currents flowing the other way, resulting in an excessively pessimistic point of view.

    Yes, public schools consume much more per student today than they did then, for generally no better results — but back then nobody had even imagined voucher or charter schools.

    (This year in NYC charter school proponents scored a victory over the teachers’ union that would have been unimaginable 10 years ago — successfully using TV ads bashing the union that would have been unimaginable to me last year.)

    Yes, the government moves ever-deeper into health care. But as this is a world-wide phenomenon it seems to result from unique political incentives in health care politics, rather than a general move towards more regulation.

    (And even so, even with the WH and 60% majorities in both House and Senate the Dems just barely got enacted a very weak tea program by liberal standards, exhausting every political trick they had to do so. There were no such problems getting Medicare enacted in the ’60s.)

    Yes, the govt is moving ever more into environmental regulation — but even as it does it bows to market principles by proposing market mechanisms like “cap and trade” rather than the command-and-control of the 50s, 60, 70s. The few on-campus free-market economists of those days would I think have been very happy indeed with such progress.

    For that matter, how many free-market Russ Robertses were there in good econ faculties in the 50s thru 70s? I’ve read Coase saying he was socially shunned on campus for many years, and he was a pretty good economist. One can go to Youtube today and see video from back then of John Kenneth Galbraith mocking Milton Friedman to a general TV audience to great applause and appreciative laughter. How many in an audience would line up like that today? (Not even Krugman!)

    So, yes, there are plenty of currents flowing the other way (gov’t sector unions grow ever bigger and stronger and extract more rent for themselves — though private sector unions become ever smaller and weaker) … but this is my overvall view of things, FWIW.

    There may be some conflation in this discussion of “regulation” and “redistribution”. IMHO there has been clear success in furthering deregulation and reduction of govt in principle — many voters all around the politicial median can appreciate it and the absurdities of many govermnent mandates — but there has been zilch success in reducing redistribution. (See supposedly small-government Republicans rising en masse to defend every dollar of Medicare benefits in the Obamacare debates.) And regulations often are imposed to effect redistribution. (See Obamacare.) That regulatory current is real and big enough.

    The poltical incentives to redistribute to seniors, farmers, bankers and every other organized interest group will never end, so regulation and “big government” for that purpose will be with us forever, and that’s no small problem.

    But faith in regulation and “big government” for purposes of boosting economic efficiency, promoting growth, and pleasing the consumer, once widely believed in, has greatly receded during the last 30 years, both in analysis and practice. How many people today would trade the Internet for the old AT&T monopoly and their rented phone?

  5. Gravatar of Bill Woolsey Bill Woolsey
    22. June 2010 at 02:20

    The gradual end of restrictions on branching is important in banking.

  6. Gravatar of Morgan Warstler Morgan Warstler
    22. June 2010 at 04:40

    Scott,

    It bugs me out to have to bring others arguments in to get you to focus, but here is Mish:

    http://globaleconomicanalysis.blogspot.com/2010/06/krugman-vs-greenspan-on-that-30s.html

    He does quick reminder of why you can’t throw out housing prices as too high, but then he settles into public unions:

    “Instead of “jobs programs” per se, we need to fix the structural problems: Unsustainable pension promises and government wages, debt at every level, corporate tax policies that encourage jobs to move overseas (deferral of taxes on profits held overseas and excessive corporate taxes in the US), and the entire tax and spend structure at every level, especially the public level.”

    I think at this point I need to ask you about your biases.

    HOW WOULD 20% cuts in wages paid to Public School Professors and fewer Professors being hired, affect you personally?

    I’m TRYING for the life of me to understand your insistence that we do not have a price contraction on ALL things artificially inflated – WHICH WILL OF COURSE effect the price of all things inflated secondarily.

    And the only thing I can come up with is that you don’t look at modernizing Education and Government as:

    1. the way to reduce debt.
    2. the way to stimulate the economy.

    You jump past those, pay them some minor tribute, insist you want to see real prices go wherever they do “naturally” and then say “THIS IS A BLOG ON MONETARY POLICY.”

    Well Scott, if all you have is a hammer, don’t be upset it I don’t want you thinking you can fix the car.

    In the big scheme of things, macro as in currency fluctuations between nations etc. is interesting at a trade level, but ultimately does not trump, nor can it override domestic micro – even when you are the reserve currency.

    We have on its face a political economy question: Government policy caused artificial booms in public employee and educators salaries and real estate. These are FAR TOO aberrant, for you to cavalierly say “don’t worry about those! before we suffer the pain of that fix, let’s build in some inflation!”

    What’s your real motive?

  7. Gravatar of Morgan Warstler Morgan Warstler
    22. June 2010 at 04:42

    correction: that we do not NEED TO have a price contraction on ALL things artificially inflated

  8. Gravatar of Morgan Warstler Morgan Warstler
    22. June 2010 at 04:49

    Also, to your topic with Russ.

    I think you both could be right. In as much as, what everyone call neo-liberal is really “most people know accept that free trade is the answer.”

    But when you get down into the nitty-gritty, you end up with MORE regulations, that may or may not be enforced.

    Hundreds of thousands of new rules and regulations. Perhaps a billion for legal sentences written?

    So the drag on the system the transfer to the non-productive lawyers, tax guys, compliance training, education, etc. as the system become more complex… whether in the name of deregulation or not.

    Russ beats you here.

  9. Gravatar of scott sumner scott sumner
    22. June 2010 at 05:00

    Benjamin, I agree with 100% of your comments.

    Doc Merlin, I think China’s real income would be higher with better property rights, and its environment would be cleaner. But its measured income might be lower. All communist countries had poor environmental conditions in the 1980s.

    Jim Glass, All good points. By the way, even in health care there has been some deregulation. I seem to recall that the eyeglass industry was partly deregulated, and NY removed price controls on hospitals.

    Bill, Yes, branching deregulation was huge.

    Morgan, I’ve been complaining about the pension problem for years. It might be the next subprime fiasco. You asked:

    “HOW WOULD 20% cuts in wages paid to Public School Professors and fewer Professors being hired, affect you personally?”

    I work for a private college, and I’d favor making all public colleges private. I don’t think the government should own any educational institutions. Once they are privatized, they can pay what they wish. My sense is that government employees may be overpaid, but I really don’t have strong views on the issue, as I haven’t studied it. I do believe the government should spend less money subsidizing education, even though it would hurt me. Ditto for tenure, which I oppose. So I don’t form my political views on the basis of whether they help me or not. Only stupid people do that.

    I completely agree that micro is much more important than macro. But monetary economics is as important as most individual micro issues, if not more so. My views on micro are mostly small government libertarian.

  10. Gravatar of scott sumner scott sumner
    22. June 2010 at 05:03

    Morgan#2, I agree that all the picky regulations that create paperwork are a nightmare. I hope to do some posts on our dysfunctional tax system.

  11. Gravatar of Hillary Hillary
    22. June 2010 at 06:39

    Scott,

    For another example of picky regulations that create paperwork, you might want to take a look at the recent Lacey Act amendment.

    For wood imports, it’s now necessary to declare the species, genus and country of harvest of the wood, regardless if it’s a raw material or a finished product. Details: http://www.aphis.usda.gov/plant_health/lacey_act/downloads/2008-0119.pdf

    The only good thing about it is that they haven’t included paper yet.

  12. Gravatar of Morgan Warstler Morgan Warstler
    22. June 2010 at 16:38

    Hillary, thx for that example.

    soctt, ok so it isn’t personal economic bias. I’m stuck.

    I need you to flesh out what 5% NGDP means is real terms. Where’s the new money going to go? What the mechanism? How are you sure it won’t come from government spending?

    How is it that the actions under a Sumner Fed, IF THEY WORK, will not be used to re-elect Obama? How do these plans not aid and abet Democrats winning?

    ——

    Because, I see before us a glorious opportunity for a smarter America to react in smarter way than our grandparents did with FDR… which ruined a generation.

    And in next ten years time, we’ll say the Dems totally fucked up the GD back then, thanks god we’re smarter, and it only took us two years to wise up and cast off Obama and Ben, and Audit the Fed, and trounce the bankers, and put the FEAR into them, and make their job boring again.

    If we simply turn against the Big Government programs and we come out of this much faster the 30′s…. it’s over. We win.

    If we find 40%+ productivity gains, saving ourselves $500B+ a year in wages not paid to public employees through headcount cuts, automation, privatization, and 401k’s for everybody, then maybe we had to spend it all, to drown it in the bath tub, in order to let everyone see what bankrupt Dems look like. Maybe that was the only way.

    To me it is right there in front of us.

    And you want to make it all far more vanilla, a little bit of inflation, a target on NGDP, and shazam! Obama gets to say the stimulus worked.

    Which proves my point, IF your idea is a good one, why not wait until The Narrative is pitch perfect, and then we’ll lock in your prosperity!

  13. Gravatar of Robb Lutton Robb Lutton
    22. June 2010 at 17:49

    It cracks me up when I hear that “taxes are more complicated”. Hasn’t anyone heard of computers and tax software? It is incomparably easier to do taxes today than it was a generation ago. Ask your father how easy it was to do their personal or business taxes back in the 60s or 70s. They probably didn’t have a calculator.

  14. Gravatar of Jon Jon
    22. June 2010 at 18:36

    How many people today would trade the Internet for the old AT&T monopoly and their rented phone?

    This happens to be a personal interest of mine. The breakup of AT&T is poorly understood. For instance, I think there is little evidence that the monopoly per se was an issue. The short version of what was going on with AT&T was this:

    1) There was a subsidy transfer from long distance to local service. This was a poverty mandate–one of many handed down by Congress.

    2) Certain companies came to market looking to exploit the cost/rate differential for the long-lines operation. AT&T was pinned down by the tariff structure imposed by Congress.

    3) They attempted optimize this situation by asserting a monopoly privilege on direct connectivity to their network.

    4) The divestiture followed but in so much as that lowered rates, it did so because the transfer subsidy mandates changed, not because of the anti-trust action itself.

    5) And, telecom was not really deregulated until the telecommunications act of 1996, and even that was tepid at best. Indeed, after 1984, the industry was MORE regulated because Judge Greene was a regulator layered on top of the existing regulatory scheme. So its not surprising that the Internet boom formed after rather than before 1996. The timing of it was NOT a coincidence. It owed directly to the loosening of regulatory strictures, particularly in so much as the loosening of the regulatory grip attracted new investment by reducing both the cost-of-business and the uncertainty.

    I suggest you start your reading here:
    http://www.cato.org/pubs/regulation/regv20n1/reg20n1r1.html

    My views on this matter were formed well before reading that essay. So in so much as it and I agree, you should regard us as independent assessments.

  15. Gravatar of scott sumner scott sumner
    23. June 2010 at 08:44

    Hillary, Good example.

    Morgan. New money comes from the Fed, not Congress. It goes into peoples’ wallets.

    Robb, Some of us old-timers are not comfortable with computers. I paid HRB $610 to do my taxes. Pure waste.

    In 1982 I could do my taxes in an hour. Now it takes me days if I do it myself.

    Jon, I agree that monopoly wasn’t the issue. It was barriers to entry. Your analysis sounds right to me.

  16. Gravatar of Morgan Warstler Morgan Warstler
    24. June 2010 at 00:07

    Scott, do you know how unimpressive this answer is?

    “Morgan. New money comes from the Fed, not Congress. It goes into peoples’ wallets.”

    How? Say it out loud, in real clear examples. How much cash? Ball park it. To who exactly?

    Because it sounds like you just turned the Fed into Congress.

    And nothing you have said, tells me how Democrats and Obama aren’t going to go buy votes, get credit for Sumner’s recovery.

    This whole thing is starting to reek, like some kind of un-thought out business plan your cousin shows up with at the BBQ.

    If you can’t be specific and DEFEND that specificity you are wrong.

    Ok go.

  17. Gravatar of scott sumner scott sumner
    24. June 2010 at 06:54

    Morgan, This blog is intended for people who already know at least a tiny bit about how monetary policy works. If you don’t know how the Fed creates money, why are you even offering opinions on the subject? Shouldn’t one at least know a tiny bit about something before sounding as confident as you do?

    If you insist on an answer (and it seems that you do as you ordered me to answer) then here it is:

    They print dollars on printing presses with paper and ink, then use the new dollars to buy bonds. That’s how the money is injected.

  18. Gravatar of Singapore Debate Association Singapore Debate Association
    6. November 2011 at 09:12

    Singapore Debate Association…

    [...]TheMoneyIllusion » Russ Roberts on regulation[...]…

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