The free-market straw man

“From outer space our little earth is blue,
But tell that to the guy in Timbuktu…”

There must be moments in every political campaign when communications officers, political consultants, and speechwriters get that weird, my-lips-to-God’s-ears feeling: yesterday’s meeting agenda item is now a walking, talking part of the campaign’s rhetoric, repeated ad nauseam at every VFW club, union headquarters, and the like. It makes me think of Albert Brooks’ character in Broadcast News, when he phones in details to the newsroom studio and they almost instantaneously come out of William Hurt’s mouth. (“I can sing while I read!”).

Because of the intense coverage presidential campaigns receive, you can perceive even minute shifts in a candidate’s message or rhetoric, and as the financial crisis has deepened smack in the middle of this year’s campaign, the spin doctors have been working double-time to impart the right amount of english to their political billiard balls. At this task Republican hopeful John McCain has done less well than his Democratic adversary, for he hasn’t really altered much of anything in his stump speeches, other than to cobble together a clutch of ideas from across the political spectrum.

Barack Obama, on the other hand, has signaled that the crisis is paradigm-shifting and has responded accordingly with a barrage of rhetorical arrows. In effect, he has used our current troubles to repudiate the economic orthodoxy of the last 25 years. Deregulation? Bad, bad, bad. Interventionist government? Good, good, good.

This, in turn, has become the starting point for Mr. Obama in a series of general criticisms that indict laissez-faire capitalism, deregulation, free trade and globalization, and supply-side economics. In Mr. Obama’s telling of the story, it would be necessary to draw and quarter Milton Friedman, that is, if he weren’t already dead, for his role in presiding over the wedding ceremony of libertarianism and capitalism.

Two years ago, I wrote a short essay occasioned by Mr. Friedman’s death in which I had questioned the very orthodoxy that is under attack today, writing:

“Just as Keynesian economics ultimately led to excesses, Friedman’s theories—and those of similar cast—will also become victims of their own success, requiring remediation—and that point may not be so far in future as some may think.”

I then identified the banking industry as a likely spot where excess will lead to changes in the way we think of economics and the proper role of government. The collapse of Wall Street and the underlying weakness of the credit markets have since set in motion changes I could not contemplate two years ago.

Mr. Obama is seeking to take advantage of this, and my own opinion is that his economic policy rhetoric (or, perhaps, the weakness of Mr. McCain’s) is largely the reason he enjoys a widening advantage in the polls. People identify Mr. McCain with the old policies of the outgoing administration, despite his better efforts to paint himself as a populist. In fact, both candidates are playing the populist card, leading conservatives to be ever-more despondent concerning the choices on offer.

But how correct is it to blame all of our woes on laissez-faire capitalism and deregulation?

First, when you begin examining capitalism as it is practiced in the United States, it is hardly “laissez-faire.” Indeed, there are more government regulations on the books today than at any time in our history. To call what we do laissez-faire capitalism is simply not true. It is a straw man thrown into the conversation to distract people from the complexities of the matter. Other than a few libertarian wingnuts and anti-government types like Ron Paul, no serious politician supports laissez-faire capitalism. If it is not being practiced, then it cannot be blamed as the proximate cause of the financial crisis.

The deregulation argument, however, carries a bit more weight, not because deregulation is necessarily a bad thing, but because it has yielded such miserable results when tried. In a perfect world, deregulation should make for more productive and efficient economic activity, but in practice, it often creates opportunities for mischief and corruption. Refer to the California energy crisis of 2000-01 for a case study of botched deregulation.

I should say here that, all things being equal, I prefer less government to more government, less regulation to more regulation, but I also recognize that neither approach is inherently right. It all comes down to execution, how individual laws are implemented, and the quality of oversight involved.

Having said that, the movement toward deregulation – a movement that is now quickly dying in Washington – suffered from an idiosyncratic flaw. The people most invested in deregulating industry – and who were most often charged with making it happen – were also folks who had the least interest in how regulations actually work. This had important consequences.

In the abstract, we tend to view regulation/deregulation as a black-white, either-or proposition, but this is rarely the case. In reality, deregulation is often a matter of degree, not a case of eliminating regulation entirely. The new regulatory regime that results from an act of deregulation still needs to be actively managed, even though its scope and power might be less than before. Indeed, often, the oversight function in a deregulated marketplace becomes even more important than before. In other words, the fewer powers granted to government must still be exercised in a competent and forthright manner. When this task falls to folks who are genuinely uninterested in how regulation works or who have an inflexible, ideological aversion to all regulation, then invariably disaster will ensue.

In my opinion, this circumstance explains why economic conservatives and libertarians might have useful things to say about deregulation, but you’d never want to put them in charge of the process. But when such failures are put forth as evidence for deregulation’s evils, it’s really more an indictment of the folks in the charge of the process, not so much the process itself. At the end of the day, you have to take an active interest in bureaucracy and regulation in order to manage it, and this is as true of emergency management as it is of banking. Many conservatives and libertarians simply don’t have the interest required.

As a final consideration here, we should remember that George W. Bush, reputedly an arch-conservative, has overseen the largest expansion of the federal government (and its associated debt) in the history of the Republic. It seems strange, then, to blame small-government, anti-regulation types for the current crisis. Even after the financial industry deregulation of the 1990s (brought to fruition, one might add, under President Clinton’s administration), there were plenty of tools at our disposal to regulate the behavior of the financial industry. But under the Bush administration, one by one, the Securities & Exchange Commission, the Federal Reserve, the ratings agencies, and, of course, the banks themselves colluded – sometimes unwittingly, sometimes not – in gaming the system. Without a bureaucracy dedicated to fulfilling its mission in a fair and forthright manner, all the regulations in the world won’t matter. Tighter regulation is not better regulation.

At its core, the financial crisis is the product of breathtaking incompetence and unchecked greed, and that’s a combination more toxic than any of Wall Street’s potions.