Sunday, January 30, 2011

Government is not the solution...but it's not the problem either--Part I

Ronald Reagan famously observed, "Government is not the solution; it is the problem." He then proceeded to preside over the beginning of a bipartisan effort to dismantle the federal role in American life so that we would experience a new "dawn." This disassembling of government focused on domestic policy while the government role, i.e., expenditures, in military defense expanded. While de-regulation--as it became known--was a clear success in the airline industry, it was destructive in other areas, especially the regulation of the financial industry.

There is a long list of examples of the way in which reducing the regulatory role of the federal government has not improved life but has been destructive: the savings and loan crisis, Enron and the Enron-like corporations looted by their managers, credit card debt over expansion, a speculative housing bubble, the economic meltdown of the Great Recession. There is no better example of this than the bipartisan repeal of the Glass-Steagall Act in the closing days of the 2000. This effort to repeal this New Deal regulatory law was supported by Republicans (Phil Gramm) and Democrats (Charles Schumer) and was signed into law by Democrat Bill Clinton. Its passage was little noted by the general population but it became the swamp out of which most of the economic woes of the Great Repression slithered.

Glass-Steagall was originally passed to create an unbreachable firewall between banks and investment firms because it had been the entwining of these two entities that had led to the speculative crash of the 1929. By the late nineties, however, this firewall was preventing some powerful organizations from making even more money. The merger of Citibank and Travelers to form Citigroup in 1998 was a clear violation of this regulation but the repeal changed all that. The rest, as they say, is history.

So government is not the problem in financial regulation. It is not the problem in national defense, in education, in health care, in environmental protection, consumer protection. For example, does anyone seriously think that we would be better off in any way if an unfettered market mechanism allocated health care to our citizens? Even a somewhat regulated system had left 40 million Americans outside any effective health care insurance system.

But government is not the answer either. Regulation and rules are not enough by themselves. Rules often create new opportunities for those who want to game the system to get into new mischief. This came home to me several years ago when my youngest son transferred to a new college and ran afoul of NCAA regulations on athletic eligibility. He was told that he should have read the NCAA rule book and thus should have known that he was violating a recently changed, somewhat obscure, rule. This was the occasion for me to see the NCAA rulebook. That is when it struck me, "If rules were the answer, NCAA Division I athletics would be clean as a whistle." The fact that is is not and seemingly never will be points to deeper issue than just creating more rules and better rules to stay ahead of the outlaws.

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