Tuesday, August 28, 2012

Carter Deregulates!

Despite the perception that presidents from the two different political parties approach things in opposite ways, there are instances of agreement. In a surprisingly consistent pattern, four Republican presidents and two Democrat presidents (Ford, Carter, Reagan, Bush, Clinton, and Bush) embraced the idea of deregulation. To be sure, they were not always uniform in applying this idea, sometimes deregulating one sector of the economy while adding new regulations to a different sector. But a steady trend of rhetoric and executive orders demonstrates that deregulation is part of the Zeitgeist - the spirit of the times.

In the case of Carter and Clinton, this shows that it is an oversimplification to assert that Democrats always restrain the freedom of the market and favor government intervention in the economy. Historians Karen O'Connor and Larry Sabato write that, after it became clear that excessive regulations - including wage and price controls under LBJ and Nixon - were harmful to the economy, enthusiasm for deregulation grew:

For some time, there were no changes in economic regulation despite these criticisms. In the mid-1970s, however, President Gerald R. Ford, seeing regulations as one cause of the high inflation that existed at the time, decided to make deregulation a major objective of his administration. Deregulation was also a high priority for Ford's successor, President Jimmy Carter, and legislation that deregulated airlines, railroads, motor carriers, and financial institutions was enacted during Carter's term as president. All successive presidents have maintained an active deregulatory agenda,

until the election of President Obama in 2008. The Obama administration marked a return to the approaches of Lyndon Johnson and Richard Nixon. LBJ's wage and price controls were cast as guidelines, and not as mandatory. Nixon's were cast as actual executive orders. In both cases, the controls failed doubly: first, they were difficult to enforce - LBJ's guidelines were toothless, and Nixon's were filled with loopholes which lawyers and accountants soon discovered; second, in those cases in which they were consistently applied, inflation only became worse.

To be sure, while deregulation almost always leads to an immediate drop in prices, it often has a transitional effect of temporarily creating chaos as various businesses adjust to find a new equilibrium point - a few consolidations, bankruptcies, and restructurings - before the full benefit of deregulation is enjoyed. Thus it is important to council patience, and not to promise that the complete advantage of deregulation will be felt soon. O'Connor and Sabato note that, long-term, deregulation wins the day,

though the effects of deregulation have been mixed, as illustrated by the airline, communication, and agricultural sectors.

American consumers noted a significant price decrease in air travel and telecommunications when those sectors were deregulated. The transitional effects, as noted, involved a shuffling of the companies in those industries. Old airlines were merged with others, or went bankrupt; new airlines emerged. The courts had to wade through the details of national telephone companies. But lower prices were the end result in both cases - so much so, that years later, when price increases took place, the "new, higher" prices were still lower than the original prices before deregulation, and only "higher" than the prices immediately after deregulation.

The occasional inconsistencies in the pattern of deregulation - a political necessity, even if an economic sin - led to certain ill effects. Carter and Clinton, while deregulating other sectors, burdened the financial sector with rules forcing lenders to write loans to customers whose ability to repay was suspect. By requiring the financial institutions to grant loans to substandard customers, Carter and Clinton paved the way for the real estate meltdown of 2008, when the economy had to absorb numerous defaults.

Standing at the historical source of the deregulation trend, President Ford wrote:

A third priority on my agenda for the first six months of 1975 was regulatory reform. And was that reform needed! Rules and regulations churned out by federal agencies were having a damaging effect on almost every aspect of American life. They were costing taxpayers an estimated $62.9 billion per year, an average of $300 per citizen. They were increasing the cost of doing business - a cost that's always passed along to consumers - and thus contributing to inflation. They were perpetuating huge bureaucracies - more than 60,000 people were employed by the federal government for the sole purpose of writing, reviewing, and enforcing regulations - to sift through pyramids of paperwork. (In 1974, Congress passed 404 new laws. They federal bureaucracy, however, produced 7,496 new rules and regulations, which accounted for some 45,000 pages of fine print in the Federal Register.) They were stifling American productivity, promoting inefficiency, eliminating competition and even invading personal privacy. Red tape surrounded and almost smothered us; we as a nation were about to suffocate.

The contrast between President Gerald Ford and President Nixon was great - from wage and price controls to deregulation. Ford began to liberate American productivity from endless rules, a trend which would continue, despite occasional relapses into the regulatory mentality, for over thirty years.