Did Deregulation Cause the Great Recession?

Did Deregulation Cause the Great Recession?

December 08, 2009
Originally published in RealClearMarkets.com

In a December 3 article in Politico ("J-O-Bs should come before GDP"), Rep. Phil Hare argues that "reckless deregulation" is one of the causes of the current economic crisis. That isn't actually true. This year's edition of the Competitive Enterprise Institute's Ten Thousand Commandments report found that 3,830 new regulations came into effect in 2008 alone.

Over 30,000 total new rules passed during the Bush years. Hardly any were repealed. Businesses currently dole out the equivalent of Canada's entire 2006 GDP - about $1.2 trillion - just to comply with federal regulations.

Where is the deregulation?

263,989 people make their living working for federal regulatory agencies, according to research from the Mercatus Center. That's an all-time high. 12,190 of them regulate financial markets from Washington. More are based in New York and other financial centers. None of these figures include state and local rules and regulators. Those cost extra.

Little changed as the Bush administration segued into the Obama administration. If anything, the pace of regulation has increased. The Waxman-Markey cap-and-trade bill that passed the House contains 397 new rules. The 2,034 page Senate health care bill contains at least that number, and would re-order one sixth of the U.S. economy.

Of course, cap-and-trade appears unlikely to pass in light of the Climategate email scandal. It remains to be seen if health care legislation will pass. But federal rules that did pass in 2009 cover everything from ironing tables to local drawbridge schedules to snow globes. Federal rules even dictate allowable physical dimensions for Irish potatoes. Is anything not regulated?

Rep. Hare's premise that deregulation contributed to the recession is false. And that false premise leads him to a false conclusion: that government is the answer to lingering unemployment.

In his eagerness to promote his New Deal for a New Economy Act, Rep. Hare forgets one of the fundamental lessons of economics: anything that government gives, it has to take away first. The money has to come from somewhere.

The economist Ludwig von Mises wrote, "If government spending for public works is financed by taxing the citizens or borrowing from them, the citizens' power to spend and invest is curtailed to the same extent as that of the public treasury expands. No additional jobs are created."

If anything, fewer jobs are created. Factor in the bureaucracy, waste, and political favors that are part of any large spending bill, and the New Deal for a New Economy Act is all but guaranteed to be a job-killer.

Of course, it will be easy for Rep. Hare to hold a press conference with some of the people given a job by his legislation, while opponents can't do the same. He'll come out looking good no matter what. But appearances can be deceiving.

Just try holding a press conference in front of a factory that was never built, flanked by workers who were never hired, who don't make a product that was never invented, because the capital they needed was spent on Congress' priorities instead. See how many cameras that press conference would attract. Opportunity costs are real, even if they're hard to see.

If anything, the recession was caused by misguided regulations. Monetary policy favored a weak dollar for too long. Political pressure to raise homeownership levels beyond what people could afford led directly to the Fannie Mae and Freddie Mac debacle, and a $700 billion bailout program.

Today's double-digit unemployment is part of the price of federal misconduct. Wall Street deserves plenty of blame for playing along. But Congress, Presidents Bush and Obama, and regulators set the rules of the game.

If Rep. Hare wants to create jobs, deregulation would be an excellent strategy. The government should try it some time. There are better uses for much of the $1.2 trillion that businesses currently spend complying with federal rules. After all, when doing business becomes difficult, there is less of it. Rep. Hare and his colleagues from both parties are only getting in the way. They should get out of it.