Patterico's Pontifications

9/21/2008

Challenging times for free market advocates

Filed under: Economics,Government — Justin Levine @ 12:28 pm



[posted by Justin Levine]

I tend to echo much of DRJ’s sentiments on this issue. Now that the government has effectively nationalized the mortgage industry and is doing the same with various banking and insurance pillars of the economy, it is time for free market advocates to go on record to state if they would prefer the economic consequences of doing nothing to the current bailout plan. If they reluctantly accept the bailout plan, then it seems to me that some rethinking of their philosophy is in order.

As for myself, I always tend to believe that the burden of proof is on the government to show that regulations will have substantially more benefits than drawbacks before imposing them. Here is where I tend to disagree with many of strict free market advocates though:

1. I think that the government is actually capable of meeting the burden of proof referenced above on occasion for certain industries. I’ve met some people who seem to think that such a hurdle is never met.

2.  Sometimes, complete regulation, or even outright socialization in rare instances is actually preferable to partial or small amounts of government regulation.

This second point is where I seem to have the biggest disagreement with many of the free marketers that I run into these days. Whenever government introduces a regulation that begins to distort market principles, free market advocates seem to accept it as inevitable, but then argue against any further regulations of the same industry. This can be a mistake in my view, since it then allows the private actors in the market to then abuse the market system and often use the initial regulations to shield themselves from the consequences.

Here is an illustrative example: Like many states, California requires you to purchase car insurance in order to drive a car. However, there is no socialized car insurance industry. You have to purchase the insurance from private players who are usually able to set their own prices and terms for their product. Had it not been for this law, there would have been many periods in my life where I would not have bought insurance (because my car was a worthless piece of junk, and my personal assets weren’t all that much either — so it made economic sense for me to forgo insurance and risk the costs associated with a potential accident).

So now that you have a government law/regulation forcing you to buy a product from a private industry, does it make more sense to have the government thoroughly regulate the prices and policies of that industry to make sure that the consumer is protected from predatory market practices that the government has encouraged with its initial regulation? I say yes. For this reason, I’m glad that there is a California Insurance Commissioner that helps regulate the industry. But I know many who would say no.  They seem to argue that as long as there is “competition” among several insurance carriers, the law forcing you to buy insurance doesn’t constitute enough of an unfair market distortion for consumers such that it warrants further government regulation. [There are also a few nitwits who would actually argue that I can just make the “free market economic choice” to not drive in Southern California. Those people and I are simply on different planets when it comes to arguing economic policy.]

Which brings us back to the current economic situation with Freddie Mac, Fannie Mae, and a host of other institutions. I would argue the same dynamic is at work here. Freddie and Fannie were born out of government tinkering with market principles in a half-assed manner. So now the government was faced with a stark choice:  More thorough regulations of the institutions, or a complete economic meltdown that would adversely affect everyone — including those who steered clear of the housing industry and are effectively “innocent” players here.

That is what I see as the real challenge for free market advocates today. There are very few genuinely laissez-faire institutions left when it comes to the large pillars of our economy. We could face this same situation again if we are lulled into thinking that 20% government regulations will always be better than 60% government regulation in all situations in every industry. Regretfully, many use the term “free market” as just a reflexive talking point these days rather than as a substantive idea that reflects the realities of today’s commerce.

So says I. Political party hacks and talking point robots can naturally continue to send the Justin Levine hate mail to Patterico.

– Justin Levine

UPDATE BY PATTERICO: Stephen Macklin dissents from Justin’s opinion, here.

UPDATE X 2 BY JUSTIN LEVINE:  I welcome Macklin’s comments. The reason I turn off comments is to encourage more substantive reactions like his that you get far more often in actual blog posts that link back to the original post, rather than off the cuff ramblings in the comment section.

With that said, I don’t see Macklin’s recation as much of an actual ‘disssent’, even though he tries to frame it in that language. He actually seems to agree with me much more than he is willing to admit.

As he states:

I see the question as, “The government created this crisis. Can and should the government have a role in fixing it?”

Despite my adherence to the idea of a free market, even to the point of it being a “reflexive talking point,” I do see a role and a responsibility for government in cleaning up its mess.

Here. Here.

I agree with him that the current situation is not a “failure of the free market”, and never said as such. My point was that government helped create this mess with half-hearted and partial regulations. And as such, it makes sense for them to minimize the damage with even more robust regulations. That is a point that Macklin seems to agree with.

My other point that perhaps Macklin fails to acknowledge is that few actual “free markets” exist anymore since government regulation now touches virtually every important sector of our economy. Even the very idea of a federal manipulation of the nation’s money supply causes market distortions. As such, it makes sense to consider further government regualtions to tame the market abuse of private players whose abuse was only enabled by the initial half-assed regulations to begin with (see for instance my automobile insurance example above which Maklin does not directly address).

UPDATE X 3 BY JUSTIN LEVINE:  Macklin his updated his thoughts and now explicitly admits, “This is not the free market we’re talking about here, this is the government. The best approach is to regulate it. Regulate it. And regulate it some more.”

Exactly my point to begin with. In many instances, thorough government regulations are far more preferable than half-assed partial regulations that distort free markets and create incentives for predatory abuse among private players who are shielded from the consequences until it is too late. Forgive me if I declare victory in this non-debate.

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