Don't throw deregulation overboard

In the current economic crisis, it is vital to remember that deregulation is a positive force and a democratic one.

The deregulation revolution got started in the late 1970s during President Jimmy Carter's term, when it became clear that private and public monopolies were stifling economic growth and rationing goods and services.

Economists like Alfred Kahn at Cornell University, and George Stigler and Milton Friedman at the University of Chicago, made the case for how deregulation could bring the U.S. economy out of recession and better satisfy consumer needs.

Under President Ronald Reagan, deregulation accelerated in the U.S., and other free-market nations followed suit - first in Europe, then in once heavily bureaucratized economies like India, China, and Brazil.

Deregulation has provided consumers with access to cheaper and more innovative services like cell phones, the Internet, and budget airfares. It has thus played a decisive role in the unprecedented global economic growth of the last 25 years. Financial deregulation - namely securitization, now much maligned - has also played a positive role.

Thanks to the resulting division of risks, more public and private investments have been made in and out the United States. Without securitization, innovative techniques and emerging-market economies would not have obtained necessary capital.

The current consensus among liberal politicians is that deregulation went too far, and they blame it for the economic woes of the last year. Their argument is not persuasive, however. For one thing, full deregulation was never attempted. State bureaucracies remain intrusive and very much in control.

Besides, many financial regulations made the crisis worse, forcing banks to sell their assets, which worsened the stock-market downturn. Regulators are usually slower to spot problems in the market than financiers. Bernie Madoff escaped scrutiny not because regulation was inadequate but because regulators saw no signs of trouble.

It's far from proven that financial deregulation is the cause of the recession, and we would do well to remember that economists still debate the events that led to the Great Depression of the 1930s. It seems presumptuous, then, to declare with such confidence the causes of our current difficulties.

Deregulation is a convenient scapegoat for politicians, who would rather have an easy target for blame than a scientific explanation. But if we were to underline one among many causes of the crisis, the Federal Reserve's loose monetary policy since 2001 would be a much better candidate - at least from an economic perspective, if not a political one.

The return to a regulated economy, mostly in the finance sector, is thus more of a political statement than an economic solution: increased regulation means a transfer of power from private entrepreneurs to the state bureaucracy.

This does not imply that laissez-faire should always prevail, however. Free markets cannot exist without the strict rule of law. The law, however, should distinguish between regulation that gives power only to regulators and stifles market forces, and regulation that brings more power to consumers through increased transparency.

The Obama administration's regulatory proposals, when they foster such transparency - as in the elimination of fine print on mortgages and credit-card agreements - should be applauded by free-market advocates.

Eventually, economic growth is always a trade-off between the state and the market: The market is efficient, but sometimes dangerous. The role of government is to make citizens aware of the benefits and hazards of the market. Armed with such information, people can then make decisions for themselves, without the tutelage of a nanny state.