On the Market

A friend told me that the internet punditry was telling him that "deregulation" was to blame for some of the recent stock crashes and financial institutional tankings. He asked for my free-market alternative explanation.

Problem is, I agree. But not in the way that much of the punditry would like. Regulation's a tricky thing. When you put regulation down, you place an arbitrary restriction on a system, and the system adjusts to compensate. Think about putting a rock down in a river--it flows around. That's problem one--changing regulation forces changes in the economy. But the second problem is weirder--often, regulation causes perverse incentives or weird economic effects, and more regulation is slapped down on these perverse incentives/ weird economic effects to try to prevent them from happening. A good example is in rent control. Large cities have huge swaths of zoning/safety/health/fire regulation--as well as large property taxes on landowners--for residential buildings in the city. With all these regulations and taxes, the landowner incurs a higher cost, and thus raises the rent. With these increases in rent, poor people can't afford rent, and become homeless. Many city governments deal with this by using rent control--they force rent to go only so high. In most models, they control middle-class or upper-class rent; but wherever they control the rent, it causes some apartments to no longer make money, and thus not rent out. Sometimes, the costs are just higher than the government-approved rent. These apartments won't be used, which reduces the supply of apartments. Without an independent change in demand, prices everywhere go up--the poor get hurt hardest. So then the government started subsidizing the rent for these guys... it keeps going. Anyway.

When you have this massive, complex structure of regulation on a system, suddenly stripping some away is clearly going to create problems. The first problem is that an economy does not change as seamlessly as a river--when you yank the rock back out, the system has to adjust, and sometimes that adjustment is violent. But the other side is that if you yank out some of this regulation, th problems caused by other regulations become manifest, in ways that are extremely complex and difficult to predict. I'm not even going to pretend to know exactly what regulated-market problems caused the recent tank--I've heard a lot of jabber on it, and none of it has made sense.

But if this is an adjustment, then a bailout won't help in the long-term--the new equilibrium is one with fewer financial institutions, fewer investment banks, more modest loaning and investment policy. Bailouts to get these guys back on their feet won't magically create a new equilibrium--it's just a use of tons of energy to force them away from the equilibrium.

Looking for the Stalemate

So we small-government folks often talk about the "stalemate" situation in government, usually between the executive and the legislative branches, but more ideally with even a legislative branch too divided to do much. One of my favorite bloggers, Divided We Stand, is dedicated to just this idea.

Why stalemate? Why not a united government? Well, we generally think a mandate to do wild and crazy partisan things is bad. Itl eads to lots of spending, and new government institutions that don't go away, and use decades of bureaucratic politics to control more of your money and your life.

Look back to the 1990's, we say: people were pretty thrilled. We had a balanced budget. Why? Because a divided government couldn't add new spending to keep up with the growing economy. We had a massive economic boom. Why? Because a stagnation of regulatory behavior meant confidence in long-term stability for investments, and investor confidence rose. Congress was popular. Why? It did nothing at all.

So I say: Seek the stalemate in the next eight years. Put away your idealism--you don't want to hand a junior senator a mandate and a veto-proof majority in congress; a lot will happen that you're going to regret later. You're drunk and lonely, and she's attractive, but there's no one-night-stand in the presidency, only marriage.

For the sake of stalemate, I say vote for Mr. McCain. Don't stress too much about his domestic policy--he won't get to do any of it in office; the Democrats will block him. His foreign policy? Much like Mr. Obama's, except not stupid.

Want to feel good about your government in the next 4 years? Seek the stalemate.