Wednesday, August 11, 2004

Policy Review

An interesting essay in the Policy Review by Sebastian Mallaby addresses the fundamental policy considerations surrounding the deregulation debate that has been underway for the past 20 years in Western industrial countries. Striking a cautionary tone, and surveying the lay of the land, Mallaby begins thusly:

If we are lucky, a new consensus may form around a slightly different principle: We will celebrate free competition rather than free markets, and we will recognize that promoting competition may frequently require departure from the principle of laissez-faire. If we are less lucky, we may face a more sweeping backlash against enterprise, with high costs to our prosperity

The incredible gains brought about by the deregulation of formerly governmental run industries—like Airline, Transportation, and Telecommunication—have created competitive markets, and inefficient ones, lower prices, and sometimes, more efficient delivery of services. Yet, at the same time, governmental oversight became lax and instances of corporate malfeasances, network collusion, and price gouging started making the logic of deregulation faulty:

The signs of this watershed are scattered, but they are too numerous to ignore. Abroad, we face a broad disaffection with pro-market reformism, which runs from disappointment at privatization and marketization in Russia to the return of leftist populism in Latin America. Within the United States, market advocates have been on the defensive, arguably, since the summer of 2000, when California’s first electricity blackouts called into question the deregulation of the energy sector. Around the same time, the telecommunications sector began its dramatic meltdown, culminating two years later in the bankruptcies of WorldCom, Global Crossing, and more than 150 less famous participants in the experiment unleashed by the 1996 telecoms deregulation law

… All that’s before you consider the twin shocks of terrorism and the outcry over corporate governance following the bankruptcy of Enron. In the aftermath of September 11, Americans turned instinctively to government for solutions — not just to hunt down al Qaeda but also to create the economic adjustments apparently required by the new circumstances.


Although Mallaby has some broader objections to the anti-market movement’s rhetoric—thinking it may, if not intellectually confronted, push for stifling governmental measures against enterprise—he concedes that reform is needed:

In the face of setbacks for markets, from California’s blackouts to the corporate governance scandals, the case in favor of the market needs to be restated vigorously, but it also needs to be defined more carefully than it has been. Pro-market people need to distinguish between issues and industries where an aggressive deregulatory approach is justified and those where this will only backfire. They need to accept that the right policy is often not deregulation but rather smart regulation and that the goal isn’t to cut the number of government rules but to ensure that rules make sense.

Despite flourishes of vacuousness, for instance, saying that the minimum wage laws are bad, the tenor of his essay is reasonable; though, similarly, it is tendentiously conservative. If there is one point that we’d agree on, this would be it:

If pro-market people can become tomorrow’s pro-competition people, they will be free to choose flexibly between markets and government activism, recognizing each as means to the pro-competition end.

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