Response to Reno

Last week in this space R. R. Reno set out to challenge the foundational beliefs of economic conservatives. They must, he said, come to grasp what the postmodern left already sees: that current economic and regulatory conditions are such that market forces and the creative destruction inherent in capitalist economies will produce significant economic inequality as well as serious hardships for different groups of people from time to time, and therefore governmental responses to ameliorate these problems are sometimes justified.

This is not the controversial proposition Reno thinks it is. As an economic conservative, I agree with it. In fact, economic conservatives generally agree with it. Richard Epstein agrees with it. Even Milton Friedman agreed with it; witness his proposals for a negative income tax. In fact, I can’t think of any serious voice in the public square that disagrees with Reno’s proposition.

Precisely because, for a very long time, virtually everyone has agreed with this idea, the United States and all other developed countries have had in place for decades a panoply of programs designed to do exactly what Reno wants: unemployment insurance, highly progressive income tax systems, social security payments for the elderly, social security payments for the disabled, Medicare and Medicaid, welfare, food stamps, the WARN Act, job training programs, free elementary and secondary education, subsidies for higher education, subsidies for home ownership, subsidies for small farmers.

Reno misunderstands what economic conservatives believe. Such conservatives do not think the government should never intervene in the market. They think, rather, that the government should intervene in the market when, but only when, it is efficient for it to do so”that is, when government intervention produces benefits in excess of costs. Nor do economic conservatives think the government should never redistribute wealth. Rather, they recognize that, because of the declining marginal utility of wealth, some redistribution of wealth from rich to poor is justified.

The debate is thus not about whether the government should regulate the market or whether wealth should be redistributed. The debate”or, more accurately, debates in the plural”concerns the actual effects, the real costs and benefits, of particular proposals. For example, unemployment benefits help people who have lost their jobs, but paying people for being out of work also creates a disincentive for such people to find alternative employment. The longer a person is out of work, the more his skills atrophy, the harder it is for him to find a new job, and the lower his long-term earnings potential. Hence, if unemployment payments are too high or continue for too long, they can end up harming the very people they are intended to help. The issue, therefore, is not whether we should have unemployment benefits but what are the optimal level and duration of the payments.

Reno also runs together two different kinds of regulation. On the one hand, there are regulations that restrict the free flow of goods, services, capital and people across international boundaries. With the demise of the Soviet Union and its satellites, the liberalization of China and India, the formation of the EU, and various free-trade agreements like NAFTA and the WTO, there are certainly many fewer such restrictions today than there were in the recent past. This is the phenomena of globalization, and Reno is right that it contributes to the creative destruction of capitalism: it exposes firms and individuals to competition from abroad and not just competition within the domestic market.

It is a different question, however, how much a particular government regulates a particular industry inside its domestic market”for example, how much a particular government regulates financial institutions within its jurisdiction. One can have much less regulation of the first kind”lots of free flows of goods, services, capital, and people”and simultaneously more of the second”regulations that those highly mobile people and things have to comply with when they enter a jurisdiction.

Which brings me to my final point, which is that, contrary to Reno’s view, in the United States today we have vastly more economic regulation than at any time in the past. This is apparent to anyone who deals with government regulations on a daily basis. For example, I have on my shelf an “Appeals Book,” which collects the most important (but not all) the federal statutes, rules, and forms regulating the securities markets. Currently, the book contains over 9,820 pages, and every month one of my university’s law librarians comes to my office to update the book, adding new pages. When I was in practice in the late 1990s, this book was about only three-quarters as big. In 1980, it would have been less than half its current size.

I was thus amazed by Reno’s statement that “by any measure financial institutions are far, far freer today than they were thirty years ago.” Yes, there are some ways in which some banks in the United States are less regulated today than they were in 1980s, and Reno mentions two or three of these, but there are also very important ways in which virtually all banks and other financial institutions are much more regulated today than at any other time in history. I take this opportunity to introduce Reno to Basel I (1988), Basel II (2004), and Basel III (2010), the international accords concerning the capital regulation of banks.

I also call Reno’s attention to Title 12 of the Code of Federal Regulations , which is entitled “Banks and Banking.” In 1980, Title 12 contained a mere 2,425 pages. Today, it runs to over 5,270 pages, in part because of such intervening legislation as the Expedited Funds Availability Act of 1987, the Truth in Savings Act of 1991, the Right to Financial Privacy Act of 1999, certain provisions of the USA PATRIOT Act of 2001, and the Credit CARD Act of 2009.

Of course, those 5,270 pages do not yet contain the great majority of implementing regulations under the Dodd-Frank Act, such as those implementing the Volcker Rule or those to be promulgated by the gigantic new Consumer Financial Products Bureau, which has been designed to be beyond both executive and legislative control .

I have great respect for Reno, but when it comes to understanding the regulation of financial institutions, he knows a lot about the theology of Genesis.

Robert T. Miller is professor of law and F. Arnold Daum Fellow in corporate law at the University of Iowa.

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