Economic Security: The Coming Era of Re-Regulation

Issue Brief

Remember the Reagan Revolution? It’s over. For 30 years, the political system has been dismantling the burden of taxes and regulations imposed on the economy by the New Deal. When Ronald Reagan won the White House in 1980, he inherited a tax system that claimed up to 70% of taxpayer income, and a political culture in which even Republicans were willing to consider price controls as a way of suppressing inflation. The Reagan Revolution eclipsed such thinking, wiping out a generation of liberal presidential candidates — Mondale, Dukakis, Gore, Kerry — who wanted to return to New Deal policies.

But a counter-revolution is brewing, and the regulators are poised to return to power. Tighter fuel-economy standards are being imposed on autos. Controls are being instituted to rein in mortgage lenders. Suburban jurisdictions around Washington and other cities are mandating “green” construction standards for new homes. And those are just the headlines from today’s Washington Post. The drumbeat of doubt about whether market forces can be trusted to deliver the best results has become deafening. In the years ahead, the heavy hand of re-regulation is likely to descend on a wide range of industries:

— The poor on-time records and flagging finances of airlines have convinced many observers that Carter-era deregulation is a failure. Fares are much cheaper than back then, but most other industry metrics have deteriorated. Things have gotten so bad that even industry gurus like Robert Crandall are calling for a return to regulation.

— Deregulation of electricity generation has become a political hot potato as rising rates convince many users they are being gouged. In some states such as Texas and Massachusetts, rates have risen over 50% since deregulation occurred at the beginning of the decade. A lot of the increase results from higher fuel costs, but rates aren’t rising as fast in states that still regulate.

— After resisting efforts to impose new fuel-economy standards on automobiles for years, the Bush Administration now plans to toughen requirements. Average fleet efficiency will be required to rise from 25 miles per gallon today to 32 miles in 2015 — a one mile improvement each year for seven straight years. The move is supposed to reduce dependence on overseas oil and limit greenhouse gases.

— With the finance industry facing problems reminiscent of the Reagan-era savings and loan debacle, federal regulators are asserting greater oversight. Federal Reserve officials say the regulatory system needs to be streamlined to detect problems sooner. That means less innovation in a sector that has turned indebtedness into a core feature of national life.

Heavier regulation of other industries will follow, from housing to healthcare to higher education. It isn’t hard to see why faith in market forces has waned: the economy has made a weak start to the new millennium, with sub-par growth rates, weak job creation (at least in the private sector) and staggering trade deficits. The cost of just about everything has risen faster than wages, from food to energy to education to medical coverage. So proponents of regulation in academia and government are gaining the upper hand against advocates of market forces. But it’s an open question whether more regulation can solve any of these problems. And we’ll see how all the academic critics of free enterprise feel when the government tells them their colleges are charging too much for an education.