Sunday, January 17, 2010

Why government regualtion of finance can work and how to make it a lot better

Mark Thoma writes today:
Adam Smith believed that competition was the best regulator of economic behavior. You can't trust government to intervene and protect people because the rich and powerful will bend government to satisfy their needs [although Mark himself favors finance regulation].
Ok, this is a point you often hear from anti-government people. But if it's really a good enough excuse always, we should have no government at all. Obviously, sometimes the good of government outweighs this cost.

And why does it sometimes, and in fact often, outweigh this cost in America. Because we have a highly democratic country, so the vast majority does have a strong say with their ability to vote. Obviously, we aren't completely democratic. The fact that Wyoming gets as many senators as California (and the District of Columbia gets none with a population larger than Wyoming's) means that a bill desired by representatives of 90% of the population can be stopped by representatives of 10% of the population. But we still are a highly democratic country, so there still is a strong incentive to not do anything that looks too bad to the public.

And we've seen that regulation and government can work very well for generations. Post World War II through the 70s we had effective banking regulation that led to the Great Moderation and a golden age of extremely high economic growth evenly spread that built the great middle class. But then we elected a party that didn't want government to work, and we've paid a very high price for that over the last generation (see here, here, here, and here).

So regulation can work in spite of the oversized influence of the wealthy and corporations. We saw that it could for decades. But how to make it work better? Two crucial steps are needed, and both would make our country far more democratic:

1) Eliminate the filibuster, which has not been with us as a de facto supermajority requirement since inception. It's only very recently that it's been used that way.

2) Greatly increase public campaign finance and/or corporate donation limits. If limits don't work because of Republican Supreme Court Justices and/or loopholes, certainly the government giving candidates and parties more campaign money than they could ever raise from corporations and private parties would destroy the incentive to cater to them for donations (they get the government money only if they decline private money). This is the idea behind (large) public campaign finance.

Some would say they support (2) but not (1), but it will be extremely hard to get a strong (2) without doing (1) first. In fact, it will be extremely hard to do any great good, from truly strong climate change action to truly strong finance reform, without doing (1) first. For more on why I support (1), please see here.