Wednesday, March 28, 2012

The Case For Regulation - Part 2

Alan Greenspan was a Reagan appointee as Chairman of the Federal Reserve Board from 1987 to 2006.  He was the darling of many businesspeople and conservative politicians as a proponent of deregulation and a free-market system.  However, when called to testify before a House committee investigating the financial collapse of 2008, he said, “I made a mistake in assuming that the self-interest of an organization, specifically banks, is such that they were capable of protecting shareholders and equity in their firms.  The fact that they simply sought predatory gains for themselves [at the expense of customers] … was a flaw in the model that I perceived is the critical functioning structure that defines how the world works.”  This semi-apology for the “flaw” in his perception of the motivation of financial leaders was presaged by his earlier statement in 2002 that, “It is not that humans have become any more greedy than in generations past.  It is that the avenues to express greed [have] grown so enormously.”

And so we have the flip side of the lure of business deregulation.  In a prior blog, the subject was the need for regulation to protect my physical wellbeing, and the wellbeing of the environment that surrounds me, from those who would cause harm.  The second need for regulation is a simple one: to keep people honest, thereby making our economy safe from crooks and business hypocrites.

We hear a lot about the wonders and benefits of capitalism and a free-market economy – benefits that I believe in strongly.  But we likewise hear many complaining about how government regulations are supposedly strangling those benefits and limiting our growth.  To which I again say, “horse hockeys.”

Our current reality is that we do a lot of rah-rah talk a lot about capitalism, but it is many businesspeople that have strangled American capitalism into near oblivion.  Capitalism only works when you have: a) easy entry into the marketplace to provide new competition and produce “better mousetraps”; b) open supply lines to meet unrestricted demand; c) truthful and transparent access to product information; and d) everyone playing by the same rules.  But those are not the conditions of the American economy today.  And contrary to the noise-making, the extent to which we do have these pillars of capitalism is only thanks to government regulations that provide them in spite of the negative efforts of many businesspeople.

The entry of new players into the market is not easy today given the dominance of the few mega-players in each industry.  Such mega-players dominate the percentage of market share available, and de facto dictate the products to be sold and their price.  New startups either get crushed by these heavyweights, or bought out and absorbed, or get pushed into smaller niche slices of the market.  We have two economies in America – the mass marketplace blanketing our everyday “generic” needs usually dominated by only 3-5 real players per industry; a specialty marketplace of small local vendors who nevertheless still have to compete with chain competitors (e.g. your local burger place versus McDonalds).  Yet even with their dominance, the big corporations still lobby for special treatment to drive out “the little guys.”  Greed to control markets knows no bounds.  It is only through the old Sherman Anti-Trust Act of 100+ years ago, and its regulatory descendants, that keep America from being totally monopolized like the early 1900’s.

Supply and demand are often no longer free-flowing.  Just look at the recent spike in gasoline prices in spite of lower domestic demand and increased drilling within America.  (America is now a net exporter of oil even as people scream for more drilling.)  But gasoline prices are driven by commodity traders (speculators) with no concern about resulting pump prices – and all half-dozen gas retailers move their prices together on the same day-by-day.  Why worry about Middle East oil sheiks when the real power players are at the minimally-regulated Chicago commodities market.  Same story for critical medicines that are being hoarded to jack up prices.  Or unmet demand for better gas mileage in cars and for alternate energies that improve only due to government pressure.  Left on their own, too many businesspeople would corner the market and sit on their protected laurels.  Anti-monopolistic regulations seek to keep the capitalistic market open.

Capitalism’s self-regulatory mechanism – consumer choice – only works if consumers know what products actually are.  Consumers need full disclosure to make informed buying decisions, thereby eliminating bad businesses through their spending choices.  But the track record of such disclosures in business is very poor.  Filler materials in food; chemical additives in agriculture and manufacturing; product defects leading to recalls; hidden fees in bank charges and loan agreements; pyramid investment or retailing schemes; non-published medical fees.  All of these and others exemplify the willingness of too many businesspeople to deceive the American people as to what they are actually buying.  Where we are prevented from making a genuine choice due to deception, regulation has been needed to keep many self-proclaimed capitalists honest.  All of those labels we read on the goods we buy came from government mandates, not voluntarily from businesspeople’s consciences.

Which brings us to playing by the rules.  Capitalism needs some level of free-wheeling and free-thinking individualism.  It sparks the creativity and inventiveness that have made our economy great.  But it also demands honesty and everyone playing under the same rulebook.  Favoritism must be crushed.  Big corporations spend millions on lobbyists and politicians to get special legal, tax, regulatory or non-competitive bids to the exclusion of their competition and to the detriment of the consumer.  “Business success” should not be measured by wins in the legislatures, but by wins in an open marketplace ruled by quality and meeting demand.  Yet competitors and small businesspeople are being frozen out of the game by rules set by others.  When the marketplace is disempowered from its ability to self-regulate due to rigged rules, then it is only by regulation that some pushback towards fairness can be achieved.

On the mantle over my kitchen fireplace sits a set of five small, antique pewter containers of varying size.  They represent standard measures for serving alcohol, required in Irish bars @150 years ago, all because bartenders had proven themselves untrustworthy to fill customer drinks to proper mixtures.  It was that same kind of shortchanging that gave us the “baker’s dozen” of 13 items to ensure honest selling to consumers.  I am all for capitalism, and always have been.  But our economic history is sadly filled with many dishonest capitalists.  It has been only regulation, enforcement and exposure that have keep such dishonesty somewhat at bay.

Regulation needs to be trim, focused, and appropriate without being overly-detailed and constricting.  But when businesspeople complain about regulation, my answer is simple: then behave honestly and virtuously.  Regulation arises from a failure to act properly and responsibly in the first place.  Until proven otherwise, regulation and oversight is needed.

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