Regulation—Unintended Consequences
by Richard BarrettActions have consequences, mostly unintended.
Ready, fire, aim.
In response—mostly—to the financial crisis, the US government has taken so many actions that the list is almost too long to chronicle here. To pick a few…
- The government has picked survivors in the banking industry.
- The government has picked survivors in the auto industry.
- The government has picked executives in many companies.
- The government has set compensation levels in many industries.
And the government’s intrusion into previously private enterprise sectors has only just begun.
Of course private enterprise has never been a model of virtue and discretion. But, just because private enterprise has executed a series of excesses, is it reasonable to assume that federal regulation will produce unalloyed goodness?
If executives in private enterprise cannot foretell catastrophes ahead, is it reasonable to assume that those same executives, when working on behalf of the federal government, will have better foresight?
Massive Actions, Unintended Consequences
The economy is in uncharted territory. This is the first major crisis of the integrated, global economy. It simply has too many moving parts for any individual or organization to identify all the inter-relationships, much less to forecast the results of all those interconnections. The chart below makes the point exquisitely.
Historically the money supply has grown by 2-7% annually, with spikes prior to Y2K and following 9/11. In the past nine months, the Fed has increased the money supply by over 100%, almost ten times greater than the largest previous increase, during Y2K. The Fed might argue that this increase was needed to offset the loss of a comparable amount of bank lending, when credit dried up in the past year.
But how and when does the Fed unwind this massive increase? What are the long-range consequences of this action?
At the moment, no one can guess. However, we can be certain that many of the consequences will be significant, unforeseen, and unintended.
Transparency – The Only Cure for Unintended Consequences.
The Federal government now controls almost 25% of all domestic economic activity, not to mention 100% of the money supply. We need much more transparency, particularly with government sponsored enterprises such as Fannie Mae and Freddie Mac.
Recently our culture has cheapened transparency to the cliché “full disclosure…” after which the author lists some relationship, often trivial.
The US government pumped over $170 billion into AIG late last year, to prevent its collapse. This expense received very little exposure, either from the press or by the Treasury Dept. execs who made the “investment.” Where did this $170 billion go? Why was this expense necessary?
Neither elected congress people nor Presidential staff exhibited any curiosity or outrage over this “investment.” However, when AIG paid out $165 million in bonuses—only 1/1000 of the amount the Treasury Dept. had spent a few months earlier—elected officials went into hysterics. Selective transparency is no transparency at all.
“Sunshine is the Best Disinfectant.” –Supreme Court Justice Louis Brandeis
Meaningful transparency can have considerable impact. Witness the recent publishing of the expense accounts of British Members of Parliament.
In the US, the Federal Election Commission (FEC) regulates campaign contributions. Of course every politician running for office has thoroughly computerized records of donors and amounts and the FEC requires that every candidate report all donations to the FEC. That information might be interesting to voters making voting decisions. But candidates provide those reports to the FEC in thick, printed volumes, specifically to delay the FEC in compiling the results. As a result the FEC finally publishes the donation reports months after the elections are done.
Follow the Money—Post Everything on the Internet
With the expansion of the government into finance, autos, energy, and insurance, as well as health care, public disclosure is critical if our economy is to respond positively. Encourage your elected representatives to post budgets, and expenses on the internet.
Over time, we can recapture our democracy.
June 16th, 2009 at 12:05 pm
The explosion in the money supply is terrifying, but not having the explosion could have created equally terrifying circumstances. Will be interesting to see where this science experiment ends up.
June 16th, 2009 at 4:22 pm
Fred — Thanks for the comment, and for reinforcing my point. While I agree that the Fed’s explosion of the money supply MAY have been necessary, it’s already done. So the question now is: what will be the consequences, both anticipated and unintended?
No one knows where this “science experiment” will end up–recession, depression, stagflation, or a return to vibrant economic growth. The outcome is vitally important for all Americans, and everyone on the globe.
History has demonstrated that unintended consequences simply overwhelm the efforts of central planners. But we have the ability to guide the outcome, by our collective actions in response to the consequences as they unfold. Timely transparency allows us all to participate in building a better future. Without transparency, we are truly shooting in the dark.
Thanks for your comment,
Richard Barrett