OK, government regulation isn’t ALL bad…
Last Friday evening I saw the movie; ENRON, The smartest guys in the room at the Historic Normal Theater, and I’m just getting around to writing about it now.
Why the delay? Because I was trying to figure out what to say.
On the one hand, the movie was immensely entertaining. The story (based on a book by Fortune magazine writer Bethany McLean) tells how an energy-futures trading company charmed financial institutions around the world, promoted a new business model and a new type of accounting, coerced financial analysts, manipulated energy markets at home and abroad, and finally collapsed in a huge steaming pile of fraud. That the movie was fun could be seen in the ample audience participation – laughter, groans, and animated conversation afterward.
On the other hand, the story drills a number of painful holes in my libertarian/conservative teeth.
I like to believe that government regulation of markets (in the form of subsidies, limits, and controls) are the reason that marketplaces don’t perform better than they do. Why, if gub’mint would only git out of the way, the marketplace would find the best solution every time!
But that’s plainly not true. One area where it does not work is in necessary services that can’t be assigned to individual consumers. NOAA comes to mind, and the CDC, the Army Corps of Engineers, or for that matter even the whole national defense enterprise. If we depended on the market to do these things, they wouldn’t get done – and they need to be done.
The other major area of market failure is where corporations become large enough to manipulate the markets out of sheer greed or the ego of their leaders. That seems to be what happened with Enron. The less regulation on that company, the worse it played out for consumers. The wreckage caused by the wishful thinking of deregulation landed on literally millions of people’s lives.
Ego played a large role in Enron. The lead guys were “colorful”, to say the least. And they obviously thought very, very highly of themselves.
I was fascinated by how financial institutions could look at Enron’s business and accounting models and not back away and go wash their hands. There really is something in human nature that wants to believe things will turn out great, I guess. We want to believe the promises of the huckster.
This does not bode well as larger forces are at the disposal of corporations, and it isn’t that reassuring in the hands of governments either. The unfortunate lesson is that sometimes, only government regulations can prevent disaster. I find it a scary thought because there are so many examples of government incompetence.
The movie did play into one of my pet intersts, though. History is full of examples where disaster loomed, a few people said “this will cause a disaster!” and were brushed aside with “Pshaw! That’s crazy talk! You just be quiet now!” Some of my favorite examples are the Johnstown flood, the Gimli glider, the Kansas City Hilton walkway, and the Challenger shuttle. I’d never thought of adding a financial collapse to the list, until now.
ENRON: the smartest guys in the room is definitely recommended!
Interesting entry … appreciated. Re your statement:
“I find it a scary thought because there are so many examples of government incompetence.”
It might be an interesting exercise for you to actually search for cases of the opposite. I.e., instances where government policy and action actually does/did benefit the collective. I think part of the problem is that the media gravitates to the sensational because it is an easy story. And in an era when media control is increasingly concentrated in fewer and fewer parent corporations (hmmmm…) finding a newspaper, broadcast or even web/blog story about a success is, it seems pretty rare.
What comes to mind immediately is The New Deal. But as those who experienced the Great Depression first hand die off, the success of The New Deal becomes less of a reality and more of a political football. GHW didn’t seem to want to tear it apart even though he undoubtedly wasn’t destitute during the depression, but W, not having even seen its dirct impact and the benefit of FDR’s programs … seems to want to ignore the lessons of history.
Other examples might be the Peace Corps, CUSO, UNICEF, etc.
I would like to compile a list like that, and a list of complete screw-ups, along with rationale for assigning things to one column or the other. The assignment is the tough part. Anyway, suggestions from readers are most welcome.
This is a really tough problem that worries me a lot. Given that (good) teaching requires passion, how to teach history in a disinterested way so that kids will be inspired to read different perspectives – or indeed keep reading at all? Somehow we need to leave them with the idea that what they learned in history class is just an introduction and a personal need to go further…
Hmm… I think this calls for some fresh strawberries and Breyer’s natural vanilla ice cream.
I definitely wouldn’t call the New Deal a success. It did help a lot of people, but remember that it also hurt a lot of people. The taxes collected for social security created a massive system of retirement and disability entitlements which has proved quite a good investment for people who have retired so far. However, the ratio of workers to retired will fall substantially in the next two decades—my generation will either have to shoulder a much higher tax burden, or the baby boom will have to experience much lower benefits than the previous one. One actuarial model I read about predicted a negative rate of return for the baby boomers if taxes are kept at their current rate (though this is controversial). In evaluating anything, one must weigh the benefits with the costs—but with most government programs this is hard to do since the benefits appear so immediate and the costs are spread so thin.
A list of very effective government programs:
(1) The WHO’s elimination of smallpox, and their movement towards the elimination of measles and polio.
(2) FDA *labeling* requirements for nonprescription foods and medicines. These have massively improved consumers’ ability to learn about and evaluate products, and food & drug quality.
(3) The international network of flu researchers who identify new strains of influenza, and culture viruses for vaccine production. This has probably postponed at least one pandemic of flu in recent years, which would probably have cost many billions of dollars worldwide, and killed hundreds of thousands or millions of people.
(4) The Civil Rights act of 1964. I don’t like certain aspects of the bill, but it certainly improved conditions for discriminated-against minorities.
(5) Equity holding requirements for banks, and some reporting requirements mandated for securities. While I am loath to mandate financial restrictions on banks on principle, I think that holding requirements have produced a vastly more stable banking system, which prevented loss of assets for millions of people.
(6) The NSF and NIH. While these have certainly funded a lot of obviously crappy research, or deverted resources from better areas, the fact that research is instantly become public domain has probably produced a lot of economic growth.
(7) The Freedom of Information Act. This is a little difficult to actually support in its current form, since it is so capricously enforced, but it’s a really good idea in principle.
Some of these I have my doubts about as ideas (i.e. 4 and 6), but it is my opinion that the benefits of these programs have far outweighed the costs.