Regulation not a Democrat or Republican Issue

By: Ameek Sodhi

It is a politician’s job to get elected every two to four years. Once elected for a first time, we as constituents re-elect incumbents overwhelmingly. By that definition, politicians have very little incentive to take a careful and detailed analysis of policy measures. As long as they get 51 percent of the vote, they’re happy. So what is an election-fearing politician to do when a serious, substantive debate comes up? Make a catchy slogan and run with it.

Political slogans have the wittiness of a fourth grade comeback – watch out. They have become commonly used in political elections big and small, and their strategies are pretty simple. If it scares people, brilliant. If the headlines make the other view sound like they have no backbone, wonderful. And if you can mischaracterize your opponent’s intentions, it’s all the better. With Regulation, more than any other issue, this childish rhetoric does not match up to the seriousness the debate requires.

Regulation is probably the most overused word by politicians. Politicians spin the concept which ever way the winds blow, to the tune of their own ideological note. Democrats complain that without regulations, the marketplace will run wild. Republicans insist that overregulation can restrict the healthy, needed risk-taking for a vibrant free market. On face value, both claims make sense. However, a firm understanding of economic history points to a solution more in depth and complex than just misleading catch-phrases.

Frankly, regulation is a case by case issue. There have been industries subject to Soviet-style overregulation where deregulation has worked. An example would be the deregulation of telecommunication industries in India, which has dramatically increased accessibility to cell phones. When I visited India, I noticed that even people with the most modest income could afford cell phones. Also, China has taken many steps in embracing a much less regulated and transparent marketplace. As a result, they have become an economic powerhouse. So in those specific cases, deregulation worked out very well.

On the other hand, there have been cases where eases on regulation have caused for the market to abuse its new found opportunity – particularly in the financial markets. The Asian Financial Crisis in 1997 is a good example. Capital was allowed to flow in and out with virtually no regulations, and caused Indonesia, Malaysia and South Korea to almost collapse. Clearly, more regulation was needed in that case.

Our current recession is another example we should learn from. For years, banks sold risky sub-prime mortgage backed securities under almost no regulation. It caused our markets to come to the precipice of collapse last September. So we know that we must be prudent when it comes to deregulating financial markets. With this case, however, there is more to the story.

For years, Republican and Democrat presidents pressured banks to make these sub-prime loans in the first place. Then, for eight years, a Democrat lead Finance Committee under a Republican president sat on their hands as the problem became much worse. In this instance – which our economy barely escaped economic Armageddon – there were institutional screw-ups, not just the question of regulation. So when politicians complain about the deregulation or regulation of American financial markets, they really are trying to cover their own mess with ideological blabber.

Clearly, regulation is a multifaceted subject that requires a case by case analysis. I look for the few, intelligent politicians from both parties that genuinely take the time to study issues like this with prudence. Some issues are cut and dry, and that is ok. However, there are certain issues where things are not so simple. On those more complex issues, like regulation, it makes sense for us to study the economics, not the rhetoric.