Deregulation
Where Do We Go From Here?

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As the ongoing financial crisis brews anti-market sentiment in Washington and the media, the deregulation, industry restructuring, and regulatory reform initiatives of the last thirty years are coming under increasing attack. In his timely new monograph, Deregulation: Where Do We Go from Here? (AEI Press, October 2009), Paul L. Joskow, MIT economics professor and president of the Alfred P. Sloan Foundation, argues that the crisis in the financial market should not become an excuse for reversing beneficial regulatory reform initiatives in other sectors. Indeed, the financial crisis presents a valuable opportunity to evaluate a broad range of regulatory reform options and make reasoned decisions about their potential application to financial products and markets.

Joskow makes five important points about the role of regulation, and deregulation, in the American economy:

  • Competitive markets--and the basic institutions of capitalism that accompany them in modern developed economies--while not perfect, are typically the most effective institutions for allocating scarce resources efficiently.
  • Deregulation, privatization, and regulatory reform initiatives have generally benefited the U.S. economy over the last thirty years by lowering costs, enhancing rates of innovation, matching consumer preferences and product quality, and creating more efficient price structures (although not always lower prices, as several regulatory programs kept prices too low and caused shortages).
  • In some cases, market imperfections necessitate the introduction of regulatory mechanisms to improve performance. But before imposing new regulations on a particular market, policymakers must apply a disciplined framework for identifying whether, where, and how regulatory policies can improve market performance, taking into account the costs of market imperfections, the benefits of regulatory constraints, and the costs of regulatory imperfections.
  • The need for, and nature of, regulation, deregulation, or regulatory reforms should be specific to the attributes of particular industries, products, firms, and consumer decisions, and subject to periodic reevaluation as new information emerges about the performance of public and private institutions.
  • Reforms to the regulation of financial products and markets in particular should be based on a complete understanding of the causes of the current crisis, a comprehensive review of the associated market imperfections, a clear articulation of regulatory goals, and a careful assessment of the strengths and weaknesses of alternative regulatory mechanisms. Furthermore, an effective regulatory framework is likely to require a fundamental restructuring of the excessive number of existing federal and state regulatory agencies.

"If history is any guide," Joskow concludes, "the rush to implement reforms in response to the immediate crisis without fully understanding its causes and developing comprehensive measures to address the market failures is likely to lead to at least some 'quick and dirty' regulatory initiatives that fail to solve the problems and may even make them worse. This is a history we should try hard not to repeat."

Deregulation: Where Do We Go from Here? is an admonition against hasty scapegoating of deregulation and knee-jerk decisions to "re-regulate." Joskow provides an insightful guide for developing reasoned regulatory reforms that will allow the American economy to rebuild and thrive.

Paul L. Joskow is president of the Alfred P. Sloan Foundation and a professor of economics at the Massachusetts Institute of Technology.

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