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Who Will Defend Free Markets?

October 6, 2008
The Heritage Foundation
If you thought passage of last week's $700 billion Wall Street bailout meant Congress would get out of Washington, you're not that lucky. Determined to pin the credit crunch on free markets, Chairman Henry Waxman (D-CA) has announced a whole month's worth of hearings in the House Oversight and Government Reform on the "financial meltdown." For Waxman and his fellow travelers on the left, the past two weeks mark the collapse of capitalism due to deregulation . Nothing could be further from the truth.

First of all, by every quantifiable measure, regulation has increased under President Bush:

Money spent by federal regulatory agencies is up to $44.9 billion in 2007 from $27 billion in 2001, a 44% increase.
Total people employed by federal regulatory agencies is up to 244,000 in 2007 from 172,000 in 2001, a 41% increase.
Total number of pages in the Code of Federal Regulations is up more than 4,500 pages since Bush took office.
Cost imposed on Americans is more than $28 billion in new regulations since Bush took office.

In total, the federal government imposes a nearly $1.1 trillion regulatory burden on the American people every year. Many of these regulations are justified. Providing transparency and creating information are value-added government functions. Regulation is not per se inconsistent with market principles. Some reinforce property rights and market mechanisms.

But creating a massive government duopoly in the residential real estate market does not reinforce market mechanisms. It perverts them, and it perverts them to such a degree that some estimate that Freddie Mac and Fannie Mae purchased more than a third of the $3 trillion in junk mortgages created during the housing bubble. They did so because heavy government regulation required them to push as much money into questionable mortgage buyers as possible. As Ronald Reagan said in his 1981 inaugural address: "Government is not the solution to our problem; government is the problem."

The free market needs defenders like Reagan now more than ever. As Washington Post columnist Sebastian Mallaby writes today:

[B]laming deregulation for the financial mess is misguided. But it is dangerous, too, because one of the big challenges for the next president will be to defend markets against the inevitable backlash that follows this crisis. Even before finance went haywire, the Doha trade negotiations had collapsed; wage stagnation for middle-class Americans had raised legitimate questions about whom the market system served; and the food-price spike had driven many emerging economies to give up on global agricultural markets as a source of food security. Coming on top of all these challenges, the financial turmoil is bound to intensify skepticism about markets. Framing the mess as the product of deregulation will make the backlash nastier.

The American people still believe in this message. According to Rasmussen Reports, 59% of Americans agree with Reagan's verdict that government is the problem. But that does not mean we should abolish government; just keep it limited to a smaller role. In that same address, Reagan also said: "Now, so there will be no misunderstanding, it's not my intention to do away with government. It is rather to make it work - work with us, not over us; to stand by our side, not ride on our back. Government can and must provide opportunity, not smother it; foster productivity, not stifle it."

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