Memo 6: The Rules are the Rules
Simple clear purpose and principles give rise to complex intelligent behavior. Complex rules and regulations give rise to simple stupid behavior – Dee Hock
1981-1982 had something that every previous failed battle against inflation had missed during The 70s: fiscal reform designed to Liberalize the economy and boost our productive capabilities. Some people might even call it Reaganomics. I’ll spare you the sermon, and even underscore that the Carter administration got the ball rolling on a ton of these initiatives. In 1982 our country adopted a comprehensive plan to fight inflation by unleashing America’s productivity (supply side) by deregulating the economy, removing federally fabricated obstacles to competition and innovation that counterbalanced extreme but otherwise insufficient rate hikes. Take a look at Table 1 below from this paper from 1998 which looks back on deregulation efforts in The 70s:
I’d like to underscore how monumental this Liberalization was to this selection of industries. Before, the government set airline, trucking, railroad, and gas prices. New entrants needed government permission to enter any of these industries, rarely granted. Banks couldn’t operate across state lines. If you’re surprised that in the middle of a Cold War against communism, the government was fixing prices across major industry – that’s the right reaction.
Our government did this in the name of competition, but no one was happier than big incumbents. At the behest of the country’s largest firms, our government froze out new competitors. Big business lobbied aggressively to maintain these set prices. Why? Because these were not price ceilings – they were price floors! Designed to prevent undercutting and guarantee profits, our captured regulatory framework promoted complacency instead of productivity, and prohibited efficiency and innovation.
Take a look at Table 2 – this is what happened after switching to Nutrisystem. As Dan Marino pitches:
“Are you sick of feeling fat and tired? Have you slowed down a bit too much?”
Well then you might want to try deregulation. Look through the massive productivity gains outlined above, and now look below to Table 3 to quantify consumers benefits from these reforms.
Behold – decreases in prices ranging from 30-75%. Is there anything better for an inflationary environment than increasing production and decreasing prices? I’ve chosen to highlight deregulation because this is where the solution starts: unleashing production. Instead, the momentum going the wrong direction - we’re looking for new ways to regulate.
Perhaps most frustrating is watching the same story unfold: companies asking to be regulated. Maybe it’s the cynic in me, but could there be any clearer sign that special interests have captured our regulatory framework? If you agree that our regulatory state is strangling our economy, then the questions take a political economy turn – how can we get our political institutions to the correct economic outcomes? In The 70s this took 12 years before we built a political mandate to deregulate. Will this time be different? Based on current discourse I think we’re still very far from this consensus.
I want to be constructive here, so at the risk of being partisan, I’m going to introduce what I view as three pillars to modern regulatory reform: immigration, energy, and housing policy. I’m picking these topics because:
Labor, energy, and housing markets are at the eye of today’s economy of shortages
I don’t think it’s controversial to say these markets have been bent out of shape
I do think we can find plenty common ground to reinvigorate these markets
This is my personal smattering of sectors in need of regulatory relief, but naturally, these will be different for everyone. Last Monday, contemporaneous to the publishing of Memo 5: The Hamster Wheel, a friend and subscriber sent over Joseph Stiglitz’s remarks. To Stiglitz:
“Fed Rate Hikes Killing Economy Won’t Fix Inflation…. The US economy needs supply-side interventions rather.”
For example, the Nobel Laureate wants to increase childcare availability as a means of getting women back into the labor force - different strokes for different folks! Now I’m not a Nobel Laureate, so who am I to argue. I tried to explore immigration, energy, and housing, but pretty quickly realized these will each need their own memos in due time.
I think the important takeaway for now is that we can all look at the world right now and see obstacles to productivity and prosperity, so I’ll put the question back: where do you see the obvious barriers to production, and what can we do to eliminate them?