October 31, 2008

October 31, 2008 | Commentary on

The Best Red Tape Your Tax Money Can Buy

As the financial turmoil has worsened, many politicians have resorted to mutual recrimination in a "blame your opponent" exercise over who was responsible for the debacle. As the process drags on, the recrimination of choice has become whether you ever were, or ever have been, in favor of deregulation, and Republicans seem to be getting much of the blame.

 With free markets on the defensive, a sweep of both branches of government by advocates of bigger government will lead to legislative efforts to impose new regulations on business and consumers, and judging by campaign rhetoric, these new regulations will concentrate in the areas of finance, environment and energy.

And while it may seem counter-intuitive, some in the business community will endorse these efforts since federal regulations often lead to less competition and higher prices, and consumers will be the chief losers.

As today's debate rages on, few remember that the current process of deregulation got its start in 1978 when Jimmy Carter got Congress to pass the Airline Deregulation Act, which was soon followed by the deregulation of railroads and interstate trucking.

Each of these efforts was spurred on by the goal of providing benefits to consumers, because federal regulations had been distorted to protect the regulated industries from competition, and often imposed controls that fixed prices at a high level.  Prior to deregulation, air travel was largely limited to those with above-average incomes.

Another important Carter era deregulation was the 1980 Depository Institutions Deregulation and Monetary Control Act, which marked the beginning of a long process of freeing financial institutions from cloying New Deal rules that discriminated against consumers by limiting interest rates banks could pay depositors.

It is unlikely that those who proposed, enacted and enforced regulations did so with the intention of transferring income from the bottom to the top, but over time affected industries used their political influence, financial power, and lobbyists to alter the regulations to their benefit.  In effect, business gets the "best" regulations money can buy.  By contrast, the ordinary consumers, without such influence often bear the burden of these regulations.

Hints about whether the same process will play out in the next Congress can be gleaned from the recent actions and inactions of the Congressional leaders in their mishandling of the Fannie Mae and Freddie Mac fiasco.

As the record of the past several decades reveals, Fannie Mae and Freddie Mac  manipulated the system to their considerable advantage in a way that provided them with all the profits while the taxpayers bore most of the risk.

To achieve this (temporary) state of bliss, both institutions paid handsomely for the lax oversight and valuable government privilege and protections that allowed them to control more than half the residential mortgage market.  Over the past decade or more:

  1. Fannie Mae and Freddie Mac and their employees contributed more than $14.6 million to U.S. senators and representatives between the 2000 and 2008 election cycles.
  2. Fannie Mae spent $79.5 million and Freddie Mac $94.9 million lobbying the U.S. Congress between 1998 and 2008.  As its then-chairman Frank Raines observed in a speech to investors: "[w]e manage our political risk with the same intensity that we manage our credit and interest rate risks."
  3. Fannie Mae pumped more than $500 million into not-for-profit groups in order to curry favor with influential constituencies.
  4. Fannie Mae financed the publication of two of the Nation's leading academic journals in housing to maintain goodwill within the academic community.

 Although Fannie Mae and Freddie Mac may have fooled Congress, they couldn't fool the tens of thousands of investors participating in global markets, and in the late summer of 2008 both institutions failed and were taken over by the U.S. Treasury (taxpayer).

Notwithstanding efforts to blame the demise of these two institutions on an ideological commitment to deregulation, the sad story of Fannie Mae and Freddie Mac has nothing to do with the ideology  but everything to do with the well-funded influence peddling now common in Washington.

The risk we confront is that the next Congress will bring us much more of the same.  In energy, new regulations could restrict oil use in favor of inefficient alternative like ethanol, wind power and trolleys in a process that will transfer billions of dollars from consumers to subsidized suppliers.

In the end, consumers run the risk of losing much of what they have gained since 1978.

Dr. Ron Utt is the Herbert and Joyce Morgan Senior Research Fellow of the Thomas A. Rowe Institute for Economic Policy Studies at The Heritage Foundation.

About the Author

Ronald D. Utt, Ph.D. Herbert and Joyce Morgan Senior Research Fellow

First appeared in the DC Examiner