January 5, 2019


Why free-market economists aren't impressed with Trump's deregulation efforts (Scott Sumner, Dec 19, 2018, Market Watch)

In many cases, the regulations being removed are much more defensible than those being added, even from a free-market perspective.

In early October, the Treasury Department put into effect regulations that will restrict foreign investment in a wide range of fields, such as biotechnology and nuclear power generation. This could make it harder for startups to find financing, given how the biotech sector is increasingly dependent on inflows of money; Asian investors contributed nearly 50% of venture-capital investments in U.S. biotech companies during the first eight months of 2018.

The federal government has also increased the hurdles that companies must overcome to hire foreign workers, ranging from high-tech professionals to summer workers in hotels and restaurants. There is now much more paperwork, and work visas are being denied much more frequently.

A recent bill aimed at dealing with the opioid epidemic will also increase regulation. The New York Times reports new rules will require the U.S. Postal Service to collect the name and address of the sender as well as the sender's description of the contents of the package by the end of this year for all shipments from China and at least 70% of all international packages. It will have to do so for all international packages by the end of 2020.

All of these regulations, as well as the recent tariff rate increases, reflect a deep distrust of interactions with the rest of the world. Some of this involves suspicions about Chinese government spying, but the concerns go far beyond foreign policy, to broader issues of trade and immigration.

The specific areas of deregulation also raise some concerns. The Trump administration has trimmed regulations in areas such as energy production, labor rules and financial markets. Yet even free-market economists often favor regulation when there are negative effects from an activity, called "externalities", such as the environmental effects of burning coal.

The financial industry is especially problematic, as we saw during the 2008 financial crisis. In many cases, an economy is most efficient when operating under free-market principles, free of regulation. However, the financial sector is already heavily distorted by government backstops such as deposit insurance (through the FDIC), government-protected enterprises that purchase mortgages such as Fannie Mae and Freddie Mac, as well as an implicit policy of "too big to fail" -- the federal government's tendency to bail out big banks during a crisis. The Trump administration has not reduced these serious market distortions.

Posted by at January 5, 2019 3:55 AM