Sunday, May 02, 2010

Government regulations will destroy free market

Published in The Tennessean, May 2, 2010

Government regulations will destroy free market

by Richard J. Grant

Banks and labor unions have more in common than meets the eye. Both owe their current forms to the plethora of labor, corporate, and banking law that has been imposed over the decades. Both groups have been protected from the moral discipline that would be imposed upon them in truly free interactions with their associates and customers.

However sweet the intentions of early labor leaders and their supporters, the main function of labor unions has been to limit the supply of labor in order to raise the incomes of their members at the expense of everyone else. Such an endeavor always requires the use of force, with or without the complicity of government. Only by force can these groups limit the alternatives available to customers and thereby extract higher payments than the value received by those customers.

Just as labor law has created an artificial distinction between union and nonunion labor, banking law has served to treat those firms that specialize in financial intermediation as being somehow different from any other service. Governments have presumed themselves somehow to possess the knowledge necessary to predict the best framework in which financial services should be offered.

Thus we have a patchwork of not-quite-rational obstacles around which the financial industry has grown in the course of providing the services that are still allowed to be offered. Politicians have long benefited from appearing to protect their constituents by “being tough” on the bankers. But politicians and their governments have also benefited from access to those with the wherewithal to offer political support and to assist in servicing the financial needs of government activities.

In a free market, where private property and the freedom to enter into agreements are mutually respected, the first entrepreneur to offer a new and truly valued service can expect to reap a significant profit. The freedom of others to offer competing services to consumers would soon bring down prices and tend to reduce profits to normal levels.

But when regulations make entry into, and innovation within, the industry difficult, less competition is possible. This restricts the supply of services available, thereby enabling the industry to keep its profits higher than normal. The actual history of regulation offers us more examples of industries being protected from customers than the other way around. When Wal-Mart and Home Depot attempted to offer banking services, the FDIC repeatedly blocked their applications in order to protect existing banks from the competition.

We see such protectionism in other industries as well. The reasons for the stagnant uniformity of cable TV offerings should be obvious when we witness existing companies spending millions of dollars to lobby government to prevent the entry of potential competitors. Similarly, we might recognize one reason for the high cost of hospital stays when we observe existing hospitals lobby the government to deny a possible competitor a "certificate of need" thereby denying customers the alternative of a new hospital.

As long as such restrictions on our freedom to do business exist, those who blame our current troubles on the "free market" will continue to sound like buffoons. But many such critics are not so innocent. Many of the senators and congressmen now pointing fingers at investment banks like Goldman Sachs would like us to forget that it was Congress that created and protected the economically unjustifiable and morally corrupting agencies that we call Fannie Mae and Freddie Mac.

Neither of these government-created companies nor the destruction that they wrought could have come into existence in a free market. Only government interference that destroys the link between actions and personal responsibility could unleash such corruption upon us.

Instead of insulting the American public by grandstanding at the expense of Goldman Sachs executives, perhaps our senators should spend more time investigating the consequences of Fannie Mae and Freddie Mac. Then they should take a good hard look at the consequences of their own voting records.

Richard J. Grant is a professor of finance and economics atLipscomb University and a scholar at the Tennessee Center for Policy Research. His column appears on Sundays.

Copyright © Richard J Grant 2010