One constant theme of Paul Krugman’s columns in the New York Times is that the economy needs more regulation, and especially financial markets. The story he tells is this: After the Great Depression, regulated markets from banking to transportation to telecommunications worked wonderfully, but conservative ideologues convinced the government to deregulate whole sections of the economy.
Unfortunately, so the morality tale goes, rampant free enterprise led to economic collapse, as entrepreneurs took huge risks and brought the economy to ruin. Had government been in charge, none of this would have happened.
As usual, Krugman rewrites history, ignoring key events and pretending they never happened. For example, he writes that what he calls the “era of boring banking” and regulation of other firms resulted in “spectacular economic growth” in the 1950s and 1960s.
This is an example of the logical fallacy known as post hoc ergo propter hoc, or “after this, therefore because of this.” The most famous example is the sun rising because the rooster crows. However, there is more, much more to this story.
If anything, the strict regulation that enveloped the economy during the 1930s held back economic growth. While it is true that the U.S. economy recovered quickly after World War II, it was pretty much the only one left standing. Furthermore, Great Britain, which had been an industrial power before World War II, was moving into socialism and nationalization of key industries, which meant that once-trusted British products would lose their quality as socialist planning and production took its toll. There were no other real economic competitors on the planet in the decade or so following the war’s end.
Krugman ignores another important development during the 1960s; the advent of inflation. At the time, the dollar was the key currency in the fixed exchange rates set by the Bretton Woods agreements of 1944, and the Kennedy and Johnson governments took full advantage of that by inflating it. That meant Americans could buy more goods from abroad even though U.S. productivity at the time was rapidly slowing.
The gravy train came to a halt in 1971, when it was clear that the dollar no longer was “good as gold” and really not even “good as paper.” During the next decade, stagflation was the rule, not the exception. (Krugman always likes to skip the 1970s in his analysis, as stagflation does not fit into the Keynesian paradigm.)
By the late 1970s a number of things were clear. First, the regulated cartels (banking, transportation, telecommunications) were failing badly. Inflation was driving people out of banks and their regulated savings accounts and into money-market funds and hard goods, such as gold. Second, the regulated railroads were going bankrupt and their general condition was poor.
Thus the administration of Jimmy Carter, which hardly fell into the “conservative Republican” category, began long-range plans to deregulate finance, transportation, and telecommunications. Airlines were deregulated in 1978, and by the time Ronald Reagan became president, all deregulation efforts were well underway. (Reagan received an endorsement from the Teamsters Union by promising to delay trucking deregulation. So much for deregulation and ideology.)
A little-known fact is that many of the entrepreneurial initiatives based on the new computer technologies were funded outside the regulated banking cartel because the it was not equipped to finance them. From CNN to MCI to personal computers to cellular-phone technology to new ways of retailing, many of these pioneering firms were financed by Michael Milken and his so-called junk bonds, something Krugman fails to point out.
To put it another way, if we had kept the regulated banking cartel that Krugman so praises, you would have to read this article in print, since the Internet and almost all the technologies that accompany it would not have been in existence or would be in much more primitive states than they are. Somehow, I doubt that fact ever will be trumpeted on the editorial page (or any other page) of the New York Times.
