My thanks to Arnold Kling for the link to this October Forbes article from Robert Crandall and Clifford Winston remarking on financial regulation. They point out, correctly, that the re-examination and soul searching about macroeconomics in which we are currently engaged overlooks the great insights and policy successes that microeconomics-based deregulation have brought to the U.S. economy:
Nothing in the last two years has undermined microeconomic analyses that influenced the deregulation of the airline, trucking, railroad, natural gas, crude oil, telecommunications and cable television markets. These deregulatory successes have not been compromised by the market failures that originated in the financial sector and are at the heart of the Krugman lament. But even if Krugman could uncover a theory that integrates irrational exuberance in financial markets with macroeconomic performance, it would hardly guarantee improved performance of government regulators. Nor would it enhance our considerable knowledge of how markets correct after sharp downturns.
I do think that Crandall and Winston overlook the crucial role that government policy had in fomenting “irrational exuberance in financial markets”, and therefore call it more of a “market failure” than I would, but it’s still a good piece and a good reminder of the benefits that economic deregulation has created in several industries over the past three decades. In particular, Randall and Winston point out that markets provide consumers with adaptation opportunities that they can use as their information and knowledge increase — a fancy way of saying that as individuals take actions in sharp downturns (such as saving more and shoring up their balance sheets), information about those adaptations ripple through markets through price signals and other means.