Did Too Much Regulation Cause Our Economic Problems?

Ed Glaeser says John Kenneth Galbraith's "'The Affluent Society' seems relevant once more":

The Age of Abundance, by Edwatd Glaeser, Commentary, NY Sun: Fifty years ago, John Kenneth Galbraith's "The Affluent Society" soared to the top of the best-seller list. ... Much of "The Affluent Society" is rooted in the 1950s, but the book's central question remains central today: Should a rich society embrace free-market capitalism and private wealth, or should that society use its wealth for more public purposes like fighting poverty and improving infrastructure?

"The Affluent Society" reflects both the economy and the culture of 1958. The book's main observation was that America has become unbelievably prosperous. ... Galbraith beautifully captured that moment in the late 1950s when rising prosperity freed the median American from having real fears about basic necessities. ...

But while "The Affluent Society" reflects American society in the 1950s, it was quite detached from postwar trends in economics, which is why Galbraith has rarely been embraced by economists. In the 1940s, cutting-edge economists turned to mathematical models and statistics. Galbraith did not. ...

"The Affluent Society" is better seen as eloquent moral suasion rather than expert economic analysis. Galbraith sees two possible paths for an affluent America, and he strongly favors one of them. "The Affluent Society" argues that America can put its faith in free enterprise, which might create more and more stuff, or it can follow the more morally uplifting path of trying to reduce poverty and improve the quality of life with the help of a more robust public sector. .. Galbraith attacks the relentless pursuit of output, which, as he sees it, only satisfies unnecessary desires ginned up by clever advertisers.

Galbraith's advocacy of public spending aimed at reducing inequality and improving infrastructure helped usher in the 1960s. Lyndon Johnson's war on poverty was decidedly Galbraithian. While the New Deal social programs were born of economic desperation, Johnson's social spending reflected the confidence of prosperity, just as Galbraith had foreseen. But after 1969, the American public gradually turned against Galbraithian social policy. By 1980, Galbraith's arch-nemesis, Milton Friedman, had found an intellectual home in the White House. In the 1990s, even Democrats embraced private wealth over public spending. But in 2008, "The Affluent Society" seems relevant once more. As the political pendulum swings left, candidates once again call for a more vibrant state to right social wrongs. The excesses of the 1960s are forgotten and once again, the government is seen as society's savior. For people of all political stripes, it is worthwhile returning to "The Affluent Society," and pondering what Galbraith got right and what he got wrong.

While I am a staunch supporter of free markets, I agree with Galbraith that there is much the public sector needs to do. Private firms do not automatically provide safe streets, good roads, and clean water. Even more important, Galbraith was dead right in arguing that we need more effective schools. Human capital is our best tool against poverty and economic stagnation.

Galbraith's great failure was that he never really understood how much society is strengthened by a free and competitive private sector. "The Affluent Society" argues that a lack of regulation made American homes inferior to those in European social democracies. That view was wrong in 1958 and is completely untenable today. American housing is the best in the world, and the weaknesses of the housing market reflect too much, not too little, regulation, especially those rules that stymie construction and make housing unaffordable. While Galbraith was right that some social problems do need a stronger public sector, his analysis would read better today if he had also appreciated the tremendous vitality that comes with economic freedom.

Obviously, I disagree that the problems we are seeing in the housing market were caused by too much rather than too little regulation. Glaeser's not the only one making this claim:

Regulatory Overkill, by Allan Meltzer, Commentary, WSJ: The claim that deregulation went too far is coming from many sides. We need more regulation, the argument goes, and even a single regulator to bring stability. ...

Their diagnosis is wrong. Mistaken regulation contributed greatly to the current problems in financial markets. Take the 1970s Basel agreement between developed country governments, which followed bank failures in Germany and the U.S. The idea was to have equivalent risk standards in all the principal lending countries. The agreement required banks to increase their capital if they increased mortgage loans and other risky assets.

The banks responded, however, by developing instruments that avoided higher reserves by moving risky loans off their balance sheets. Risk moved to all corners of the global marketplace. We find out who holds the risky assets when they announce they are about to fail.

The response to the Basel regulation is not unique. The first principle of regulation is: Lawyers and politicians write rules; and markets develop ways to circumvent these rules without violating them. ...

The perennial argument of regulators is: "If only I had more power. . ." Not so. Regulators did not see the chicanery at Enron. Nor did they prevent the dot-com bubble or the Latin American debt problems in the 1980s. A main reason is "capture" -- when the interests of the regulated dominate the interests of the public.

Capture is not the only reason regulation often fails. Regulators and most politicians are good at developing rules and restrictions, but poor at thinking about the incentives that the market will face. If the incentives are strong, the market circumvents the regulation. The Basel regulation encouraged a system that is far less transparent than the system it replaced. ...

Mr. Frank and Senate Banking Committee Chairman Christopher Dodd are planning more schemes to move the risk to the taxpayers from those who made bad decisions, such as buying mortgages that are now in default. As a result, ordinary citizens will ask themselves: Why should I pay my mortgage if my neighbors can get theirs reduced? These proposals have stark long-term consequences. The financial system cannot survive if the bankers make the profits and the taxpayers take the losses.

The government has a responsibility to prevent systemic crises and financial collapse. Long ago that job was given to the Federal Reserve. It serves as lender of last resort to the market. Today, the Fed should not rescue individual firms, but it must keep the payments system from failing. To carry out that responsibility, the Fed has auctioned reserves and exchanged marketable Treasury bills for illiquid mortgages, and it has succeeded so far. Now, it must stop responding to calls for lower interest rates.

If the government underwrites all the risks, call it socialism. If it underwrites only the failures, call it foolishness.

Other than citing Basel as a general example, and I'd argue that even though Basel was not perfect it was much better than having no regulation at all, Meltzer doesn't actually say how too much regulation brought about this particular crisis. His arguments are about the problems he sees with regulation more generally, but there are no specific details about how over regulation may have caused our current difficulties. If the regulations under Basel caused banks to move assets off the books, then without regulation they wouldn't have needed to move them, but the assets still could have been used in the same way, financial institutions could have taken the same risks and would have had the same or more incentive to do so without regulatory oversight, and they could have caused the same troubles. I don't see how the regulations themselves caused the risk taking. Regulation caused evasion of regulation, and Basel II is trying to deal with that problem, but the regulations did not cause the risk-taking itself. I think Meltzer would likely argue that the regulations caused complicated financial instruments to be created that had risk properties that were difficult to assess - without regulation money would have stayed in the regulated sector where the risks would have been more transparent. But that seems to me to be an argument for regulation that forces transparency (as in the regulated sector), not an argument against regulation.  Glaeser's argument that our economic troubles are due to regulations that interfere with housing construction doesn't seem to me to be able to explain what is happening either, and he doesn't explain the connection in any detail, so basically we have two people asserting our current troubles were caused by too much regulation, but no concrete story about how that occurred. If they had one, I'm sure they'd tell it.

Update: Here's a bit more on Basel from Mishkin's monetary theory and policy text (this was written before the current crisis hit, note that regulators were already worried about banks' off-balance-sheet activities and Basel was an attempt to reduce risk their exposure):

Bank capital requirements take two forms. The first type is based on the leverage ratio, the amount of capital divided by the bank's total assets. To be classified as well capitalized, a bank's leverage ratio must exceed 5%; a lower leverage ratio, especially one below 3%, triggers increased regulatory restrictions on the bank. Through most of the 1980s, minimum bank capital in the United States was set solely by specifying a minimum leverage ratio.

In the wake of the Continental Illinois and savings and loans bailouts, regulators in the United States and the rest of the world have become increasingly worried about banks' holdings of risky assets and about the increase in banks' off-balance-sheet activities, activities that involve trading financial instruments and generating income from fees, which do not appear on bank balance sheets but nevertheless expose banks to risk. An agreement among banking officials from industrialized nations set up the Basel Committee on Banking Supervision (because it meets under the auspices of the Bank for International Settlements in Basel, Switzerland), which has implemented the Basel Accord dealing with a second type of capital requirements, risk-based capital requirements. The Basel Accord, which required that banks hold as capital at least 8% of their risk-weighted assets, has been adopted by more than 100 countries, including the United States. Assets and off-balance-sheet activities were allocated into four categories, each with a different weight to reflect the degree of credit risk. The first category carries a zero weight and includes items that have little default risk, such as reserves and government securities in the Organization for Economic Cooperation and Development (OECD-industrialized) countries. The second category has a 20% weight and includes claims on banks in OECD countries. The third category has a weight of 50% and includes municipal bonds and residential mortgages. The fourth category has the maximum weight of 100% and includes loans to consumers and corporations. Off-balancesheet activities are treated in a similar manner by assigning a credit-equivalent percentage that converts them to on-balance-sheet items to which the appropriate risk weight applies. The 1996 Market Risk Amendment to the Basel Accord set minimum capital requirements for risks in banks' trading accounts.

Over time, limitations of the Basel Accord have become apparent, because the regulatory measure of bank risk as stipulated by the risk weights can differ substantially from the actual risk the bank faces. This has resulted in regulatory arbitrage, a practice in which banks keep on their books assets that have the same risk-based capital requirement but are relatively risky, such as a loan to a company with a very low credit rating, while taking off their books low-risk assets, such as a loan to a company with a very high credit rating. The Basel Accord could thus lead to increased risk taking, the opposite of its intent. To address these limitations, the Basel Committee on Bank Supervision has released proposals for a new capital accord, often referred to as Basel 2, but it is not clear if it is workable.

The Basel Committee's work on bank capital requirements is never-ending. As the banking industry changes, the regulation of bank capital must change with it to ensure the safety and soundness of the banking institutions.

Comments

[Bruce Wilder]

Bush, in his last election campaign, argued against Democratic proposals to increase taxes on the wealthy by arguing that the rich have lawyers and accountants, who will avoid increased taxes, and the increase in taxes will instead fall on the middle class.

It might as well be the template for Meltzer's argument.

We are well down the rabbit hole in arguing policy with Meltzer, Glaeser and their ilk.

Some bankers and financial wizards, who have taken home, as individuals (!) literally hundreds of millions of dollars, have driven the institutions they led and the economy into a ditch. But, Meltzer is concerned about the moral hazard problem of helping out some poor schmuck with his mortgage.

The prime issue to me is less and less what these gasbags say about Iraq or the Economy, than it is that all sensible opinion is excluded from any consideration.

[Patricia Shannon]

"Did Too Much Regulation Cause Our Economic Problems?"? Ha, ha, ha. Any bonehead who would make this argument now is too boneheaded to pay attention to.

This morning's program on the effects of no-downpayment loans on the mortgage crisis referred to home buyers lying about how much they made when they were applying for a loan. There was no mention of the cases where the home buyer told the truth, but the information was changed by the loan officers in order to obtain higher bonuses and commissions. Maybe NPR got their story from Allan Meltzer.

[hari]

Let me first say what a pleasure to recall the likes of Galbraith (origin-Canadian) six feet tall compared to my first Stockholm mentor Gunnar Myrdal. They're great mutual friends, and I even set with them in seminar during
Galbraith's trips to Stk.

"The Affluent Society" came out simultaneoulsy (or so) with Myrdal's "Poverty of Nations". The two were intellectual giants when dealing with political economy. Unlike Myrdal, who was eventually to become the ideologue of Social Democracy in Sweden, Galbraith was a gentle and humourous lecturer.

[Bernard Yomtov]

Regulation caused evasion of regulation, and Basel II is trying to deal with that problem, but the regulations did not cause the risk-taking itself.

Well put.

[spencer]

Interestingly Metzler does not seem to think that firms moving things off balance sheet is a problem. But without off balance sheet financing much of the last round of financial problems -- dating back to Enron -- probably would not have developed. While in theory there may be some esoteric conditions that really justify off balance sheet transactions, the real story behind virtually all off balance sheet transactions is to make them less transparent and conceal the true state of a firms conditions. As long as people like Metzler blame regulations and ignore the off balance sheet fiasco it is hard to take them seriously.

[anne]

"Galbraith's great failure was that he never really understood how much society is strengthened by a free and competitive private sector."

Among the most bizarre comments ever made; we truly live at a time when not only is history a problem for some who pass for teachers but even the ability to read is a problem.

[spencer]

Over the last several years independent investors should have raised such a stink each and every time a firm used off balance sheet transactions that it would never have been an issue.

But obviously they did not do it.

Maybe Metzler can explain how this could have happened under his theory of self regulation.

[robertdfeinman]

Language Police here again:
But after 1969, the American public gradually turned against Galbraithian social policy. By 1980, Galbraith's arch-nemesis, Milton Friedman, had found an intellectual home in the White House.

Exactly which "public" is it that turned against an egalitarian social policy? As I keep saying Friedman and crew were and are a minority. Their policies are frowned upon in most of the world (Theatcherism excepted), they are kept afloat by a constant infusion of money from the "vast right wing conspiracy" which also funds Heritage, Hoover, Cato, GMU, etc, and their greed-is-good ideology fit in perfectly with the aspirations of the super wealthy family dynasties.

The "public" has wanted a better health care system since Truman. Why hasn't it gotten it? Because we live in a plutocracy where money votes not people.

As I keep repeating, it's the throwaway common words which reveal the hidden assumptions of the free marketeers. My list keeps getting longer: "public", "regulation", "savings", "investment", "terrorism", "welfare"...

[anne]

http://query.nytimes.com/gst/fullpage.html?res=9B0DE5D7133EF93BA25756C0A961948260

May 18, 1987

Gunnar Myrdal, Analyst of Race Crisis
By NEW YORK TIMES

Gunnar Myrdal, the Swedish economist and sociologist whose 1944 book, ''An American Dilemma,'' helped to destroy the ''separate but equal'' racial policy in the United States, died yesterday in a hospital in Sweden. He was 88 years old.

Reports from the Swedish capital said he had been hospitalized for more than two months. At his bedside were his daughter Kaj Folster and a grandson, Janken Myrdal, who said Mr. Myrdal had ''died naturally of old age.''

Mr. Myrdal, the 1974 Nobelist in economics, was the widower of Alva Myrdal, co-winner of the Nobel Peace Prize in 1982 for her efforts to promote world disarmament. She died in 1986.

A Footnote to History

Mr. Myrdal has been called the leading economist and social scientist of his epoch. Statesman, reformer, dissenter, pacifist and foe of inequality, an architect of the Swedish welfare state, he literally left his mark in a footnote to history - the famous footnote 11 to the United States Supreme Court's 1954 ruling that segregation in public schools was unconstitutional. Listing sources to prove that schools could not be ''separate but equal'' because separation implied and enforced inferiority, the Court said, ''See generally Myrdal, An American Dilemma 5/81944).''

The work appeared in two massive volumes in 1944, in an edition of only 2,500 copies; there have been about 30 editions since, but all have been small, with sales totaling 100,000. Nonetheless, the work has often been compared with Toqueville in its importance as a study of the United States.

''An American Dilemma: The Negro Problem and Modern Democracy'' was, Mr. Myrdal once said, ''not a study of the Negroes but of the American society from the viewpoint of the most disadvantaged group.'' The predicament, he wrote, was the conflict between the ideals that white Americans proclaimed and their betrayal in daily life. He held that this was particularly true in the South, where, he argued, discrimination was due less to bias than to a failure of the courts and the police to enforce the Constitution.

Though segregationists protested that the Court had fallen under the influence of a radical foreigner, the Myrdal study was highly optimistic about America's ability to solve its racial problem - over-optimistic, as Mr. Myrdal would acknowledge. The study was infused with admiration for this country, which he called his second home. He had no doubt that the conflict between American idealism and the reality of racism would be resolved in a reasonable time. ''No social utopia can compete with the promise of the American Constitution and with the American creed which it embodies,'' he wrote.

Above his desk in Stockholm hung two framed documents, the Declaration of Independence and a citation from Lincoln: ''To sin by silence when they should protest makes cowards of men.''

Explaining his views, an American friend, the economist Paul A. Samuelson, said, ''He's always lecturing us like a Dutch uncle because he loves us.'' Mr. Myrdal, talking with a reporter in 1972 about his long campaign against the Vietnam War, remarked, ''I don't say it's a pleasure, but for my conscience I could not say no.''

''I've always been optimistic about America,'' he continued. ''Why? Why do I sit here when I could spend my time with wine and girls? Because ideals mean something. They mean something special in America.''

Left Deep Mark on Homeland

He also left his mark on Sweden, where he helped draft many social and economic programs, and to a smaller extent on South Asia, where he vigorously preached land reform. Furthermore, as a United Nations official he promoted East-West detente before it became fashionable, and as an economist he criticized orthodox patterns of thinking and pioneered new ones....

[anne]

http://query.nytimes.com/gst/fullpage.html?res=9B0DE5D7133EF93BA25756C0A961948260

Mr. Myrdal has been called the leading economist and social scientist of his epoch. Statesman, reformer, dissenter, pacifist and foe of inequality, an architect of the Swedish welfare state, he literally left his mark in a footnote to history - the famous footnote 11 to the United States Supreme Court's 1954 ruling that segregation in public schools was unconstitutional. Listing sources to prove that schools could not be ''separate but equal'' because separation implied and enforced inferiority, the Court said, ''See generally Myrdal, An American Dilemma 5/81944).'' ...

There was a momumental economist.

[swells]

The cycles of regulation followed by invention to avoid regulation seems similar to the population cycles of a predator/prey relationship. Is there a good reason to think the spiral won't continue if more regulation is devised? The reason I ask is that it seems to me that the unintended consequences of such an "arms race" seem to become more and more fraught with potential catastrophe at each stage of the cycle.

After all, most predator/prey population cycles eventually end up with both populations extinct. Now, my analogy may not be apposite but any inappositeness is not immediately apparent to me.

[kthomas]

Thx, Prof. Thoma.

I scoffed. And I agree with Patricia: boneheads. Too polite, really.

Greed cannot be stopped, but appropriate regualtion is always needed, lest we turn to eating one another as food and selling one another as slaves.

[anne]

"The excesses of the 1960s are forgotten and once again, the government is seen as society's savior."

Which excesses of the 1960s would those excesses be, since such mean-spirited idiocy has been recited before? Which, say the war in Vietnam which destroyed the struggle against poverty, or possibly the civil rights struggle. Was Martin Luther King the problem?

Was Martin Luther King the problem of the 1960s? I really need to know.

[anne]

"The excesses of the 1960s are forgotten and once again, the government is seen as society's savior."

So, a few words and the heritage of Martin Luther King ceases to exist, the American civil rights heritage ceases to exist, the American movement for peace ceases to exist, the movement against poverty ceases to exist.

I suppose that goverment now is only the savior of Iraq's society, or am I confused?

[TIV]

Professor Thoma,

Glaeser has shown time and again that housing prices have been dramatically (and artificially) inflated over the last 20-30 years by local land use regulations that block new housing construction. Suburban communities use land use regulations to block new housing construction, which restricts the supply of housing in the metropolitan area, and drives housing prices way up. Here are a couple of his most recent studies on this:

http://www.economics.harvard.edu/pub/hier/2006/HIER2124.pdf
http://www.economics.harvard.edu/pub/hier/2007/HIER2131.pdf

As for the connection to the current housing crisis, Paul Krugman has also argued that land use regulations caused the housing bubble, so it's not the knee-jerk conservative "over-regulation" argument that you seem to think it is.

[anne]

Let me be perfectly clear, clearer than marbles, Ed Glaeser's essay is mean-spirited and deceiving and distorted. These last years have been the dream of compassionless conservatives, the dream of de-regulators since the New Deal, a distorted nightmarish dream that has given us a $3 trillion war driven by deception and pretending to have nothing to do with "government being society's savior." But, the tribe of Glaesers have had their way an I am not interested in the Glaesea way even a bit.

Please though explain the problemn with Martin Luther King. I am all tingly waiting.

[kthomas]

Bit off topic:

http://www.reuters.com/article/marketsNews/idUSN2739676020080327

Great, all we need now is these same unscrupulous people running up the price of food. Thank you Chairman Bernanke.

[Mark Thoma]

I don't find the argument that if we just could have built more houses and made more subprime loans, then we would have avoided all this very compelling. Rather than helping, it's just as likely that we'd have an even bigger over-supply of houses on the market right now, and an even bigger problem.

The demand that set this in motion didn't arise from restrictive regulation, and the ability to make ill-fitting loans that put people into homes they couldn't afford wasn't from restrictions on home building, it was from lax regulation elsewhere. Yes, building regulations can drive prices up faster, but we are seeing a broad-based increase in foreclosures (e.g. doesn't Las Vegas have a high rate? Places like Stockton, CA aren't exactly limited in their land expansion, it's flat as it gets, and foreclosure rates are pretty high), it isn't just in places where prices went up the fastest, and that's another reason to suspect the driving force wasn't building regulations, they were merely an amplifying factor.

[Robinia]

Um... Swells, most predator/prey relationships in nature are an ongoing part of functional ecosystems over millenia.

Remarkable how the most seemingly obvious things can look differrent from a different point of view. The need for a better, more up-to-date regulatory regime (and the public-sector employees with adequate skills to implement it) seems as obvious to me... well, as that cats catch mice, I guess.

[spencer]

TIV -- have you driven down A1A from about Pompano Beach south to Miami in recent years. What you see is high rise condo after high rise condo blocking the beach. They are even converting old hotels into condos.

How anyone can argue that zoning regulations was the reason for the South Florida housing boom and still claim to have a grasp on reality is beyond me.

There is a belt around Boston from 5 to 10 miles deep where street after street is lined with triple deckers and apartment buildings with essentially no zoning restrictions.
It is virtually impossible to spot a spot of green grass except for parks and school yards. Yes, affluent communities like Lexington, Concord and Lincoln are full of single family McMansions on large lots. But they account for an insignificant portion of the available land area and if you eliminated them it would not make a lot of difference. this is true in every old city. The reason builders construct single family homes 30 miles out is because that is what people want, not because of zoning restrictions. The reason cities like Boston, Miami, Washington and San Diego home prices are soaring is because they are full and have no empty land to build on, not because of zoning restrictions.
Your argument is an urban myth.

[Barkley Rosser]

Mark,

Stockton may be flat, but California in general has lots of local land use regs. Many of these are silly and way overdone. I do not agree with Glaeser that they explain the bubble, but they do contribute to the rate of upward spiral when one happens. Glaeser's favorite counterexample is Texas, which has had very little increase in housing prices, even though demand for housing has certainly been substantial there. I think TX goes too far the other way, especially in ugly Houston with zero zoning. But arguably the bubble was exacerbated in MA and CA in particular by excessive regs. He has listed the regs in some suburban MA areas near Boston. They go on and on for pages.

[RW]

I normally don't cross-post but the excuse-making for neo-conservatism's increasingly manifest failures that we're seeing from Glaeser, Meltzer, et al as well as the usual suspects is only going to increase so a re-introduction to the nature of degenerate programs as proposed by the philosopher Imre Lakatos is in order (the rest of the comment is at http://tinyurl.com/yujo4h ):

The question for Lakatos (and us) was and is: even in the physical sciences it is possible to come up with some explanation for recalcitrant data that will preserve a cherished theory or core set of assumptions about the world, and in the social sciences it is almost always possible, so what stops that process? According to Lakatos it is when the only purpose new explanations (ad hoc hypotheses) have is to account for another set of inconsistent data, preserving the core belt of theories, but which are otherwise barren, leading neither to new questions nor new knowledge; i.e., the program must be considered degenerate.

I believe what we are seeing in the economy and markets now is an enormous empirical challenge to neoconservatism (deregulation, low and/or regressive taxes, etc.) but not entirely in favor of neoliberalism (e.g., global trade and labor imbalances). That all the nasty data can be explained away is a given -- and not always stupidly like Ben Stein or Larry Kudlow either -- but if the theoretical core of either program is true then, even assuming necessary adjustments (e.g., auxiliary hypotheses), a great deal more must be provided than an explanation for the failure to anticipate events, a path must open.

OT: And as for this,

"After all, most predator/prey population cycles eventually end up with both populations extinct."

Speaking as someone with experience in ecology this is simply untrue -- at the moment I can't recall having ever seen or heard of a single non-human instance -- and is also self-contradictory because of the logic of such cycles; i.e., as the prey population declines the predator population starves or reproduces less allowing the prey population to recover and this is the case even in simplified, poorly regulated systems (generally those that lack alternative food sources) although populations in such systems tend to 'crash' more often; well regulated systems (a wealth of negative and positive feedback mechanisms) normally never crash except as a result of catastrophic exogenous events such as asteroid impact, human encroachment, etc.

says...

Spencer "The reason cities like Boston, Miami, Washington and San Diego home prices are soaring is because they are full and have no empty land to build on, not because of zoning restrictions. Your argument is an urban myth."

Have you flown over any of these cities recently? We are not running out of land - another urban myth.

[piglet]

""The Affluent Society" argues that a lack of regulation made American homes inferior to those in European social democracies. That view was wrong in 1958 and is completely untenable today. American housing is the best in the world"

If only he cared to justify any of his claims! Ask any European exchange student about the quality of their housing. I don't think you'll get many positive responses. I have to repeat myself once again and point out that houses of the quality that are considered standard or even better than average in the US could not be built in Central Europe. Oh yes, they may be bigger, especially the suburban subdivision McMansions, but bigger really isn't better, especially if you can't heat it in winter. On my search for a house to buy (in a reasonable price range but not cheap), I haven't seen a single one that I would consider being in really good shape. Not one that wouldn't need some serious work.

Can Mr. Glaeser even imagine that Central Europeans are typically living in houses made of actual stone, and not cardboard? That even rental units there are geenrally well-maintained and in good shape? I am aware that part of this discussion hinges on questions of taste and values. If you feel that big is always better, no matter the quality, there's no point arguing about it. But let me recount one experience. An aquaintance of mine is building a castle-like mansion, a huge thing with stone finishing, gargoyles, a tower, a living room bigger than most houses, all kinds of expensive - and often well thought-out - design details. But you know, when I knock on the wall of the tower room (which is designed in a medieval castle style with meter thick walls), it sounds hollow! It is plastic! I'm sorry but no, I can't agree that "American housing is the best in the world".

[reason]

Piglet,
yes I found the comment about housing completely bazar. I wonder why he thinks that, and why he thinks that lack of regulation is the reason? Lack of regulation will obviously help the supply (by making building cheaper) but I can't think of any reason that it would positively affect the quality, unless the regulation is very bad. In which case it wouldn't be the existance regulation a such that was the problem, but the poor quality regulation (or enforcement). And the US as I understand has plenty of pernicious zoning laws anyway. I have made the argument in the past that regulation improves the quality of housing without increasing the price, wherever land is expensive, because the price of land is governed by capacity to pay not the price of the house (if you get what I mean). (People will build whatever they can afford, if the house is cheaper then they will pay more for the land. If regulation makes the house more expensive but better quality, the price of land will fall. So regulation will force down the price of land but improve housing.)

[ken melvin]

Thanks Robert, thanks Anne, thanks all.

In the Mar/Apr Adbusters,Tom Green list those economists whose Nobels should be recalled: Friedman, Selow, Becker, ... ,and lists those who should've but didn't receive the prize: Georgescu-Roegen, Joan Robinson, JKG, and Herb Daly.

In re the CATO/// line on zoning, how is it that they can get permits to build anywhere everywhere but in those places that need rebuilding? We're not all stupid.

[Icarus]

A question about the purported inconsistency of "neo-liberalism"...

If we define 'neo-liberalism' as the freedom of markets to legally prosper, supported by the rule of law which protects property and contracts, with minimal trade barriers, and only requisite regulation...we see "neo-liberalism" at work.
The so called "Housing Crisis" is neo-liberalism working, is it not?

Speculators and buyers take risk, in any neo-liberal market...and in that behavior, some will suffer. That suffering is what we're seeing now.

But, should we be too alarmed? Anyone purchasing a home, in the US, in 2005-2006, with strange loan offers, should have been suspicious and diligent. That is the obligation every person entering a contract has. Substandard educational levels, or the innate desire to be a homeowner are not excuses.
The only excuse is outright fraud by mortgage lenders. Other than those situations, neo-liberalism says "let the markets prosper".

What neo-liberalism promises, is that over the long run, markets will produce the greatest overall ends. It doesn't speak of distribution too much, only overall growth, productivity, and gdp rates.

For every statistic of doom, there are just as many detailing the prosperousness of American, and Americans. The 'doom' is related to the unreal level of expectations, given our global environment, people in the US expect. There is an expectation that a quasi-literate, half educated, somewhat obese people automatically deserve a 'middle class' life. Well, that standard of living is far above the global median, and, there are countless hordes willing to work harder, study more, and restrain from childbearing, in order to secure that life.

Neo-liberalsim even applauds the market for labor. We applaud the people who rise beyond the excuses, and secretly despise those that don't. It's really crude, I know...but, thta's the logic of capital.

[TIV]

Professor Thoma: I agree with you that restrictive land use regulations weren't really the "cause" of the current housing crisis. I just wanted to clarify what the meat of his argument probably is (seeing as he didn't spell it out in his op-ed), and to point out that Krugman made the same argument about restrictive land use regulations causing the housing bubble.

Spencer: I don't know what else to tell you other than: You're wrong. Very wrong. Here's what Glaeser and Bryce Ward wrote about your "there's no more land around cities" argument in a 2006 article:

"One hypothesis is that supply has become increasingly inelastic in the Boston area because Greater Boston is running out of land. In Section II of this paper, we refute this hypothesis. Within the Boston region, higher densities are associated with more permitting, not less."

So it's your argument, in fact, that's the urban myth.

[Patricia Shannon]

Reasonable regulation is helpful. I read some years ago that because of the institution of federal regulations on
manufactured homes, in 1976, the worst built after that time were better than the best before that time. Having lived in manufactured homes built before and after that date, I believe it. The first one, which I bought in 1970, had no insulation. When it rained, the lintels over the doors guided the rain to the pressed wood floor, under the tile and carpet, which I discovered when the floors developed holes. The one I'm living in now I in 1993, built in the late 1980's. It is definitely better built, having insulation, and no holes in the floor! But it was still affordable for working class people.
see http://www.nachi.org/manufacturedhomes.htm

An example of bad regulation are zoning laws in Gwinnett County,in the north metro Atlanta area. Big houses and lots are mandated. When developers want to build more affordable housing, nearby homeowners organize and come out to the zoning board meetings and protest that it would decrease the value of their homes. If they are losing out in the current situation, well ha, ha, I don't feel sorry for them.

[piglet]

I think we need to get away from the fallacious "zoning - good or bad" discussion. Obviously, while advocating strong regulation, I am not saying that all regulation is always good, the more there is the better. There are plenty of examples of bad regulation. Rejecting bad regulation doesn't imply rejecting regulation per se. It is true, as Patricia points out, that zoning regulations in many places promote urban sprawl, rather than curbing it. I recently read "This Land: The Battle over Sprawl and the Future of America" by Anthony Flint, which I highly recommend. The book explains in detail how zoning regulations in the US have historically been in part responsible for US suburbanization. Only recently has there been a countermovement towards zoning laws that limit sprawl. The question should really be what regulation we want, not whether we want regulation at all.

In my city, Citiy Council recently refused permit for an 11 unit development on 2 acres, on the grounds that "children won't have enough space to play". That is so pathetic. It's a mentality thing. Maybe when gas and heating costs force people to prefer smaller houses closer to work and shopping, people will start becoming reasonable.

[Patricia Shannon]

Piglet, good points. Of course we want zoning laws that keep a cement factory from being built right beside our house!

[anne]

[K Thomas says...

"Great, all we need now is these same unscrupulous people running up the price of food."

There are anecdotal warnings of rising foo prices from analysts in selected regions internationally, but I cannot judge whether this is generally unusual. United Nations reports do not yet allow for judging.]

[anne]

Wandering through Europe, I have just not found homes unpleasant certainly not unpleasant to look at and not unpleasant to be in though how many home can a person ever be in who is not in the home business. What have I missed that should make me sorry or sorrier than I am for the French?

[Bupa]

"The Affluent Society" argues that a lack of regulation made American homes inferior to those in European social democracies. That view was wrong in 1958 and is completely untenable today. American housing is the best in the world, and the weaknesses of the housing market reflect too much, not too little, regulation, especially those rules that stymie construction and make housing unaffordable."

Breathtakingly ignorant.

How can this idiot be paid to write this crap?

I’ve spent half my adult life in Europe and half in America. It’s clear to any casual observer that America’s housing is unquestionably inferior to Europe’s. Americans have hollow under-insolated paper houses. You can hear someone sneeze in the attic when standing in the basement. The wind literally blows through the walls. Even America’s most expensive houses are made from a skeleton of thin plywood and 2 by 4s. These cheap paper houses would be illegal constructions in Europe. America’s paper houses are yet another example of why the carbon footprint of the average American is multiples of that of the average European.

Sadly, most American’s would read the line “American housing is the best in the world” without the slightest doubt that this grossly false statement is true.

[Patricia Shannon]

Americans have been brainwashed for many years, by those who benefit from the status quo, that we are better off in all ways to any other country. I'm sure many, maybe most, people still think we have the longest life expectancy. People here have been indoctrinated to equate love of country with worship of country. Of course, a benefit is that if things are already perfect, we don't have to make an effort to improve things, or even to keep informed.

[Patricia Shannon]

We're not What We Say We Are
copyright Patricia M. Shannon 1991

We say that we're just below angels,
but we sit on our butts all day,
watching the boob tube and killing
our souls a little more each day.

We say we're the peak of creation,
master of all we survey,
but we're killing our rivers and forests,
and expecting our children to pay.

(chorus)
When will we learn, will be ever learn,
to be what we say we are?
Is it too much to expect us to try
to be what we say we are?

We say that we're rational creatures,
not animals, no not we,
but we think that the purpose of college
is to support the football team.

We say we're a Christian nation,
leaders of the free world we are,
but we're spending our money on weapons
and allowing our children to starve.

(chorus)

[gordon]

Regulation is one side of Govt. action to preserve a liveable and stable society and economy; Govt. enterprise is another. There isn't much discussion of Govt. enterprise in the regulation debate, and I don't know why. Though I'm no expert on the New Deal, I seem to remember that FDR's Administration created a lot of Govt. agencies which in total must have accounted for a noticeable slice of the US economy by 1940, and that these agencies were just as much instruments for achieving New Deal objectives as legislation was.

The only proposal for addressing the US housing crisis which is based on an agency rather than on legislation that I can think of is Alan Blinder's proposal to revive HOLC. Are there any others? Oh, wait, I forgot my own proposal to create a Govt. bank (the Commonwealth Bank of the United States)!

One good reason for using Govt. enterprises is to avoid the "catch-up" problem inherent in regulation, where new regulations only lead to new avoidance strategies. If you have a Govt. enterprise in any sector which offers goods/services on an honest basis (I'm not going to define that at present), you have created a continuing pressure against fraud which doesn't rely on lawyers and courts.

[Quality, not Quantity]

Too much or too little regulation is not the problem, ineffective/inefficient regulation is. Get rid of the counter productive regulations (really), keep the efficiency enhancing regulations, and add more efficiency enhancing regulations as needed.

[a]

No regulation is better than toothless regulation; but real regulation is better than either.

There are banks which are too big to fail, and this list is expanding every day. Who decides how much capital they should hold, which helps prevent failure? It's not the regulators, it's the banks. The bank is allowed to develop an internal model to calculate its capital needs, and as long as this backtests over the past 5 or 10 years, the regulators accept it. So naturally the internal models are created to underestimate or ignore "black swan" risks, and everyone is happy until the once-in-a-century flood occurs (which happens every 5 years or so).

1/ Regulators need to be the ones to decide how much capital a bank holds.
2/ This capital needs to be magnitudes bigger than currently held.
3/ Regulators need to be able to understand every product on a bank's books. If it cannot, there needs to be a punitive amount of capital held against the product.

says...

While I am a staunch supporter of free markets, I agree with Galbraith that there is much the public sector needs to do. Private firms do not automatically provide safe streets, good roads, and clean water.

Which is it?

And besides, infrastructure is crumbling rapidly.

On the other hand, have you looked at the privately financed
streets in subdivisions across the US? Their streets look
much better.

Now foreigners are buying toll roads because the publicly
financed versions are crumbling. That was inevitable as
in the latter case the "public" pays no cost for being
wrong.

They ran out of capital. The Tragedy of the Commons
again.

[swells]

RW, 99% of all species that ever existed are extinct. If that is the case, then it logically follows that most predator / prey cycles wind up with both populations extinct.

My point here is that we can either mindlessly participate in such escalating "arms races" or we can think outside the box and find another approach.

The one premise that is accepted by both sides; i.e., those for coercive regulation and those for coercive exploitation, is that greater and greater centralization of power is a good thing.

All I'm doing is to ask whether a devolution of power might not be a more effective antidote to that particular poison.

[Patricia Shannon]

Swells, I don't understand what you mean by "a devolution of power".

[RW]

"...99% of all species that ever existed are extinct. If that is the case, then it logically follows that most predator / prey cycles wind up with both populations extinct."

No, it does not logically follow. Typical reasons for extinction of a species are environment change or loss and/or competition, not predation.

It doesn't even logically follow that the extinction of a prey species will inevitably lead to the extinction of its primary predator unless that predator is completely incapable of acquiring alternate prey.

If you wish to use nature as a metaphor you need another analogy.

You seem to assume that regulation is inherently coercive but that it not a given nor is its apposition to exploitation given. Neither is it clear what you mean by "both sides" -- who exactly are you referring to here -- nor what you mean by concentration of power so, like Patricia, I am at a loss as to what you may mean by "devolution of power."

[Holly W.]

I'm curious about the assertion that "American housing is the best in the world." By what measure? I'm not a globe trotter by any means, but the Canadians and Brits I know seem to live in equally nice housing compared to the Americans I know. So while this statement may be perfectly true, I'm left wishing for alot more support of it.

[Holly W.]

The cycles of regulation followed by invention to avoid regulation seems similar to the population cycles of a predator/prey relationship. Is there a good reason to think the spiral won't continue if more regulation is devised?

Swells, I'm not sure I see your point. Predator/prey relationships are generally considered to maintain balance in an ecosystem. Without interference (by humans, disease, bad weather, or invasive species, for example), most ecosystems work pretty well over the long term. Yet you seem to be implying that we should just give up on regulation ... please correct me if I'm mistaking your intent.

The predator/prey relationship often forces all species involved to develop beneficial adaptations -- better speed, sharper senses, camouflage, whatever. They may end up different – but they don't end up extinct.

[RW]

Really should wait until after the second cup of coffee before making replies if only to avoid snappishness. My apologies.

Look swells, what you seem to be saying is that you would like to see an evolution towards a model of distributed power but that implies a level of cooperation that does not currently exist as well as a heightened level of complexity that could obscure as much as it conceals.

What we have now has already evolved into a distributed model that strongly favors some forms of human-on-human predation (mainly financial swindles or larceny) in which actual coercion is typically low (everyone is a willing if frequently ignorant participant) and neither rules nor enforcement sufficiently stringent or global to protect fellow citizens from harm or offer cures afterward. Whether it is a con man in a small town running a ponzi scheme or a Wall Street heavyweight promoting asset-backed securities, enforced transparency and ability to locate and/or punish the malefactor afterward are extremely low or even nil: Escape may be only a state line, an international border, a high-powered law firm or a friendly government away.

Back when everyone did business in smaller venues, in towns or villages, enforcement could be implicit in the workings of local networks, there really was a definable 'marketplace' in many respects and violation of accepted norms could indeed cost the malefactor their livelihood or even their life.

But that is not the case any more and even when it was the case it hardly worked perfectly nor was it always desirable. In the rural areas of India there is a centuries-old tradition of itinerate 'doctors' who travel long trails from town-to-town, sometimes not returning to the same town for years or even never, but all recognized and typically welcomed by townsfolk for their unguents and various cures. Mostly placebos of course which can cause a life here or there because no further help is sought but since alternate forms of medicine are, or at least were, not that common one could argue no particular harm done: A poor family is a bit poorer in coin and loss of a beloved but is that not the way of the world?

And some palliatives are also cruel. Cataracts are common in that hard land and, amazingly, the itinerate witchdoctor really has a cure: A thin thorn slid through the sclera at the side of the eye to pierce the inner aqueous humor, flooding the front of the eye with clear liquid and miraculously restoring sight. Much coin is exchanged for that miracle and a sufficient number of months typically passes before the patient goes completely and irrevocably blind so that they may even fail to make the connection and continue to bless the itinerate miracle worker for that brief but glorious return of sight.

What makes modern libertarianism relatively incoherent as a philosophy is that its devotees often quite unreflectively seem to be seeking either that tribal world or a world of anarchy or a feudalistic/corporatist society in which there is no countervailing force of sufficient scale or scope to prevent the stronger from gaining ever more power and/or 'freely' expropriating what they wish from the weaker. Libertarians have no way to prevent that without contradicting their core premise(s) and so the circle closes; I personally believe it is a vicious circle.

[swells]

RW, thanks a lot for the very well-considered reply. It is worth reading and then re-reading, which I will certainly do. To a degree, I am making a staw-man argument for the purpose of determining if there might be something to it. And yes, I know my predator / prey population cycle analogy is not completely apt for many of the reasons you explain.

But, I do wonder, honestly, if the focus on the current turn of some similar cycle might not be obscuring the more fundamental danger we face. By that, I mean that I hear people arguing about whether more regulation or less regulation would be the better idea but I don't hear anyone (but myself) questioning the premise that undergirds both sides of the debate; i.e., that the massive move toward the centralization of power that is happening in either case poses unnecessary intrinsic risk.

To be clear about my own bias, I very much hold individual liberty and responsibility to be the end that society is intended to facilitate, that indeed that end is the only justification for society at all. I have to be careful of my own motives here, in the sense that this view predisposes me to feel really creeped out by powerful institutions be they governmental, commercial or religious.

Nonetheless, most social development does seem to be of a sort that centralizes power and provides an opportunity for smaller and smaller groups to exercise power in more and more concentrated ways.

If the actions that people take are potentially damaging, even if thru no other mechanism than that of unintended consequence, it seems likely at some point that these ever more powerful forms of leverage will produce some single consequence that will be disastrous. To anaolgize, it really doesn't matter if one wins 40 out of 50 hands at the poker table using a particularly aggressive strategy if the 51st hand is an all in gone wrong that wipes out one's entire stake.

I'm very concerned by the concentration of power into fewer and fewer hands that I think I see happening. I really do wonder if what needs regulating is, at root, the process of power concentrating itself.

[swells]

RW, I wish I were a better writer and a clearer, more disciplined thinker. I should have given some examples to clarify what I mean by the particularly aggressive poker startegy analogy.

Humans seem to love leverage in all it's forms. I think it's clear that an inappropriate infatuation with leverage is behind the current meltdown in the financial market. But, in my view, that is just the latest instance. Representative democracy is a leveraged version of direct democracy. A stockholder's limited liability in a public corporation is a form of economic leverage itself in that it limits the stockholder's exposure to risk more than it limits a stockholder's potential for gain.

I guess what I'm trying to ask is at what point do we decide the lever we're trying to use is too big? To use an overly simplistic example, we may not worry about using a lever to move a 1 ton rock but should we worry about using a lever to move a rock wieghing 50 tons? If a 1 ton rock does something unexpected after we lever it from it's position, we could probably jump out of the way or maybe stop it by throwing a part of a log in front of it. If a 50 ton rock reacts unexpectedly, we have a lot fewer options for stopping it's momentum before something valuable gets crushed.

I'm not trying to say all levers are bad, bad tools that should never be used. I am asking if we're dealing with a 50 ton rock and, if we are, is it possible we shouldn't be trying to move things that big with our current repertoire of levers.

[RW]

swells, leverage is a technology, in fact now that I think about it the terms technology and leverage are virtually interchangeable implying as both do that a particular tool now permits an action that would have previously been much more difficult or impossible, at least assuming it is wielded appropriately.

Bruno Latour writes extensively on the subject of leverage in all its forms, pointing out in the process how little humans have changed even as their ability to move things and, yes, to be moved in turn has become very great - we can initiate potent actions at such enormous distance that Alexander the Great's jaw would drop (Latour's book "We Have Never Been Modern" has some rather esoteric sections but I do recommend it): It is one of the ironies of our era that we can do so much yet feel ever more constrained and have both sensations reflect a true state of affairs at the same time.

But yes, even though tools by their design tend to demand a specific use, errors or abuse are always possible: The hammer can strike the hand (or a head) as well as a nail, a mechanism to assure equal representation can be manipulated or skewed to permit tyranny, at least of a kind. So the tools must be learned, actively engaged, or the risk they will be turned against one becomes greater.

Rejecting the tool while it remains in others hands appears risky but, to indulge again in metaphors from nature, can be successfully accomplished through hiding or mimesis, pretending to be what one is not. And of course there is that distant possibility a day will come when we can trust each other; perhaps that is what you really wish for and, in that respect, I rather doubt you are alone.

[ashleigh]

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