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Where's the regulatory middle ground?

March 29, 2010 | 11:28 am

Economist Mark Thoma of the University of Oregon is no fan of Republicans, so he's probably not a go-to source for suggestions on how they should conduct themselves in Congress. But he raised an interesting point in a blog post Saturday that questioned the rationale of the GOP's "Nobama" approach in response to the most obvious market failures of our generation:

There's an inconsistency between free market ideology and the need for reform in areas like health care and financial services. One of the first steps in reforming the system is to acknowledge that the market won't take care of the problems itself. Once that is acknowledged, i.e. that regulation is needed to fix these market failures, the only question is whether that regulation will be of the "market-based" variety or by edict (e.g. this is the difference between system of tradable carbon permits that allow least cost carbon reduction strategies to emerge and a government set emission limit for each industry which generally does not achieve carbon reductions at least cost).

With Democrats mostly opposed to old fashioned edict style regulation -- with their willingness to embrace market-based solutions to regulatory issues --  and with Republicans unwilling to embrace anything that Democrats propose, there is little ground left for those Republicans who are willing to admit that markets sometimes fail to stand upon. Democrats have taken the middle ground -- market based regulation -- from Republicans. This leaves Republicans with a choice of going along and compromising (and thereby embracing proposals they have made in the past, e.g. the health care bill looks an awful lot like the health care program [then-Gov. Mitt] Romney put in place in Massachusetts), or standing in opposition simply because it is a Democratic proposal. The choice they've made, standing in opposition to everything, is a losing strategy that allows policy to be shaped entirely be the other side. It will be interesting to see if a fissure develops within the Republican Party over this.

Will Republicans be able to share the market-based regulatory ground Democrats have taken away? There are already signs that Republicans will work with Democrats on financial reform, but there were early signs of a bi-partisan effort on health care as well, so we'll see how this plays out. I think people are fed up with banks and want something to be done, and Republican attempts to block legislation won't play well with the public at all. So I expect the coalition of no to be broken -- some legislators will see that they cannot continue just saying no and expect public support -- but not without big fights within the Republican Party between the extremists and the centrists. If Republicans do move in this direction, and it's more likely they'll do so on financial reform than on climate change legislation, you'll see an attempt to reclaim these policies as Republican (here's a great example: Health Care Reform--A Republican Idea?). And given the administration's centrist tendencies, in many cases they'll have a pretty good argument.

For those who might want to argue that the debacle triggered by the subprime collapse wasn't a market failure, please revisit then-Treasury Secretary Henry M. Paulson's comments to the Times' editorial board in December 2007. That's in the halcyon days prior to the failure and/or bailout of Bear Stearns, Lehman Bros., AIG, Fannie Mae, Freddie Mac and others, when "market failure" seemed more like a treatable illness than a pandemic.

-- Jon Healey

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