Why Deregulation Breaks Things

Introduction

There is a very suspect trend in this country over the last few decades. Every time there is an administration that pushes to deregulate – especially the financial industry – it seems to be followed quickly by a crisis. The next administration is seen as “cleaning up the mess” by clamping down on regulations yet again. Additionally, it seems to follow an alternating pattern of left vs. right.

While it is not as straightforward as this narrative suggests (it was Clinton who repealed Glass-Steagall, laying the groundwork for the Great Recession), there is certainly some truth to it. There are two reasons why deregulation leads to crisis, crash, and recession. However, “unchecked capitalism” is not to blame.

Unhealthy Organisms Die

The larger something is, the more fragile it is – by nature. As businesses grow larger, they become more susceptible to shock, disruption, and irrelevance. Just like an elephant is more fragile than a rabbit, dinosaur businesses are more fragile than startups.

Therefore, the only way for large companies to hold on to what they have is state coercion. Through lobbying, campaigning, donations, and bribery, large companies persuade the state to close the door behind them, effectively preventing competition through red tape. This is the opposite of capitalism and free markets. The problem is here is too much government, not too little.

When waves of deregulation sweep through landscapes full of the above, things start to break. This is painful but healthy. All the old, heavy, fragile, slow, and irrelevant big businesses start to crumble underneath their own weight as startups and competition start to devour them. This leads to job losses for some – and job gains for others. This leads to investment losses for some – and investment gains for others. Overall, the system is healthier long-term, even though it is painful for some short-term.

Cutting The Cord Rarely Accompanies Deregulation

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Gary Anderson 6 months ago Contributor's comment

Deregulation hurt the middle class. Nothing healthy about it. Yes, Clinton was president but the repeal of Glass Seagall was bipartisan. And it was pushed by Republicans.