American Economic Policy: Financial and Environmental Regulation
-Structure & history of policies -Significance of issue -Consequences of inaction -Policy recommendations Landmark Legislation and Events Environmental: Clean Air Act (1970) Financial: Dodd-Frank (2010) Outline of discussion topics
"At every one of our meetings, within no more than 10 minutes, government over regulation comes up. It is impacting jobs. We need government not to be a stumbling block but a stepping stone to be able to get people back to work in this country." -Representative Scott Tipton (R-CO)
Significance of environmental regulation • Economies rely heavily on energy • Energy shapes the politics and economics of nations • With a less environmental regulation, our economy can expand, wasteful government spending can be reduced, and independence from foreign oil will make us safer
History of environmental regulation • Conservation movement in early 20th century • Silent Spring raised alarm about environmental degradation • Environmental movement took place in 1960s and 1970s • Major environmental policy began in 1970s • Creation of EPA and DoE under Nixon • Clean Air Act & Clean Water Acts (1970 & 1972) • Amendments to acts gave EPA and DoE power to set environmental policy
Clean Air Act of 1970 • First major piece of environmentalist legislation • Many fields regulated (air quality, ozone protection, emission, and waste management) • Purpose: • To give power to the EPA to control air pollution levels by creating and enforcing regulations to protect public from airborne toxins. • To give permission for the EPA to assume control of state pollution practices if it deems necessary. • Set precedent of increased government regulation in energy and environment • Overturned status quo of state-controlled environmental regulation
Current approach to environmental regulation • The Obama administration has vowed to increase regulation in the energy sector • President Obama has appointed Michael Bromwich to head the Mineral Management Service, the federal agency that regulates mining and oil drilling • The Stimulus Package in 2009 directed over $50 billion to environmental regulatory agencies and subsidies to promote (often inefficient) research • President Obama is in favor of encouraging a switch to renewable energy sources such as solar and hydro power1 • Nuclear power not heavily supported by administration • Currently, companies are heavily regulated in their pollution and waste management-->which prevent innovation and growth 1. "Comparisons of various energy sources," Nucleartourist, Last modified April 12, 2009, http://www.nucleartourist.com/basics/why.html.
Issues raised by environmental regulation • Current energy policies do no allow us to access our vast resources of natural gas and offshore oil • the opportunity to export natural gas is limited, prohibiting growth • Prevention of tapping our resources makes us dependent of foreign dictatorships2 • Exempli gratia: Venezuela, Saudi Arabia, Iran • Can lead to conflict of cultures, institutions, et cetera • Exempli gratia: 1970s oil crisis, Iran closing the Strait of Hormuz • Government spends large amounts on environmental and energy regulation and research ($50 billion in the stimulus alone) that destroys wealth 2. Emily Gertz, "Can offshore drilling really make the U.S. energy independent?" Scientific American, Last modified September 12, 2008, http://www.scientificamerican.com/article.cfm?id=can-offshore-drilling-make-us-independent. 3. Kimberly Amadeo, "Obama's first major act to stimulate the economy," About.com, http://useconomy.about.com/od/candidatesandtheeconomy/a/Obama_Stimulus.html.
Solutions to Over-regulation • Allow companies to access large amounts of natural gas and offshore oil reserves to curb foreign dependance • Repeal amendment to Clean Air Act that allows EPA to encroach on state's pollution control directions (Dual Federalism) • Slash funding for environmental regulatory agencies and privatize public land (b/c gov'ts can't afford the upkeep) • Provide royalties for public in area ex. Alaska • Increase private research and development of efficient alternative energy sources like nuclear power1 1. "Comparisons of various energy sources," Nucleartourist, Last modified April 12, 2009, http://www.nucleartourist.com/basics/why.html.
Financial Regulation "Until we understand what the causes were, we may be implementing ineffective and even counterproductive reforms. I understand the need for action. I understand the need for something to be done. But what I expect from political leaders is for them to demonstrate leadership in telling the public that we need to proceed about this in a much more deliberate and rational and thoughtful way." -Andrew Lo, Massachusetts Institute of Technology Sloan Professor of Finance1 1. Sewell Chan, "Senate Financial Bill Misguided, Some Academics Say,"The New York Times, Last modified 2 May 2010, http://www.nytimes.com/2010/05/03/business/economy/03crisis.html
History+Structure -Buttonwood Agreement (1792) founded NYSE -Government during first half of 19th century closely involved with businesses -Most banking was local or done by the government -Gilded Age: proliferation of banks to fund industry -Sherman & Clayton Anti-trust, Federal Reserve created -Little federal regulation of financial community until Great Depression -New Deal, 1960s-1970s, and 2000s were periods of robust regulatory overhaul1 1. Ibid
History+Structure (cont.) List of a few regulatory agencies: -Securities and Exchange Commission -Financial Industry Regulatory Authority -Federal Reserve System List of some regulations: -Community Reinvestment and Equal Credit Opportunity Acts -Glass-Steagall Act (FDIC, separation of investment & commercial banks, interest rate restrictions, et cetera) -Basel III (capital requirements for liquidity of banks)
Significance of financial regulation • Financial markets determine investing, booms and busts of economy, and allocation of resources in economy • Regulation on financial services decreases efficiency, liquidity, certainty, and economic growth • All bubbles in 20th century caused by financial markets • Nearly all bubbles in financial market caused by government intervention (price distortions, easy money, uncertainty caused by regulation, et cetera) • Example: expansion of money supply in 1920s by Fed--> stock market crash-->uncertainty caused by Hawley-Smoot Tariff--> Fed rapidly deflates money supply on suspicion of speculation --> depression ensues as credit is cut off
Why We Should Act • Too much financial regulation creates complications in economy • This can lead to more damage by large corporations • Focus on repairing underlying conditions • Financial regulation supports idea of "too big to fail" • We should act to prevent another similar financial crisis
Dodd-Frank Wall Street Reform and Consumer Protection Act • In response to Great Recession (2007-Present) • Largest overhaul of financial industry since Great Depression • Requires more than a dozen federal agencies to complete 540 new sets of rules • Purpose: "promote the financial stability of the United States by improving accountability and transparency in the financial system, to end 'too big to fail,' to protect the American taxpayer by ending bailouts, to protect consumers from abusive financial services practices, and for other purposes."2 • Grants administrative agencies broad and unchallenged discretionary authority; budget of agencies determined by Fed, not Congress • Majority of act vests power in bureaucracy (e.g. newly created Consumer Financial Protection Bureau) • CFPB has power to regulate nearly all financial products and services • Savings and checking accounts, mortgages, student loans, credit and debit cards, et cetera 2.Diane Katz, "Reining in the CFPB," The Daily Caller, Last modified 22 July 2011, http://dailycaller.com/2011/07/20/reining-in-the-cfpb.
Policy recommendations • Scrap current regulatory scheme • Strengthen legal system's prosecution of fraud • Make people, not companies, liable for fraud • End Too Big to Fail by reducing government power over appropriations • Disband Fannie Mae and Freddie Mac • Will prevent another housing bubble • They promote lax loaning standards • Abolish most, if not all, financial bureaucratic agencies • Current state restricts credit creation/capital formation • Have broad regulatory authority; restrict freedom • Increase costs for consumers and small businesses • Repeal Dodd-Frank • Doesn't address fundamental causes of crisis (easy money/asymmetric information) but exacerbates them • Makes credit more expensive (stifles innovation) • Reform monetary framework • Monetarist Fed or Austrian free banking system
Conclusions about regulation • Regulation in economy: generally detrimental • Hurts consumers and smaller companies more than larger companies • Stifles innovation by using up money that could have gone toward R&D • Creates larger, unelected, inefficient bureaucracy • Unduly limits freedom to conduct mutually beneficial trade • Courts should be strengthened in absence of regulation • Those who destroy property, cause injury to others, or commit fraud should be brought to justice (jail and/or fines)
Works cited Environmental Regulation Sources 1. "Comparisons of various energy sources." Nucleartourist. Last modified April 12, 2009. http://www.nucleartourist.com/basics/why.html 2. Gertz, Emily. "Can offshore drilling really make the U.S. energy independent?" Scientific American. Last modified September 12, 2008. http://www.scientificamerican.com/article.cfm?id=can-offshore-drilling-make-us-independent.3. "Amadeo, Kimberly. "Obama's first major act to stimulate the economy." About.com. http://useconomy.about.com/od/candidatesandtheeconomy/a/Obama_Stimulus.html Financial Regulation Sources1. Chan, Sewell. "Senate Financial Bill Misguided, Some Academics Say."The New York Times. Last modified 2 May 2010. http://www.nytimes.com/2010/05/03/business/economy/03crisis.html 2. Katz, Diane. "Reining in the CFPB." The Daily Caller. Last modified 22 July 2011. http://dailycaller.com/2011/07/20/reining-in-the-cfpb/
Graphics courtesy of the following websites Pollution of Beijing http://blogs.sltrib.com/slcrawler/uploaded_images/Beijing_pollution_-700904.jpg Earth http://3.bp.blogspot.com/-gA8q4n1b30E/Te5R9feZ8hI Environmental Regulation Political Cartoon http://jeffreyhill.typepad.com/.a/6a00d8341d417153ef0134802568e7970c-pi Gavel http://images.halloweencostumes.com/judges-gavel-zoom.jpg Federal Reserve Emblem http://images.encyclopedia.com/utility/image.aspx?id=2795217&imagetype=Hero Dodd-Frank Regulations Chart http://www.deloitte.com/assets/Dcom-UnitedStates/Local%20Assets/Images