If one wants economic growth, a country needs three things: a secure medium of exchange, the right to hold, use, or transfer one’s property at will, and a government that ensures the first two. The current financial panic makes me wonder if we have the equation out of balance in the US. Our banks, although heavily regulated in some ways, have a great deal of liberty in how they do business, and they have taken liberties with financial instruments. (To be sure, this was done partly because Congress and the administrative bureaucracy egged them on in the real estate mortgage department. But that’s not the whole story). Even so, mistakes made in finance pose systemic risks unlike those of any other industry. A couple of years ago, a blown transformer (or something like that) in Ohio took down the power grid of the entire Eastern US. The Financial system is similar. The Constitution gives Congress the authority to coin money and regulate the value thereof precisely because they understood the importance of guaranteeing a stable circumating medium.

Given OSHA regulations, zoning restrictions, ADA regulations, affirmative action, environmental regulations, minimum wage requirements, union-friendly laws (particularly in some states), and a host of other regulations, industrial businesses have less freedom of action. We have a heavily service economy, I suspect, partly because the regulatory burden on services is lower than that on industry. That truth applies, even moreso to financial services.

Two further comments on the financial sector. The S&L mess of the 1980s was, to a great degree, the result of two main factors. The high inflation, and interest rates, of the late 1970s made the S&L business model of charging 6% interest on mortgages and giving 3% interest on money in the bank untenable. Rather than admit that the game was up, Washington tried to free the S&Ls to be more like regular banks. The result was excess and corruption. The new model worked for a few years, but ultimately was doomed. Might that be part of the problem now? The old regulations of banks, drawn largely from the 1930s were dead. No one quite knew what to replace them with. Hence our financial sector was allowed to get over-leveraged. There is also the rise of private equity. That provided competition and a rival to emulate.

A further question: Was the financial sector given more freedom precisely because it’s a white collar business? The argument makes some sense: the folks on Wall Street are big boys, and, for that reason, don’t need the kind of big brother watching them that, the argument goes, is necessary to keep the auto makers from exploiting their workers. We have deregulated trucking and airlines and have had some success with that. But the deregulation was only partial. These businesses gained more liberty to pursue or not to pursue certain lines of action. They did not, however, get anything like at-will hiring and firing, nor did they get relief from a host of other regulations. Finance, precisely because it does not pollute, does not need large parcels of land, or any raw materials (with the partial exception of precious metals) was easy to deregulate. Liberating other industries from the grip of regulatory bureaucracy would require more work.

Not long ago, I was speaking with a colleague who teaches the history of the late Roman Empire. He noted that it was less expensive to grow food in Egypt and ship it to Byzantium than to grow it closer to home. He suggested that we are, to a degree, in a similar situation. To him, however, the new plutocrats and the Republicans are at fault. There is certainly some truth to that. (Even Reagan did not turn back the Administrative state that the Progressives built upon the original American constitutional order). On the other hand, the reason why basic goods are so much more expensive to produce in American than abroad is the high cost of labor, regulations, and taxes. Were we to drop the regulations noted above, and perhaps scale back the hand-outs (ie: “entitlements”) that we now give to poor, middle class, and even wealthy Americans, we could change that situation.

I can’t help thinking that Senator Obama will win this year because he represents the hope that there is another answer.