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Myth 4: Deregulation Always Improves the Economy

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America's Free Market Myths

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Abstract

Myth: Deregulation always improves the economy’s efficiency. Industries protected from competition, from the need to innovate and reduce costs would have to deal with the uncompromising realities of the market – the true test of efficiency. Deregulation represents a move toward free markets. It spurs the economy and raises productivity and eventually living standards.

Reality: Deregulation does not necessarily improve the economy. Often the motive behind deregulation is greater profitability yet not from reduced costs, innovation or more competition but rather from market power or rent seeking activities. Economic deregulation did not lead to an economic boom; it worked in some industries but in others a competitive outcome did not materialize. Financial deregulation turned out to be a disaster.

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Notes

  1. 1.

    Thomas Friedman (2000).

  2. 2.

    Orbach (2012).

  3. 3.

    Orbach (2012).

  4. 4.

    Colin Camerer et al. (2003).

  5. 5.

    Polyani (2001).

  6. 6.

    Stiglitz (2001).

  7. 7.

    Backhouse and Medema (2009).

  8. 8.

    Shepherd (1991).

  9. 9.

    Perelman (2007).

  10. 10.

    See also Madrick (2009).

  11. 11.

    Kuttner (2007).

  12. 12.

    Madrick (2009).

  13. 13.

    Carlton and Perloff (2000).

  14. 14.

    Winston (1993).

  15. 15.

    Perelman (2007).

  16. 16.

    Johnson and Kwak (2010).

  17. 17.

    Greer (1993).

  18. 18.

    Greer (1993).

  19. 19.

    Kahn (1971).

  20. 20.

    Stiglitz (2010).

  21. 21.

    Johnston (2006).

  22. 22.

    Johnston (2006).

  23. 23.

    Kuttner (2007).

  24. 24.

    Johnson and Kwak (2010).

  25. 25.

    Leverage – using debt to buy assets.

  26. 26.

    Stiglitz (2010) and Krugman (2012a).

  27. 27.

    Johnson and Kwak (2010).

  28. 28.

    Derivatives – securities or contracts that derive their value from an underlying asset.

  29. 29.

    The shadow banking system – nonregulated financial intermediaries involved in credit creation worldwide.

  30. 30.

    Johnson and Kwak (2010).

  31. 31.

    Cassidy (2009).

  32. 32.

    Madrick (2009).

  33. 33.

    Johnson and Kwak (2010).

  34. 34.

    Kuttner (2007).

  35. 35.

    Kuttner (2007).

  36. 36.

    Mortgage backed securities – bonds backed by mortgage loans.

  37. 37.

    Subprime mortgage – mortgage loans offered to people with low credit rating.

  38. 38.

    Cassidy (2009).

  39. 39.

    Stiglitz (2010).

  40. 40.

    Mirowski (2013) offers an explanation based on the symbiotic nature of the relationship between the Fed and economists.

  41. 41.

    Johnson and Kwak (2010).

  42. 42.

    Johnson and Kwak (2010).

  43. 43.

    Madrick (2009).

  44. 44.

    Madrick (2009).

  45. 45.

    Kuttner (2007.

  46. 46.

    Johnson and Kwak (2010).

  47. 47.

    Pereleman (2007).

  48. 48.

    Madrick (2009).

  49. 49.

    Akerlof and Romer (1993).

  50. 50.

    Dayen (2016).

  51. 51.

    Cohan (2013).

  52. 52.

    Perelman (2007).

  53. 53.

    Crouch (2011).

  54. 54.

    Crouch (2011).

  55. 55.

    Kuttner (2007) and Cassidy (2009).

  56. 56.

    Madrick (2009).

  57. 57.

    Kuttner (2007).

  58. 58.

    Madrick (2009).

  59. 59.

    Stiglitz (2012).

  60. 60.

    Kuttner (2007).

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  1. Bryant University, Smithfield, Rhode Island, USA

    Joseph Shaanan

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Shaanan, J. (2017). Myth 4: Deregulation Always Improves the Economy. In: America's Free Market Myths. Palgrave Macmillan, Cham. https://doi.org/10.1007/978-3-319-50636-4_5

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  • DOI: https://doi.org/10.1007/978-3-319-50636-4_5

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