In a recent Wall Street Journal news story titled “New Climate, Tech Bills Expand Role of Government in Private Markets,” senior writer Jon Hilsenrath notes that with two recent bills, the Biden administration “has grown the federal government’s imprint on major sectors of the US economy—including semiconductors, energy, and health—and further buried the idea once widely held in Washington that private markets should be left alone, without government involvement.”
Hilsenrath is correct that Biden has grown the federal government and he correctly identifies the domestic areas in which he has grown it the most. (I’m leaving out Biden’s “imprint” on foreign policy in Eastern Europe.) He’s also correct that Biden has further buried the idea that private markets should be left free of government intervention. But is he right that the idea of refraining from intervening in free markets was “once widely held in Washington”? If “once” referred to, say, the first decade of the twentieth century, he might have had a point, although even then we were well into the Progressive era. But Hilsenrath is referring to the 1980s and 1990s. While the rhetoric in the 1980s and 1990s was more pro–free market, the follow-through was tepid. Government grew in the 1980s and 1990s also, but just more slowly than it did under Bush II, Obama, and Trump.
I’ve followed Hilsenrath’s reporting in the Journal for many years. He has traditionally been good at sticking to facts, although now, as a senior correspondent rather than a reporter, he gets to put more of his interpretation on the facts. And in this article, that’s where he gets into trouble.
Absence of Evidence
Consider Hilsenrath’s evidence for his claim that the idea of leaving private markets alone was widely held in Washington in the 1980s and 1990s. It consists of only three pieces of evidence. First, Milton Friedman’s case for small government was “taken up by Mr. Reagan and the Republican Party.” Second, Friedman’s case was embraced by middle-of-the-road Democrats, including Bill Clinton. Third, Clinton “declared in a 1996 State of the Union address that the era of big government was over.”
That’s it. That’s his evidence. What’s missing? Any evidence that politicians in Washington, either in the 1980s or in the 1990s, actually followed through on those views. If a bank robber told us yesterday that he had reformed but a camera caught him stealing from a bank today, we would say that he hadn’t reformed. Similarly, to make the case that a view was embraced, you need to show evidence that the “embracers” acted on it. Hilsenrath doesn’t. He doesn't even try.
Hilsenrath could have made somewhat of a case. He could have pointed to the fact that government spending as a percent of gross domestic product fell substantially through the 1990s, from 21.0 percent in 1990 to 17.5 percent in 2000. Even there, he would have needed to point out that 3 percentage points of this 3.5-percentage-point decline were in defense spending and were due to the breakup of the USSR and the end of the Cold War. But he didn’t even mention these data. Is it possible that he didn’t actually look at empirical evidence because, other than the decline in government spending as a percent of GDP, the empirical evidence is pretty skimpy?
The Housing Crisis
Hilsenrath claims that three economic crises in the past twenty-five years “shook views about leaving markets alone.” The three crises he lists were the bursting of the technology “bubble” in 2000, the housing crisis in 2007, and the COVID-19 “shock” in 2020. Let’s focus on the last two because Hilsenrath is right that they shook positive views about free markets. What he doesn’t tell you is that they shouldn’t have shaken those views, because much of what happened that went wrong was due to heavy government regulation, not to free markets.
Consider first the housing crisis. The standard story that many fairly uninformed reporters told their uninformed readers during the housing crisis of 2007 and 2008 was that we had had a deregulated banking sector and that that’s what led to absurdly large loans to unqualified borrowers. If you believed that banking was deregulated, then, of course, your confidence in deregulated markets would have been shaken.
But these reporters were typically able to point to only one piece of banking deregulation: the repeal of the part of the Depression-era Glass-Steagall Act that had prevented investment banks and commercial banks from being affiliated. The Gramm-Leach-Bliley Act of 1999 lightened regulation slightly. After it passed, an investment bank and a mortgage bank could both be subsidiaries of the same bank holding company. That’s it. That’s the vaunted deregulation. In short, the 1999 act slightly reduced regulation of what was, at the time, one of the most regulated industries in the United States.
Ironically, it was this little bit of deregulation that made emerging from the housing crisis slightly easier: it facilitated the acquisition of commercial banks by bank holding companies. In September 2008, for example, the US Office of Thrift Supervision, in response to a run on WaMu Bank, seized the bank from its holding company, WaMu Inc., and sold it to JP Morgan Chase, a different, and financially sounder, holding company. That action would have been illegal in the absence of Gramm-Leach-Bliley.
What the standard story left out was the tremendous amount of regulation that helped lead to the housing crisis. I am not saying that there would have been no crisis in the absence of regulation. I am saying that regulation made it substantially worse.
One key cause was the Community Reinvestment Act of 1995. Under this law, the US government required banks to lend money to low-income people who would, in many cases, have a slim chance of repaying the loans. Peter Wallison, an expert on financial regulation at the American Enterprise Institute, noted that to make banks lend these substantial funds, federal regulators held up approval of bank mergers and acquisitions. Jeffrey Friedman, editor of What Caused the Financial Crisis? (University of Pennsylvania Press, 2011), pointed out that in 1995 the US Department of Housing and Urban Development (HUD) ordered two government-sponsored enterprises, Fannie Mae and Freddie Mac, to direct 42 percent of their mortgage financing to low- and moderate-income borrowers. In 1997, to help achieve that goal, Fannie Mae introduced a 3-percent-down mortgage. The traditional mortgage, by contrast, had required a 20 percent down payment. With only 3 percent down, an owner whose house value fell only a few percent below the original price would be tempted to walk away. And, of course, that’s exactly what happened in many cases.
And that’s just one regulation among many. Also important was the federal government’s deposit insurance, which insulated bank depositors from the effects of their banks’ bad lending decisions. In June 1933, only three months into his presidency, Franklin Roosevelt signed the bill that created federal deposit insurance. But interestingly, he had understood eight months earlier the bad incentives it would create. In an October 1932 letter to the New York Sun, FDR said that deposit insurance “would lead to laxity in bank management and carelessness on the part of both banker and depositor.”
Markets and Regulation During the COVID Shock
Hilsenrath’s third major example of a shock that “shook views about leaving markets alone” is the COVID-19 shock of 2020. He doesn’t make clear how it shook people’s views. After all, the federal and state governments, with the exception of the government of South Dakota and of a handful of other state governments, didn't let free markets alone for more than a few weeks after fear of the virus became widespread. If he’s saying that people didn’t think free markets could handle it, he could be right that people thought that.
But what we don’t know is whether that view was correct. The government, writes Hilsenrath, “bailed out airlines, car makers, banks, and millions of small businesses.” I was arguing at the time (see “The Anti-Stimulus Bill,” Defining Ideas, April 23, 2020, at https://www.hoover.org/research/anti-stimulus-bill) that we didn’t need federal bailouts and that if any bailouts should be undertaken, they should be done by the governments that had imposed the lockdowns, namely the state and some city governments. Moreover, there’s a strong case that without the bailouts, more people would have been pushing for ending lockdowns sooner. Then we might had an experience similar to that of Sweden or of South Dakota, both of which avoided lockdowns. Was their experience worse than that of the majority of US states? Hilsenrath doesn’t say. But the evidence is that it wasn’t. As of August 23, 2022, US deaths per million from COVID-19 were 3,207. That compares to 1,920 in Sweden and 3,367 in South Dakota. Moreover, New York, which locked down heavily, had 3,689 deaths per million, slightly higher than the performance of South Dakota. None of this is evidence that lockdowns worked.
One intervention he highlights is the Trump administration’s funding “a pharmaceutical industry race to develop new vaccines.” This was Operation Warp Speed (OWS). But the funding was only part of OWS. Another part was the pressure on the Food and Drug Administration to respond quickly to Pharma’s application to sell the drugs. Without FDA regulation in the first place, the pharmaceutical companies wouldn’t have needed that permission and we would have had the vaccines even faster. In “The FDA’s Deadly Caution,” AIER, December 16, 2020, drug expert Charles L. Hooper and I wrote: “The Moderna lab in Massachusetts took all of one weekend to formulate the vaccine, which was ready on Monday, January 13.” That’s January 13, 2020. It’s quite plausible to think that Moderna would not have produced drugs as quickly without federal funding of its production. But Pfizer went without federal funding. To be sure, the federal government guaranteed that it would purchase the drugs from Pfizer. But could Pfizer have made even more money without a federal guarantee and with no FDA slowing the process? Possibly.
Hilsenrath could argue that he’s simply pointing out people’s lack of confidence in free markets. Unfortunately, he has added to it by never going beneath the surface opinions and considering whether there’s much evidence for that lack of confidence. If his purpose is to inform, he gave up a golden opportunity.
Interestingly, though, Hilsenrath recognizes one bad consequence of government intervention: lobbying to set the rules. He writes, “As Washington’s sway has grown, so has the amount of money that the private sector spends to influence decisions.” Those industries that have spent the most are, not surprisingly, “those most heavily touched by government policies.” Even if that doesn’t cause many people to question the heavy role of government, maybe in a future article Jon Hilsenrath will consider whether things might be better with a lighter role. One can always hope.
