Unintended Consequences Of Regulation

, Spencer Irvine, Leave a comment

Edward Conard’s book Unintended Consequences attacks the myths surrounding modern economics. Instead of shifting blame on the “too big to fail” banks and greedy investors, Conard diagnoses the problems regarding the 2007 economic crisis, which he terms “the Financial Crisis,” and proposes solutions to these problems.

Innovation is an important component of the American economy and risk-taking is a part of innovation, Conard avers. He points out that Facebook and Google had to face stiff competition as start-ups before taking down the likes of Yahoo and AOL. Americans would not be using them if these start-ups did not innovate and take the risk to dominate their markets. If government regulators stifle innovation, the economy suffers. Innovation is composed of both reducing the cost of existing products and proving that newer products are much better than the existing ones. It drives and will continue to drive the American economy, setting the US far apart from the likes of slower-growing Japan and Germany.

Opposition to so-called outsourcing, which Conard calls “offshoring”, is also misguided. US companies often deposit their earnings and profits in US banks and not in accounts in foreign places, Conard argues. Offshoring is an essential part of free trade in cutting costs while raising the earnings and living standards of impoverished foreign workers. Contrary to popular belief, if money isn’t invested it hurts the US economy because it is not being put toward innovation and business creation.

In like fashion, wealth redistribution (or progressive taxes) affects the wealthy, but by targeting their wealth, the US is helping to make investors an endangered species. The wealthy, not the poor and not many of the middle class, are the primary investors in the economy and the wealthy usually have more money to put at risk through investment. Then, if they are taxed as progressives want, there will be less investment and less risk, which leads to economic recession (which explains the current US economic doldrums).

As a side note in this section, Conard explains that the emergence of economic conservative voters is a result of forming a voting bloc coalition of pro-life social conservatives and pro-choice fiscal conservatives. As a result, Ronald Reagan won the 1980 election and paved way for the implementation of Reaganomics. He points out that presidents since Reagan have won presidential elections with a significantly lower marginal tax rate in the history of the US, as marginal tax rates play a part in election campaigns. For example, Reagan won re-election with a 28% marginal tax rate, when previous presidents like Eisenhower presided over a tax system with a 70% marginal tax rate.

Conard’s main conclusions are that the US government should reward, not tax or restrict, their innovators and risk-takers, some of whom are the wealthy. Risk-taking and innovation drives the US economy and separates the US from other economies. He notes that politicians are narrow-minded and should not punish the banks and the wealthy, instead they should do their homework and interfere less in the economy (as they often create the opposite effect of what they want). The blame lies with the lawmakers, not the banks, their CEOs and investors. The US should increase incentives for investment and increase confidence, not discourage it through poor policy decisions. This is how the US economy can rebound and bounce back from its current recession.

Spencer Irvine is a research assistant at Accuracy in Academia.

If you would like to comment on this article, e-mail mal.kline@academia.org.