NCPA - National Center for Policy Analysis


December 17, 2008

What caused the financial crisis?  President-elect Barack Obama had a simple answer during the campaign: eight years of policies that have shredded consumer protections, loosened oversight and regulation and encouraged outsized bonuses to CEOs while ignoring middle-class Americans.  In other words, deregulation and conservative ideology are to blame.  But the data show the exact opposite, says Kevin Hassett, director of economic policy studies at the American Enterprise Institute.

According to Hassett, there is a simple analysis to test Obama's view:

  • Countries around the world have wildly different regulatory structures; some, like the United States, have relatively light regulatory structures, and rely more on free markets to discipline institutions.
  • Others, including Germany and Turkey, regulate a good deal more.

If Obama's thesis is correct, then the economic crisis should be worse in the countries that have looser regulations fueled by a "failed ideology."  However, an international comparison of stock market performance over the last year shows that countries that were economically free, while still suffering downturns, have fared better than more regulated economies, says Hassett.

Looking at a measure of economic freedom:

  • If Obama were correct, the line measuring economic freedom would slope downward indicating that countries that are economically free would have had bigger collapses in their stock markets.
  • However, the line is upward-sloping, which implies that over the past year, countries that are economically free have suffered less than countries that are not.
  • Therefore, there is no country that went unscathed over the past year; even the most aggressive European regulatory states suffered terribly.

As we consider regulatory changes, there is no successful country in the Organization for Economic Co-operation and Development (OECD) that the United States could consider copying.  We already know that countries that were less free fared worse, says Hassett.

Source: Kevin A. Hassett, "The Regulators' Rough Ride," National Review, December 15, 2008; based upon: Kevin A. Hassett, "The Regulators' Rough Ride," American Enterprise Institute, December 1, 2008.

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