Academic journal article Policy Review

The Place of Government: Setting the Terms to Promote Competition

Academic journal article Policy Review

The Place of Government: Setting the Terms to Promote Competition

Article excerpt

HISTORICAL WATERSHEDS ARE clearly perceived only in retrospect, but we can at least speculate that we are crossing one now. After two decades in which Anglo-Saxon political economy has been dominated by deregulation, privatization, and faith in the magic of the market, we may be entering a period when free-market wisdom is no longer conventional. If we are lucky, a new consensus may form around a slightly different principle: We will celebrate free competition rather than free markets, and we will recognize that promoting competition may frequently require departure from the principle of laissez-faire. If we are less lucky, we may face a more sweeping backlash against enterprise, with high costs to our prosperity.

The signs of this watershed are scattered, but they are too numerous to ignore. Abroad, we face a broad disaffection with pro-market reformism, which runs from disappointment at privatization and marketization in Russia to the return of leftist populism in Latin America. Within the United States, market advocates have been on the defensive, arguably, since the summer of 2000, when California's first electricity blackouts called into question the deregulation of the energy sector. Around the same time, the telecommunications sector began its dramatic meltdown, culminating two years later in the bankruptcies of WorldCom, Global Crossing, and more than 150 less famous participants in the experiment unleashed by the 1996 telecoms deregulation law. The only healthy telephone companies--the heirs to the local Bell firms--face their own set of questions: Despite deregulation, they have managed to retain a stranglehold on the local residential market, with the result that the lower prices promised by deregulation hav e not materialized. Meanwhile the airline industry, deregulated with huge success in 1978, has faced periodic questions. Customer frustration with delays fueled calls for a passengers "bill of rights" in the late 1990s; mergers among airlines have caused some economists to fear for the price cuts that deregulation has delivered; recently the bankruptcy of U.S. Airways and United, along with the precarious finances of other airlines, has raised the question of whether further consolidation is inevitable. The health sector has faced calls for tougher regulation too, with state legislatures tying red tape around the health maintenance organizations that seek to restrain medical costs.

All that's before you consider the twin shocks of terrorism and the outcry over corporate governance following the bankruptcy of Enron. In the aftermath of September 11, Americans turned instinctively to government for solutions--not just to hunt down al Qaeda but also to create the economic adjustments apparently required by the new circumstances. The airline industry, weak even before September 11 and now positively reeling, was immediately promised $s billion in cash and $10 billion in loan guarantees by Congress. The responsibility for security at airports was transferred from the private sector to the government. The Bush administration advocated the creation of a government insurer to underwrite terrorism risks. There were efforts to strengthen government surveillance of all kinds of communication and mobility--emails, money transfers, commercial shipments across borders--to the point that some commentators wondered whether globalization might be threatened.

The aftermath of Enron brought a similarly broad response. After considering the string of failures that allowed the firm's chief financial officer to steal $45 million from shareholders, Congress passed soup-to-nuts legislation that President Bush signed in July 2002. The new law strengthens government oversight of auditors. It ends seven decades during which auditors have been allowed to write their own professional standards. It regulates the kinds of consulting services that accounting firms can peddle. It obliges Wall Street's stock analysts to declare the conflicts of interest created by their firms' investment-banking activities. …

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