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Brux column: The economics of deregulation

This opinion column will address the economics of current policy issues. Writer Dr. Jackie Brux is an emeritus professor of economics and founder/director of the Center for International Development at UW-River Falls; and author of the college textbook, “Economic Issues and Policy.”

"Rules and regulations, who needs them — throw them out the door." How many of you aging hipsters remember singing along with this line from Crosby, Stills, Nash, and Young?

As it turns out, we are the ones who need those regulations! I'm talking about a variety of government regulations, including those that protect consumers (e.g. auto safety), workers (e.g. safe working conditions), the environment (e.g. climate change), and our financial system (example in a moment). Intelligent people can disagree on how much regulation we need, and whether some regulations are too extensive or intrusive.

Still, you are undoubtedly aware of the swath of deregulation activity by our president. Deregulation means the removal of regulations by the government. Here's the economic theory behind it.

Assume that compliance with government regulations is costly for businesses (though this is not always the case, e.g. green energy). Trump argues that deregulation cuts business costs, thereby encouraging more production, jobs, and of course, profits. Some economists would agree with this. Others believe that Trump has moved far beyond sensible deregulation, eliminating as many regulations as possible regardless of any social benefits we receive from them.

The idea of social benefits takes us to another economic concept, that of externalities. Externalities are the side effects of economic activities that spill over onto society. These can be positive or negative. Secondary education is a good example of a positive externality. The high school student benefits in the form of better jobs and income. But education also provides important benefits to society, including a better educated and more productive citizenry. Therefore, economists of all stripes support government intervention in education. And, since economists are big on incentives—in this case incentives to attend school, most notably by offering it free to the student.

Pollution is the best example of a negative externality. This negative spillover harms our environment and society at large. This harm may be monetary (e.g. higher societal healthcare costs) and non-monetary (the subjective harm of poor health to people's well-being).

Back to economists' predilection for incentives — they like to discourage (disincentivize) negative externalities, in this case, pollution. "Pollution taxes" would discourage pollution, subsidies can encourage the use of green energy, and regulations can prevent pollution. While many economists prefer market-based solutions (like the pollution taxes and green energy subsidies), many others support regulations, preferably non-specific recommendations that permit reduced pollution by any means, as opposed to regulations requiring specific means to reduce pollution (like catalytic converters). [Economists prefer non-specific forms of regulation to ensure greater efficiency and innovation.]

Let's return to the topic of deregulation. We are all aware of Trump's deregulation of pollution controls, especially in the area of climate change. But let's move onto another example, that of deregulation of our nation's financial sector.

We know that the absence of financial regulations triggered the 2007-2009 financial crisis and subsequent Great Recession. Had President Obama's financial regulations been in place prior to his presidency, the greed and financial mismanagement that triggered these crises would not have occurred. Trump has been steadily dismantling these protective rules.

The most recent example of financial deregulation is the effort by Trump-appointed Mick Mulvaney's Consumer Financial Protection Bureau to remove protections against payday lending.

Payday lending is a hugely profitable industry that charges excessive interest rates for quick loans to people with poor credit ratings. Mulvaney would eliminate the so-called "ability to repay" rule that requires payday lenders to discern the customer's ability to repay the loan. Otherwise, the borrower ends up repeatedly renewing the loan for exorbitant fees.

The customers of payday lending are largely poor people in desperate need of money for expenses. Millions of Americans will use a payday loan this year and will rack up billions of dollars in fees. [Note that Mulvaney took thousands of dollars from payday lending companies as a congressman. And, the CFSA, a payday lending group, is holding its annual conference next month at Trump's Golf Club in Miami. And, in his previous life, Mulvaney lobbied to abolish the Consumer Financial Protection Bureau entirely. This is what we're dealing with.]

There is one more line from the song I began with: "We can change the world, rearrange the world — it's dying ...." We can change the world. One local opportunity is the ecumenical group, Hope for Creation, which fosters education and action around climate change. They invite the public to see the film, "Before the Flood" at 7 p.m. Thursday March 14 at the River Falls United Methodist Church, 127 S. Second St. We all can educate ourselves and others, vote and contact our legislators, and keep on talking until we turn this around.