Hamilton Advocates Countercyclical Regulatory Policy

James Hamilton asks What could America be good at?  and considers the impact of regulations:

… if new regulations cause someone to lose their job or kill a new project that would have been hiring, the regulations are making a direct contribution to our cyclical problems, and are significantly more costly than if the same regulations had been implemented when the economy was operating at full employment.

Hamilton’s major concern is regulations that affect our ability to take advantage of natural resources, but it applies to all regulations. He then goes on to say:

Obviously what we need to do is weigh the costs of regulation against the benefits. Just because the costs are higher in a recession, that does not mean that new regulations during a recession are always a bad idea. But I do believe Americans need to acknowledge that, both because of the current economic weakness, and because of the longer-run challenge in finding a basis for future economic growth and current-account balance, we are poorer than we used to be. A challenge of this magnitude needs to be approached with some humility about just what we should be willing to do to get back on track.

Just the argument that I have made for countercyclical regulatory policy (see here and here).   In periods of economic weakness, we have learned how to change our monetary and fiscal policy in order to stimulate the economy, cutting interest rates and running deficits that would be unthinkable in normal times. We should consider using the very powerful regulatory apparatus of the government in the same way.


  1. Ah, the cry of the person who just hates all regulations at any time because it stops maximization of profit in the short term. In order to achieve long-term goals and right serious wrongs, you need regulatory action. If we don’t force things to happen in downturns – and many of those new regulations require activity to support, so not having them just makes matters worse – then we don’t make progress over the longer term either. And then, well, there’s always good reason to not start yet because we can’t be sure the good times are going to last or are at risk of reversal, and no-one wants to be the one to under-report growth when everyone else is, so we don’t want to support new regulations when we’re in growth mode either. Over the business cycle, it just doesn’t matter when it gets done, unless by delaying, you can do it cheaper, which rarely happens. If there’s good reason to add a regulation, then you’ve just got to suck it up. The bigger issue is to not have bad regulations, and that has nothing to do with being a short run or continuing cost or not. It’s just doing the wrong thing or solving a problem that doesn’t really exist. For those, there’s never a justification to do them at any time. Businesses are cost avoiders; they’ve never seen a cost they like, or a tax they like. They’d like nothing more than to eliminate them all. They’d like nothing more to eliminate all EPA regulations either so they can pollute at will; and we end up with another Bhopal. Business leaders can promise to be good boys and not do anything naughty, but when push comes to profit, we can be pretty sure that they’ll all take the shortcuts if they think they can get away with them. Even in a highly regulated day like today, we still see people trying it in the hope they don’t get caught and that’s with draconian penalties in play.

  2. I welcome all calls for less regulation but you are doing it for the wrong reasons and the wrong way. If the mooted regulation doesn’t make sense, I doubt it would have made sense just because we were marginally richer in 2007. While there are a lot of benefits to cutting back on our massive regulatory state, those benefits don’t go away when times are good. In fact, perhaps we wouldn’t be in this mess if the govt hadn’t decide to “regulate” the housing sector and pump a bunch of money into it through the formerly public then quasi-privatized Fannie and Freddie. You will convince no one if you yourself believe that such regulation was necessary in good times, as John here demonstrates.

    John, I don’t think you know Mike at all if you think he’s all about short-term profit. 🙂 It is precisely the ignorant views you espouse that make things worse during a recession like we’re seeing today, where blind calls for more govt power and regulation simply make things worse. I don’t know why you think businesses would “get away with” it if there’s no govt, ever heard of boycotts and lawsuits? If you’re worried about monitoring them, there’s a pretty simple private solution that does a far better job: Consumer Reports-style watchdogs that get paid by the consumer to keep an eye on such things. As the internet takes off in the coming decades, such private watchdogs are going to put govt regulatory agencies out of business, just like the twin forces of email and Fedex are currently bankrupting the post office. 🙂

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