The Economist Cautions Obama

Against "stifl[ing] America’s dynamism" by over-regulating the market (May 28th edition at 13):

[T]he Democrats’ present zeal for government activism often goes well beyond addressing market failures. The president and Congress seem to believe that they can surgically intervene in the economy but overlook the unintended consequences. They are willing to demonise business when doing so furthers their aims. In one breath Mr Obama praises a bank that wrote down its claims on Chrysler and in the next lashes out at investors who, as was their right, did not.

Members of his team believe that tougher rules for business are necessary to cool voter anger that would otherwise result in even more vindictive measures. But rather than tamping down the backlash, they may only feed it. They aggravate that risk by outsourcing rule-writing to Congress, as with the fiscal stimulus and carbon emissions and, soon, health care. Congress is much more likely than the executive branch to let special interests or demagoguery shape the outcome.

Too often, the result is overkill. Last December the Federal Reserve approved sweeping new rules on credit cards. Congress said it was not enough, and passed its own law which takes effect sooner and is even more restrictive. Some provisions restrain genuinely odious practices, such as charging interest on already-paid balances, but others prevent banks from tailoring interest rates to customers’ changing risks.

The approach to energy is worse. Under a mammoth carbon-emissions bill now working its way through Congress, 85% of valuable permits to emit carbon dioxide (which might all have been auctioned) will be given away free. This creates a huge new pot of favours for government to hand out, and new incentives for businesses to lobby. It will be costlier to fight climate change, while harder to avoid political favour-trading.

Mr Obama’s people seem sincere when they say they want to rid the government of its stakes in banks and carmakers as soon as possible. But in the meantime they are introducing new rules, such as limits on performance-related pay at banks, that could do more harm than good (see article). Nor can they resist using that ownership to push goals unrelated to the firms’ welfare, such as pressing banks to relent on foreclosures or carmakers to make alternative-fuel cars for which there is no obvious demand. On top of that, they are passing more stringent fuel-economy standards that favour light trucks over cars. A far less distorting (and transparent) way to cut carbon emissions and raise fuel economy would be a carbon tax--but almost no one in Washington has the courage to propose one.

These mistakes matter because, for all Mr Obama’s oratory, it will be very hard to reverse course in future. Regulations and interventions spawn constituencies that will fight any paring of their benefits. The federal government created Fannie Mae and Freddie Mac, the big mortgage agencies, in the interest of raising home-ownership. But long after that goal was met, the housing lobby barred almost all efforts to rein them in. Only massive taxpayer bail-outs have prevented their collapse.

America’s free-market capitalism has always been a model for the rest of the world. By all means fix its flaws, Mr Obama; but do not take its dynamism for granted.

Agreed--this is the danger of over-reacting in a fashion that would further impoverish us.