1. REGULATIONS: Will economic crisis, climate concerns end 'era of deregulation'? (Greenwire, 10/28/2008)

Noelle Straub and Robin Bravender, Greenwire reporters

With the U.S. banking and housing meltdown driving federal activism to levels unseen in decades, many see the government's newfound regulatory muscle being felt far beyond financial markets.

"In the wake of the credit crisis, many people are crying for more and more regulation," said Patrick McLaughlin, an economist with the Mercatus Center at George Mason University. With Democrats expected to tighten their grip on Congress, he said, "the climate might be such that the era of deregulation is over."

Since the Reagan Revolution, U.S. policy has favored less government intervention wherever possible, reining in regulators in fields ranging from finance to health care to the environment. Now scholars on both sides of the regulation debate are seeing a shift to more government intervention, particularly in the financial and environmental sectors. But analysts also warn that the same financial crisis that spurred the cry for more monitoring may dampen the government's ability to pay for reforms.

One area with the greatest potential for new regulation: climate change. Both major presidential candidates support a cap-and-trade program to curb U.S. heat-trapping emissions, and earlier this month, House Energy and Commerce Chairman John Dingell (D-Mich.) released a proposal that figures to serve as a guidepost for next year's congressional debate on the issue.

Recent far-reaching federal actions have expanded the government's role in ways unseen since the Great Depression. The $700 billion Wall Street bailout package signed into law Oct. 3 will allow the Treasury to buy troubled assets from financial institutions and to buy stakes in banks. While the bill is the most sweeping example of recent government intervention efforts, it came amid a host of smaller reforms.

A consumer product law that was passed in August required new standards for children's products and banned controversial chemical additives from toys. In September, the government takeover of U.S. mortgage giants Fannie Mae and Freddie Mac helped soften the blow of the housing market crash. Also last month, the House passed a bill to give more authority to the Commodity Futures Trading Commission's inspector general after record-high oil prices sparked cries of malfeasance.

Harshly criticized by the House Oversight and Government Reform Committee last week, former Federal Reserve Chairman Alan Greenspan -- who has long held that markets can discipline themselves -- acknowledged that his ideology was not working and that certain financial derivatives need regulation.

And experts predict that regulations could expand even further as public opinion shifts away from the ideals of the Reagan era.

"Overall, things are going to be tightened up," said Robert Litan, vice president of research and policy at the Kauffman Foundation and a senior fellow of economic studies at the Brookings Institution. "I think in the wake of this crisis there's currently less trust of markets and perhaps more willingness to tolerate a regulation."

Historically, Democrats have been more sympathetic to regulation than Republicans, but either of the presidential candidates -- Democrat Barack Obama or Republican John McCain -- is likely to increase government intervention, Litan said. "Both Senator McCain and Senator Obama have called for tightening up regulation," he said.

New wave of environmental regulation?

Although most of the attention has focused on the financial industry, which has had the most serious problems, regulation will extend to other sectors, including the environment, said Murray Weidenbaum, honorary chairman of the Weidenbaum Center on the Economy, Government and Public Policy at Washington University in St. Louis.

Weidenbaum, who served for two years as chairman of President Reagan's Council of Economic Advisers, said the New Deal ushered in massive expansion in government regulations, which have largely stayed in place. The 1960s and '70s saw another wave of regulation in the environmental and safety realms, he said, even as financial deregulation occurred simultaneously. And now a new wave of environmental regulation has begun, he added.

He pointed to EPA's recent toughening of nationwide standards for airborne lead -- the first revision in the standard in 30 years -- as a sign of things to come. "I think we're going to see more of that," Weidenbaum said.

And with widespread agreement on a cap-and-trade approach to greenhouse gas regulation, Weidenbaum said, "I think whoever's president and the Congress is going to move ahead on global warming."

Wesley Warren, director of programs for the Natural Resources Defense Council, said government will take a more active role in a variety of ways, including moving toward a clean energy economy, more investments in environmental protections and standards for business practices.

"The days of the sort of wild-frontier open market will be coming to a close," Warren said. "What you've seen for several years now is a sort of anything-goes approach to doing business. And instead what you'll see is a greater appreciation for the role of government in helping steer that and set the boundaries."

For example, if Congress had raised fuel-efficiency standards for motor vehicles several years ago, it would not be making loans to the automakers now to develop efficient vehicles, said Wesley, who held several positions overseeing environmental programs during his seven-year tenure in the Clinton White House.

McLaughlin of the Mercatus Center said the good news for those who favor deregulation is that the trend will be toward market-based reforms that give greater flexibility on how to achieve goals, instead of mandates. Any climate-change program passed by Congress would likely be better than having EPA manage greenhouse gas emissions through pending regulations, he added. And he does not expect the current period of increased regulations to be permanent.

Jim Manley, a spokesman for Senate Majority Leader Harry Reid (D-Nev.), said recent events have exposed flaws in the current regulatory structure on issues from financial services to the environment. He said the Banking Committee will tackle that financial regulatory reform early in the next Congress.

"Regarding the environment, action depends in part on who the next president is, but we can and must design it to create jobs while reducing emissions," Manley said. "There won't be a bailout option on protecting the climate unless we get started ASAP."

Immediately after the House voted to pass the Wall Street bailout bill, House Appropriations Chairman David Obey (D-Wis.) chalked up the current economic turmoil to systematic deregulation.

"You wound up over time taking the umpire off the field," Obey said, adding that the new Congress "has to" put the umpire back.

'Awesome deficits' could crimp intervention

Despite calls for expanded regulatory efforts, Weidenbaum said the government will likely be hamstrung by the financial meltdown.

While requests for enforcement are going to be strongly supported, he said, "when I think of the awesome deficits that Congress will be facing ... there will be a lot of pressure to take it easy on other government spending."

But others say opportunities to regulate will kick in once the economy rebounds.

Conditions are right for searching for lower-cost ways to accomplish regulatory goals and make regulation more effective than it has been in the past, said Bruce Yandle, dean emeritus of Clemson University's College of Business and Behavioral Science.

"I think we have a wonderful opportunity for revising the way we regulate," said Yandle, who was executive director of the Federal Trade Commission during the Reagan administration and has written several books on environmental regulation.

Much of environmental regulation is constrained by laws like the Endangered Species Act, so some efforts will be "tinkering at the margins, trying to improve environmental outcomes in the context of existing statutes," Yandle said.

"Once we get beyond [the current economic difficulties], I think there will be new interest shown in looking at the basic statutes themselves, amending statutes and dealing with some issues we haven't dealt with before, like climate change," Yandle said.

How soon that happens depends on when the economy begins to recover, he added, because environmental issues have the same income sensitivity as the selling of BMWs.

"When we have declining income, human populations back away from spending a large amount of resources on environmental [activities]," Yandle said. "People act as though environmental activity is a luxury activity and at the margins."

And experts warn that there could be a downside if the pendulum swings toward hyper-regulation.

"The reason to regulate is to fix market imperfections," said Litan of the Kauffman Foundation. "I would hope that in our rush to regulate things that we continue to be aware that there's a cost to regulate."

Still, Litan added, "I'm still cautiously optimistic that we'll get roughly the right regulatory response."

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