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Prosperity & Regulation

May 13, 1999

George Bittlingmayer, University of California at Davis, spoke at the Mises Institute conference on Reassessing the Presidency (click here for audio tapes). His topic was the effect of economic regulation on the business cycle in U.S. history.

He was interview by the Investors Business Daily, May 17, 1999:

Economics And Public Policy

The U.S. is enjoying a record-breaking economic expansion - 8 years old and counting. But can it last?

Sure it can, says George Bittlingmayer, an economist at the University of California at Davis. The key, he says, is sound government policy.

Unfortunately, that's often lacking. The 1970s, he says, saw plenty of ill-conceived and damaging policies, including a harsh anti-business climate.

That's changed in the 1980s and 1990s. Deregulation, and a more lenient attitude toward mergers and acquisitions are among the new factors that have helped create the longest peacetime boom in U.S. history.

In a recent conversation with IBD, Bittlingmayer offers some ideas about past policy gaffes and how economic performance could be improved.

IBD: What explains the long economic expansion of the 1990s?

Bittlingmayer:
Many economists are puzzled because economic cycles historically have followed a three-to-five year pattern. A downturn seems overdue.

However, a downturn is not something that has to happen. Downturns have specific, preventable causes. The poor economic growth and the miserable stock market of the 1970s were due to government policies.

IBD:
How are the policies of the 1980s and 1990s different from those of the 1970s?

Bittlingmayer:
First, the Fed brought down inflation. It's been below 6% since 1982, and below 3% since 1993.

The second factor is the abandonment of the strident anti-business policies of the 1970s. Most importantly, that shift encouraged the strong merger wave that has occurred almost without interruption since the early 1980s.

IBD:
Is that a good thing?

Bittlingmayer:
It's no coincidence that mergers and good times have gone together. Mergers are a cause and not just a consequence of good times.

IBD:
Do any other policy shifts come to mind?

Bittlingmayer:
Energy policy provides a good example. The 1970s energy price shocks would have been manageable, but their negative consequences were greatly aggravated by some volatile, highly politicized policy measures.

The policies actually put in place included gasoline and crude price controls, as well as the ill-advised ''windfall'' profits tax on crude oil. Other touches, such as the corporate-average fuel-economy standards, added insult to injury.

All of this has changed. We have low inflation, we have a relatively enlightened merger policy, and we've largely rolled back regulation in industries such as railroads, airlines and telecommunications, as well as energy.

IBD:
But many people believe mergers bring misery.

Bittlingmayer:
Mergers are essential for healthy growth. Mergers provide an excellent exit strategy for new, growing or struggling firms.

Under a permissive merger policy, firms are much more likely to be founded, and investors are more likely to invest in them. And mergers are more common in industries with high growth and significant R&D. Acquisitions are a method by which know-how can be transferred across organizations.

IBD:
What explains the political opposition to mergers?

Bittlingmayer:
In principle, the government opposes mergers because of their effect on consumers. In practice, much of the pressure to oppose specific mergers comes from competitors.

When GM and Toyota negotiated a joint venture in the early 1980s to produce cars in the U.S., Chrysler was one of the leading critics. When Microsoft wanted to acquire Intuit, the maker of Quicken and Turbo Tax, in 1994, an anonymous group of Silicon Valley competitors funded an effort to convince the government that it should block the merger.

Opposition also comes from sectors that are merely inconvenienced. Charities, museums and other institutions that depend on corporate donations lose funding sources when corporate headquarters disappear after a merger.

IBD:
What are the dangers we'll face in the future?

Bittlingmayer:
Currently, Microsoft is on trial. Intel has settled its case, but the FTC is still investigating it on broader charges. And the FTC is investigating Cisco.

I think the public has learned to live with big business, especially after seeing upstarts displace the big companies that the government once challenged as monopolies.

But Washington will continue to take its cut of the action. The wealth created by new, dynamic industries is too large and the chance to broker deals on behalf of losers in the marketplace too tempting for politicians to stay away.

The increased action at the state level poses a special danger. Twenty states are involved in the Microsoft suit. Involvement by the states is not likely to produce focused, unpolitical economic policy. The states are also involved in telecommunications regulation, and telecommunications will be the scene of continued restructuring and political pressure.

(C) Copyright 1999 Investors Business Daily, Inc.


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