The Failed Promise of Economic Deregulation

In the United States and in Pennsylvania, the stagflation (high unemployment and high inflation) of the 1970s precipitated a three-decade experiment in economic deregulation. Financial markets, labor markets, and individual industries were all deregulated, and policies that protected vulnerable workers (the unemployed, the low-wage earner, the welfare recipient) were all weakened.

The rationalization for deregulation was that policies and institutions that helped rescue the economy from the Great Depression were now obsolete, part of the problem rather than part of the solution. The promise of deregulation was that it would restore prosperity for all, replacing a high “misery index” (defined as the unemployment rate plus the rate of inflation) with a new era of prosperity.

The 2001-2008 period represents the latest evidence on the impact of economic deregulation. The jury is in and, based on a fair reading of the evidence, the jury has reached a unanimous verdict: Our experiment in economic deregulation is a failure. The middle-class is more, not less, miserable. To wit:

The wages of most workers are stagnant, even though productivity has nearly doubled since 1979;

The concentration of income among the richest 1% is greater than at any time since the 1920s, even while the share of families in poverty, or unable to cover the cost of a basic family budget, has not declined.

Our financial system is on the brink of a meltdown.

The survival of millions of people, and possibly the planet, is under threat from the consequences of global warming.

The end of this report suggests that we can do better—and outlines how.

A basic flaw in the deregulatory approach pursued since the late 1970s is that it takes the extreme and ideological view that regulations are bad per se. As Keystone Research Center has emphasized since its founding in 1996, there is a need to update economic policies and institutions, many of which have not been substantially updated since the 1930s. The reinvention of policies and institutions needs to take place in areas including education and skill development; economic development and the stimulation of key industries; renewable energy and energy efficiency; labor relations and the role of unions; and trade. If we bring our policies and institutions up to date with the economic and social challenges of today’s economy, we can strengthen our competitiveness, expand opportunity and security for working families, and successfully confront environmental challenges, including climate change.

The conclusion of this report outlines in more detail a national agenda for restoring prosperity and opportunity in Pennsylvania—A New Deal for a New Economy. That section also underscores that Pennsylvania, contrary to some perceptions, is ahead of the curve when it comes to institutional renewal in key areas of economic policy.

In the end, of course, restoring prosperity and opportunity is less a technical problem and more a challenge of political will. Today, in August of 2008, with our national economy spiraling downward and a presidential election and transition approaching, we as a nation have the best opportunity since the 1930s for a fundamental renewal of our economic policies—a renewal that will serve economic, environmental, and social goals. We cannot afford to miss this opportunity.

This page is an on-line summary of a portion of the full State of Working Pennsylvania 2008 report available for download from www.stateofworkingpa.org. © 2008 Keystone Research Center - www.keystoneresearch.org.