Market Governance
Let us review this thesis by briefly surveying specific policies from the Reagan era, beginning with market governance and then proceeding to the broader policy agenda.
Antitrust: The Reagan administration shifted decisively from the proactive U.S. antitrust policy of earlier decades toward the more laissez-faire Chicago School. It drastically cut the number of attorneys, eased enforcement, and loosened merger review. As mergers boomed, the increase in market concentration meant there were fewer small firms with less ability to challenge incumbents.
Intellectual property rights: IP protection – such as patents, copyrights, and trademarks – provides a critical incentive for innovation. Yet it can also impede inventors, who must avoid violating the exclusionary privileges of existing IP holders. The Reagan administration exacerbated this problem by extending patent protection to new products, such as software and business methods. This produced a patent “thicket”: a dense web of patent rights that companies must hack through to commercialize new technology. And it fostered non-practicing entities (“trolls”) that would buy up huge numbers of patents (largely for software), search for possible infringements, and demand financial settlements or seek judgments through litigation. In the process, these trolls impeded the development of new products, increased costs for businesses and consumers, and clogged the judicial system.
Financial liberalization: The Reagan administration accelerated a process of financial liberalization that began before it and continued after. These reforms produced a financial sector that was more competitive and less stable, facilitated financial innovation, fueled a sustained increase in the financial sector’s share of national income, exacerbated economic inequality, and permitted a major consolidation of the sector. This eliminated many small financial institutions, weakening a major channel of finance to small businesses, which often relied on close personal ties to local lenders for credit. The reforms also fueled the savings and loan crisis of 1986-95 and set the stage for the global financial crisis of 2008.
Deregulation: Many small business owners felt that much government regulation was expensive, unnecessary, and placed a disproportionate burden on them. And for Reagan administration officials, attacking red-tape fit nicely with their reverence for self-reliance and economic freedom. Yet regulations bestow benefits as well as costs. The Office of Information and Regulatory Affairs (OIRA) has consistently found that the net benefit of regulations exceeds the costs. And regulations do not actually impair entrepreneurship at the aggregate level. Alex Tabarrok, a libertarian economist, designed a study to test whether the increase in regulations caused the decline in economic dynamism over the past 30 years in the United States, including the reduction in business startups and the pace of job reallocation – but he found that they did not. To his credit, he changed his perspective on the relationship between economic regulation and economic dynamism and published his negative results, to considerable acclaim.