The Price of Civilization_ Reawakening American Virtue and Prosperity - Jeffrey D. Sachs [25]
One of the most consequential decisions of the Reagan administration was to dismantle the research and development program on alternative energy supplies begun by Jimmy Carter. When Americans wonder why we are far more dependent on oil in 2010 than in 1973, at the time of the first oil embargo, and why we are drilling in dangerous deep-sea reserves, they should look first at Figure 4.4, showing the outlays on energy R&D. Jimmy Carter declared the energy crisis the “moral equivalent of war.” The free-market Right mocked Carter’s call for a national energy strategy and cleverly and unfortunately repackaged Carter’s call to arms with its acronym, MEOW.
Carter substantially boosted R&D on solar energy, biofuels, coal-to-liquid-gas, and other technologies. R&D spending roughly tripled from 1974 to 1980, rising from $2.9 billion to $9 billion (expressed in constant 2009 dollars).18 When Reagan came to office, he dismantled what he found, driving R&D back to around $3 billion, with much of that really directed at dual-use military technologies of nuclear power. Symbolically, he ultimately removed the solar panels that Carter had installed on the White House roof, vividly indicating the end of the drive for renewable energy. We are now paying the price, a quarter century later, for Reagan’s actions.
Figure 4.4: Federal Energy Research and Development as a Percentage of GDP
Source: Data from International Energy Agency Data Services.
The Great Deregulation
The free-market ideologists of the Reagan Revolution despised regulation as an intrusion on private property and more pragmatically saw government regulation as an obstacle to short-run profitability. Bureaucrats were seen as meddling in the genius of the market and standing between business and a gusher of profits. Since the early 1980s, the underlying conceptual reasons for the regulation—including externalities, asymmetric information, principal-agent problems, outright fraud, and risks of self-fulfilling market panics—have been downplayed as unimportant or unworthy of attention compared with the benefits of granting more entrepreneurial discretion as soon as possible.
The biggest deregulation blunders were in financial markets and environmental regulation, both areas in which markets do not function efficiently on their own. The Great Depression had taught the country of the need for thorough financial regulation to curb fraud and excessive leveraging of risk. Yet the Reagan administration unleashed a process of dismantling that regulation. The first step was the Garn—St. Germain Depository Institutions Act of 1982, which deregulated savings and loan institutions and set the course for the massive savings and loan crisis a few years later. From the 1980s onward, financial deregulation became a bipartisan political gift to Wall Street, which amply rewarded politicians with jobs and generous campaign funds. Some of the key measures included the dismantling of barriers between commercial banking and investment banking and the decision at the end of the Clinton administration to keep derivatives unregulated. The disdain for regulation led Alan Greenspan to believe that financial institutions would police their own risks, a blunder that ended up costing the world economy trillions of dollars.
Tough environmental regulations on air and water pollution introduced in the 1960s and 1970s were also partially rolled back after 1980. James Watt, Reagan’s secretary of the interior, slashed funding for regulatory agencies within the Interior Department and championed mining and oil production on federal wilderness lands. Environmental regulations certainly did not disappear after 1980, but their application has remained inconsistent, conflict-ridden, and limited by aggressive claims of private property rights asserted by libertarian groups within the Republican Party.
Another aspect of deregulation,