03/20/2009 - It was almost precisely a century ago that the United States experienced an economic cycle characterized by prosperity, financial crisis and recession—all within the space of a few years.
Eerily mirroring current economic developments, the Panic of 1907 began when New York banks lent more than their assets could cover, leading to the failure of state and local banks and businesses nationwide. Responding to the gravity of the situation, Congress created the Federal Reserve System in 1913, overcoming vigorous opposition by the banks.
While the Federal Reserve is widely recognized as providing critical stability and security to the nation’s banking system during periods of economic uncertainty, the fierce debate over government regulation that preceded its establishment has continued to echo across the intervening century.
As J. Howard Pew, one of The Pew Charitable Trusts’ four founders, observed in 1938, when the nation was still climbing out of the Great Depression, "It is proper for government to lay down general rules to preserve competition, to prevent monopoly, to enforce sound business ethics. Having laid them down, government should enforce them." The problem, he cautioned, occurs when government exercises so much control that it is "paralyzing to initiative, invention, adventure and enterprise."
Today, after more than two decades of steady deregulation across most sectors of the economy, we are now beginning to see the pendulum of government regulation swinging strongly back. The question is, how fast and far will it swing? At the same time, the current financial crisis has weakened our economy and exacerbated our nation’s already alarming fiscal condition.
In response to our founder’s concerns, which find particular resonance in today’s political and economic climate, Pew recently expanded its Economic Policy department to address two areas that have never been more relevant to the United States.
The Fiscal and Budget Program elevates fiscal responsibility as a primary element of federal executive and legislative leadership, promotes reforms to the budget process that enable greater transparency and supports policies that are critical to ensuring the nation’s long-term financial health. And the Markets Program will investigate and document the full extent of government involvement in markets through such measures as subsidies and regulation.
Both ventures seek to reveal how government resources are used to support a range of interests in the national economy—with the goal, ultimately, of helping policy makers make more informed and engaged decisions about how these scarce public assets should be allocated.
As its first undertaking, the Fiscal and Budget Program last year created US Budget Watch, a partnership between Pew and the Committee for a Responsible Federal Budget.
The initiative produced a pre-election voter’s guide to the presidential candidates’ major policy proposals and their costs. The objective was not to sway public opinion in favor of one candidate over another, but rather to inform the national debate and make voters more aware of the fiscal implications of various policy alternatives.
The program’s next undertaking involved the creation of a high-level national commission, in partnership with the Peter G. Peterson Foundation, to make recommendations for improving the congressional budgeting process. This process, last updated in 1967, lays the foundation, and establishes the rules of the game, for all policy decisions.
Without sound methodology and rules, meaningful action on critical policy reform will be far more complicated. Yet the process has become fundamentally mismatched with many of the budgetary needs of the country. In fact, most of the federal budget is now on automatic pilot and does not receive regular oversight. The Peterson-Pew Commission on Budget Reform will develop targeted recommendations for legislation, resulting in substantive improvements to the budgeting process and enhancing the transparency of an exercise that deserves greater public scrutiny.
In a society that holds the free market in such high regard, the undercurrent of suspicion about government intervention is strong. Recent events in the financial markets, however, have created a growing backlash against loosely regulated or unregulated industry. Through our Markets Program, Pew will launch a series of initiatives aimed at forging a middle ground that strikes the appropriate balance in regulatory policy.
The first major project is Subsidyscope, which seeks to focus public and policy-maker attention on the size and scope of federal subsidies by aggregating information on direct payments, loan guarantees and tax expenditures from multiple sources into a comprehensive, searchable, high-quality database. By increasing the public’s understanding of the extent to which our nation’s markets are managed, Subsidyscope can encourage a truly informed debate about how best to deploy increasingly scarce government resources.
Our nation is already engaged in debates over appropriate levels of government spending, debt, subsidies and regulation, and good data will surely be critical to informing these discussions. We believe that the Economic Policy department is poised to make significant contributions by providing understandable, unbiased research that will engage the public and policy makers, and lead to meaningful policy change.
John E. Morton
Managing Director, Economic Policy
Read more about Pew’s work in Pew Prospectus 2009 (PDF).