Op-Ed

Jacalyn Carfagno: Nobel respite from an election year's simpleton economics

Jean Tirole won a Nobel in economics for his work on regulation of markets.
Jean Tirole won a Nobel in economics for his work on regulation of markets.

Election years are always a challenge.

I don't watch much commercial television but I do sit in on almost every endorsement interview our editorial board conducts and I read a lot, including the mailers sent to my home.

I think I have a pretty good idea of the messages candidates are trying to send beleaguered voters.

Increasingly, many of them seem to boil down to simplistic ideas about government's role in an extremely complex economy. I think I could sum them up this way:

■ Government is bad, specifically government regulation.

■ Private enterprise always produces the best results.

Nuance, let's face it, is not a big part of campaign-speak.

But it is a big part of the work of French economist Jean Tirole, who was just awarded the 2014 Nobel Prize in Economics by the Swedish Academy of Sciences for his work on the complex world of government regulation of markets.

Indeed, the first heading in the Swedish Academy's dumbed-down explainer on Tirole's work is this, "Regulation is difficult."

This has become increasingly clear, it notes, since governments have opened up traditional government controlled or operated monopolies — such as telecommunications and other utilities, education and highways — to private players. (Being Europeans they included health care.)

We could, of course, add a few here in Kentucky, like prisons, to that list. More locally, we've got Kentucky-American Water or Time Warner Cable.

The Academy dryly notes: "it has often been more difficult than anticipated to get private firms to behave in the desired way."

This might cause some of the anti-government crowd, including those who spend millions of other peoples' money to be part of the government, to respond that government should just get out of the business of trying to make private companies behave in any particular way. The genius of the market will provide the perfect solutions that government can't, they say.

But then they would have to explain why high prices, bad service, slow broadband, food riots and raped prisoners are the desired outcomes.

This is why Tirole's work is so important. It's about how to design regulation in markets where a few firms dominate so that firms are encouraged to innovate, thereby expanding markets and efficiencies but not in such a way that they can choke off competition from smaller, more nimble firms, and gouge customers.

The Academy's dumbed-down version of the reasoning and mathematics behind Tirole's approach is five pages long so I won't try to recap that here, even if I thought I were competent to do so.

It's complicated.

But complicated and nuanced don't mean wishy-washy. We need regulation in many markets (see price, service, broadband, riots above), it just needs to be done right.

In an interview with a Bloomberg reporter after the Nobel was announced, Tirole made it clear that regulation of banks is not only desirable, it is essential.

When government agencies, like our FDIC, guarantee deposits in banks, "we need strong rules that are going to prevent banks from gambling with taxpayers' money," he said.

My personal thanks to the Swedish Academy and Tirole for a welcome bit of complicated sanity in this election season.

Reach Jaci Carfagno at jcarfagno@herald-leader.com and 859-231-1652.

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