It is too quick to say that we went through an era of financial deregulation in the past decade. The idea that the financial sector was deregulated is mostly a product of the rhetoric of the Republicans seeking votes from businesses and free marketeers. Later, of course, it became a talking point for the Obama campaign.
In reality, federal spending on financial regulation has continued to grow for decades. It grew 26 per cent during the Bush administration, for instance.
What really happened, however, was that the growth of the financial sector far outpaced the growth of the regulators. So while financial regulatory continued the trend line on which it had grown for the last 50 years, the financial sector itself exploded far beyond historical trends.
So what we had was a growing gap between the size of the regulators—as measured by spending on regulation—and the size of the regulated. This doesn’t tell us that much about the quality of the regulatory output or the costs regulation imposed on businesses and the economy. It’s always possible that financial regulators just got more efficient so that spending didn’t need to grow as the financial sector grew.
Of course, recent events seem to imply that we didn’t develop highly efficient regulators during the period covered by the chart.
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