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China, U.S. need free-market police

Commentator Robert Reich

TEXT OF COMMENTARY

KAI RYSSDAL: There was another recall of Chinese imports today. The Consumer Product Safety Commission made the announcement. It includes a quarter-million Sponge Bob SquarePants address books and journals. Too much lead paint on their spiral bindings, it seems.

There's been some talk that all the problems China's having with manufacturing can be traced to its get-rich economic system. But commentator Robert Reich says our brand of free market isn't squeaky clean either.


ROBERT REICH:

Twenty years ago, we divided the world's economic systems into two camps. On one side were Communist, government-run economies. On the other side capitalist, free-market economies.

Now, Chinese free-market capitalists are going gangbusters. And China's problem isn't too much government intrusion into its economy, it's too little — or at least too little of the right kind. Chinese toy makers have used lead paint, some Chinese pet-food producers have employed toxic chemicals, and makers of counterfeit toothpaste in China have used other toxins.

A basic free-market principle is that when consumers cannot differentiate between risky products and good products, they'll withdraw from the market, which is what's happening to China's consumer exports. So China has to rein in its rip-roaring free-market capitalists with regulations that better ensure safe products.

The American financial market is facing much the same challenge. When it became apparent that many subprime mortgage loans were far riskier than assumed, and were packaged with other loans, investors began withdrawing from all sorts of financial instruments because they couldn't figure out how much risk they had taken on.

So now we have to rein in our rip-roaring financial capitalists with regulations that clarify risk — by, for example, requiring hedge funds to disclose more and credit-rating agencies to do better.

The lesson on both sides of the Pacific is that free-market capitalism and government intervention are not on opposite sides of a great divide. Free markets need governments to police them so buyers can be confident about what they're buying. If governments fail in this basic job, buyers will be scared off. And this will bring down even responsible sellers.

The practical question, then — in China and America — isn't whether you're in favor of free markets or government regulation. It's what kind of regulation is needed to make markets work.

Ryssdal: Robert Reich is a professor of public policy at the University of California, Berkeley. Once upon a time he was the Secretary of Labor for President Clinton.

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