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We don’t need both bank reserve requirements and Federal Deposit Insurance. The reason to have either is to protect depositors in times of liquidity shocks to the banks they are members of. What kind of a signal does the existence of both send to us? Well, it tells us that the banking regulators do not have a clue about appropriate reserve requirements. After all, if they did have a clue, the requirements would be set such that the need to insure depositors would scarcely arise – particularly since one justifiable (perhaps) role of a central bank would be to provide its members with liquidity in times of financial stress (liquidity stresses that is). Rather than taxing banks by contributing to an FDIC insurance fund and slapping big “Your Deposits are Insured up to $250,000” sign on every teller window, wouldn’t the same “confidence fairy” exist by slapping a sign that reads, “The Fed will always be ready to print more dollars in case you are worried that we don’t have ’em in the vault behind us?” And what does the standard answer to my question tell you about what we think of the job the Fed does?

Similarly, I would argue that we don’t both need unions and federal government workplace safety and discrimination rules. Sure, you are free to join a union, as I argue that doing so can reduce the transactions costs of negotiating various aspects of job conditions as well as perhaps making it easier to communicate with employers (is there evidence for this?). But if the reason to be in a union is because you feel like you need workplace protections, then tell me again why we have OSHA and other labor market laws explicitly instituted to protect workers? Do you wish to argue that we still need unions because our workplace safety and discrimination rules are ineffective?

I’ll believe we are living in a climate of deregulation when I see thoughtful proposals to do away with FDIC insurance or bank reserve requirements as well as the elimination of workplace safety rules so long as we have institutions in place to do what those sorts of things are supposed to do. I’d bet cold hard cash that I’ll never live to see that day.

Finally, consider the standard case for justifying union formation: that firms have too much power in the employer-employee relationship. (I am not really objecting to union formation per se here, but rather laws that do not permit folks to dissociate from a union if their fellow workers decide that this is what they would like to do – why should I, for example, be forced to join a Professor’s union just because 51% of my fellow faculty members who decide to vote on such a thing choose to form a union?) This might seem to be a reasonable position to take in a relatively uncompetitive world. But is that the world we live in today? Competition among firms, given the rapid pace of globalization, is higher, not lower, today than in the past. Competition for talented workers is higher, not lower, today than in the past – just ask any company if they can find “a few good men” and hear what they have to say. Yet union supporters today seem to be arguing that unionization is more important today than ever before. That seems odd to me – when there is no competition you need unions to protect workers. When there is vigorous competition you need unions to protect people. What gives?

2 Responses to “You Don’t Need Both”

  1. chuck martel says:

    If safety in the workplace is the issue, neither unions nor OSHA are relevant, insurance companies call the shots.

  2. To finance the Civil War, Salmon P. Chase created the National Bank system. (First National Bank of Hometown, Hometown National Bank, etc., etc., are the result of this.) To be a national bank, the owners had to deposit at least $25,000 in gold with the US Treasury for which they would receive interest-bearing Treasury Bonds against which they could create banknotes up to 90% of the face value. Some banks still failed. Sen. Aldrich Nelson and others launched the effort to create the Federal Reserve as a result of the “Panic of 1907.” However, again, the nation was on the gold standard when the failures swept through the financial networks. And, more to the point, recovery occured without the central bank or federal insurance. As with failure, recovery came from several factors in concert, such as infusions from J. P. Morgan, and the creation of emergency “Clearinghouse Scrip” currency.

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