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What's the Difference?

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At first blush, the 2012 presidential race is about the role of the state in taming markets and powerful corporations. Mitt Romney and Paul Ryan argue that we need to unleash the power of markets and this can be achieved only by getting the state out of the way. Barack Obama, on the other hand, has articulated a vision in which the state needs to regulate markets, for example in finance and health care.

Differing visions on financial markets appear to exemplify this debate. Republicans would like less regulation because regulations increase costs by creating inefficiencies and create a competitive disadvantage for Wall Street against other financial centers. Democrats would like more regulation so that the sort of risk taking that led to the financial crisis doesn't happen again, and remuneration on Wall Street makes chief executives and traders take a longer-term perspective and act more prudently.

But appearances can be deceptive. Though the policies advocated by Republicans and Democrats are diametrically opposed on the surface, their implications and their constituencies may be much more similar.

The root cause of the problems in financial markets wasn't lack of regulation per se. There were many regulations on the books, and large banks such as Bank of America and Citibank and investment banks such as Goldman Sachs, Lehman and Morgan Stanley weren't supposed to take the risks they did. And yet they were able to do so because regulation wasn't effective. Regulation deals with the symptoms not the root causes of the problem, the power of large banks, which has if anything increased since the crisis due to consolidation in the industry. If large banks remain economically and politically oversized and powerful, new regulations are likely to be largely ineffective. They will innovate around the regulations, which will only be enforced lightly, by understaffed, underpaid and often easy-to-capture regulators. Moreover, many such regulations, including much of the Dodd-Frank Act, will increase costs more for small banks, creating a competitive advantage for large banks in the industry. So regulation by itself, with no change in the underlying politics and economics of the problem, will not transform how the financial markets work, and will not change the bottom line. Wall Street will keep on taking risks and making a lot of money -- at least for the executives and the traders, even if not always for its shareholders.

On health care, Democrats and Republicans are at loggerheads over the Affordable Care Act, which has certainly increased regulation in the health care market. Republicans would like to reduce regulations so that competition between insurance companies, pharmaceutical companies, hospitals and doctors create greater efficiency. But as in finance, if the root cause of the problem is that insurance and pharmaceutical companies, hospitals and doctors have too much power relative to consumers, this sort of regulation may not achieve much.

In both cases, why government action remains at the level of superficial regulation is easy to understand. Whether Democrat or Republican, any administration feels that it needs the support of key players -- in the case of finance, the large bankers; in the case of health care, insurance and pharmaceutical companies, hospitals and doctors. Both parties also need money, huge amounts of money, to compete in the election, which is often provided by the very players that are economically and politically powerful. So consummate insiders from both parties (and the non-insiders are nowhere to be seen) cozy up to the same groups, and radical policies, such as breaking up the largest banks or single-payer health insurance, remain off the agenda.

If regulation with an unchanged distribution of economic and political power in society is likely to be ineffective, then the debate between Republicans and Democrats is not about the fundamental role of the state in the economy, but the form of the mutually beneficial relationships between politicians and big business. And if so, though we will hear both parties talk plenty about increasing efficiency, creating a fairer society and helping the middle class, in the end this will be just that -- talk.

And if Romney and Obama do not offer real choice, perhaps you should look elsewhere. Roseanne Barr is also running for president...

Daron Acemoglu and James A. Robinson are the co-authors of Why Nations Fail: The Origins of Power, Prosperity, and Poverty.

This post is part of the HuffPost Shadow Conventions 2012, a series spotlighting three issues that are not being discussed at the national GOP and Democratic conventions: The Drug War, Poverty in America, and Money in Politics.

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