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Tuesday, November 29, 2005

Liberals, Government Intervention, and Competitive Capitalism

The debate among those on the left noted in this commentary appears often in the comments here:

Labor's Lost Story, by E. J. Dionne Jr., Washington Post: ...General Motors' layoffs of 30,000 workers... [has] become a new litmus test in American politics. Almost everybody right of center sees the job losses as inevitable, the result of the American auto industry's failure to meet foreign competition and the "excessively" generous wages, health benefits and, especially, retirement programs... The believers in inevitability inevitably cite the economist Joseph Schumpeter to the effect that ... It is capitalism's gift for "creative destruction," ... that guaranteed new consumer goods, new methods of production and new forms of organization.

A different story is told left of center, though ... progressives can't quite agree on a single narrative. The left is united in talking about rising health care costs and the fact that most of our foreign competitors have government-run health insurance systems that take the burden of health care off employers. ... Critics of globalization tell an additional story of how free trade is sending many of our best-paying blue-collar jobs offshore. ... The contrast between these two accounts explains why economic conservatives currently hold the upper hand in America's political debate. The conservatives have a single, coherent story and stick to it: Economic change is good for everyone...

The left's narrative is less compelling not only because there is no single story but also because few on the left attack the current system with the same gusto the right brings to defending it. ... Much of the left accepts a certain amount of creative destruction because, in Margaret Thatcher's famous phrase, there is no alternative. But this muddle reflects a default on parts of the left ... [S]o many Democrats fear that they might sound like -- God forbid! -- socialists, they are unwilling to challenge the right's core story. Capitalism, all by itself, would never have achieved the rising living standards that were the pride of the United States in [the] 1950s and still are today. ... As medical costs rise, more Americans will need government help. ... Yes, that's "socialized medicine," just like Medicare. But don't tell anyone. The phrase plays terribly in focus groups.

For 60 years New Dealers and social democrats, liberals and progressives, turned Schumpeter on his head. They insisted that few would embrace capitalism's innovations if the system's tendency toward creative destruction was not balanced by public innovations to spread the bounty and protect millions from being injured by change. It's a compelling story. ... Too bad it isn't told very often anymore.

Here are the rules I try and play by. I advocate government intervention only when I can justify it through economics, otherwise I believe in the market's ability to do what we expect it to do, deliver goods as cheap as possible in the correct quantities. My default is a laissez faire approach. I don't advocate government sponsored healthcare and social insurance because I like bloated government, I do it because I believe these are instances where the private market cannot, without regulation or intervention, provide the proper quantities of goods and services at the lowest possible price. I don't think the government should be more active in preventing monopoly power because I dislike big business, I say that because I want a competitive marketplace. I don't want to hug trees of infinite utility, I want market based solutions to environmental problems whenever possible. Simple market principles can do wonders for recycling and conservation programs. I want efficient taxes that minimize distortions. I believe in equal marginal sacrifice to fund government, but that is a normative choice, not something derived from economics. Government should not be any larger than necessary. I don't advocate redistribution of income for the sake of "equity," but I do believe the government should ensure that everyone has an equal chance in life, not an equal outcome but an equal start, and that may involve redistributive policies.

It's quite possible to be a liberal and not abandon economics and not abandon capitalism in particular. We can argue over whether there truly is market failure in this instance or that, I will admit to seeing market failure more often than those on the right. We can debate contestable markets and whether it applies to a particular market, we can debate price cap versus rate of return regulation (no contest, price caps win, but what type of price cap is best?) and how best to make markets competitive (how do you get public utility regulators to understand you have to allow profit to attract entry?), we can debate the economics until the Gateway cows come home. But don't accuse me of being a socialist just because I believe the government is, in its heart of hearts, made up of good people who want to help, because I believe there are times when government is the solution rather than the problem. I don't want to "sound like -- God forbid! -- socialists," the economics of capitalism is the proper battleground for me.

    Posted by on Tuesday, November 29, 2005 at 01:28 AM in Income Distribution, Market Failure, Policy, Politics, Regulation | Permalink  TrackBack (1)  Comments (51)


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