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Tuesday, August 12, 2008

Making Markets Work for Everyone

Greg Anrig via Brad DeLong:

Greg Anrig on the GOP, by Brad DeLong: He smells a wind from out of the west:

McCain's Problem Isn't His Tactics. It's GOP Ideas.: At long last, the conservative juggernaut is cracking up. From the Reagan era until late 2005 or so, conservatives crushed progressives like me in debates as reliably as the Harlem Globetrotters owned the Washington Generals. The right would eloquently praise the virtues of free markets and the magic of the invisible hand. We would respond by stammering about the importance of regulation and a mixed economy, knowing even as the words came out that our audience was becoming bored.

Conservatives would get knowing laughs by mocking bureaucrats. We would drone on about how everyone can benefit from the experience and expertise of able civil servants. ... They offered tax cuts. We talked amorphously about taxes as the price of a civilized society. ...

But now, seemingly all of a sudden, conservatives are the ones who are tongue-tied, as demonstrated by Sen. John McCain's limping, message-free presidential campaign. McCain's ongoing difficulties in exciting voters aren't just a tactical problem; his woes stem largely from his long-standing adherence to a set of ideas that simply haven't worked in practice. The belief system and finely crafted policy pitches that enabled the right to dominate the war of ideas for the past 30 years have produced a relentless succession of governing failures, from Iraq to Katrina to the economy to the environment.

Largely as a consequence, the public's attitude toward government -- Ronald Reagan's bête noire -- has shifted. A recent Wall Street Journal/NBC News poll found that, by a 53-to-42 percent margin, Americans want government to "do more to solve problems"; a dozen years ago, respondents opposed government action by 2 to 1. Meanwhile, Republican constituency groups' long-standing determination to put aside their often significant differences and band together to support GOP candidates is fracturing: The libertarian darling Ron Paul and the evangelical Christian leader James C. Dobson are among the Republican bigwigs who haven't so far endorsed McCain. ...

As I listen to leading voices and thinkers on the right pondering the condition of their ideology, it is increasingly clear to me that they face a fundamental dilemma -- one that cannot be resolved anytime soon and that might well leave the conservative movement out to pasture for as long as we progressives have been powerlessly chewing grass. That choice is whether to stick with rhetoric and policies wedded to free markets, limited government and bellicose unilateralism, or to endorse a more robust role for the public sector at home while relying more on diplomacy and international institutions abroad. Either way, conservative Republicans seem destined to have a much harder time winning elections for the foreseeable future. Just ask McCain how much fun he's having.

The single theme that most animated the modern conservative movement was the conviction that government was the problem and market forces the solution. It was a simple, elegant, politically attractive idea, and the right applied it to virtually every major domestic challenge -- retirement security, health care, education, jobs, the environment and so on. Whatever the issue, conservatives proposed substituting market forces for government -- pushing the bureaucrats aside and letting private-sector competition work to everyone's benefit.

So they advocated creating health savings accounts, handing out school vouchers, privatizing Social Security, shifting government functions to private contractors, and curtailing regulations on public health, safety, the environment and more. And, of course, they pushed to cut taxes to further weaken the public sector by "starving the beast." President Bush has followed this playbook more closely than any previous president, including Reagan, notwithstanding today's desperate efforts by the right to distance itself from the deeply unpopular chief executive.

But in practice, those ideas have all failed to deliver...

Conservatives will contest that "President Bush has followed this playbook more closely than ... Reagan." They'll try to argue that the problem is the Bush administration, not conservative ideas. In fact, liberals make this argument too:

[T]he free-market, supply-side crowd... had behind them the authority of a vast academic establishment, ranging from Friedrich von Hayek to Milton Friedman to such contemporaries as Gary Becker and Robert Mundell... The academic economics of the 1970s lined up behind the right-wing politics of the 1980s for a reason. Reaganomics had a logic. ... Deregulation, above all, would substitute the invisible hand of the "efficient market" for the dead hand of bureaucracy.

The judicial coup of December 2000 that installed Bush and Cheney brought back some of Reagan's men and his most extreme policies - tax cuts for the wealthy, big increases in military spending, aggressive deregulation. But it didn't bring back the ideas. Instead, it became clear that Bush and Cheney had no real ideas, no larger public justification. They cut taxes to enrich their supporters. ... They were willing to have the government spend like a drunken sailor in 2003/4 to boost the economy before the election. ...

It was very interesting to me that some of the first to sense this loss of public purpose were the very conservatives who had swept in with Reagan. The nemeses of my youth, people like Bruce Bartlett, Paul Craig Roberts, the late Jude Wanniski, went over into hard opposition..., at the core they felt that Bush had no conservative convictions.

The free market rhetoric still has power even when it offers false hopes. In previous campaigns we heard how tax cuts would pay for themselves. Cut taxes and get the government out of the way, the argument goes, and output will grow so much that taxes will actually rise. That, of course, didn't happen. This campaign, it's offshore drilling. Offshore drilling won't lower oil prices, that's a false hope, yet the cry that government imposed environmental restrictions are causing higher prices has had some success. Let the market work, we hear, and it will solve the problem. There are other of signs that politicians are not yet ready to abandon the free-market message. When it comes to health care reform, the Obama campaign fears the word mandates for a reason, and prefers to push a plan that has "many private health insurance options." Talk of raising taxes and increasing the size of government is avoided, and Democrats step very lightly around free trade. The idea that the market works still has resonance.

So my instinct is different. Markets do what we expect them to do - they allocate resources efficiently - when they operate under the proper conditions. Those conditions include lack of market power among market participants, the lack of political influence, having the proper regulatory structure in place, and so on. Using anti-government ideology, conservatives have undermined rather than supported the market system, and that's the important message. Take deregulation as an example. There were certainly places where government overreached, and removing regulations in those cases was needed, but thoughtlessly stripping away any rule or regulation pertaining to business that you encounter is not the way to create a market system that functions optimally.

I want Democrats to make it clear that we aren't opposed to markets, not at all, and to say it forcefully. In fact, we like markets so much we want to fix the ones that are broken from so many years of neglect by Republican administrations. We want to make markets work for everyone, not just a few at the very top who are able to work the system to their advantage. We have a pretty good idea of what it takes for markets to function well, and it requires active government involvement to create the conditions and supporting institutions for markets to flourish. That type of government oversight has been absent under Republican administrations - see the financial meltdown - and it's up to Democrats to step up and fill the void.

The confusion here is simple, I think. Free markets - where free simply means minimal government involvement - are not necessarily the same as competitive markets. There is nothing that says what many interpret as freeing markets - lifting all government restrictions - will give us competitive markets, not at all. Government regulation (as well as laws, social norms, etc.) is often necessary to help markets approach competitive ideals. Environmental restrictions that force producers to internalize all costs of production make markets work better, not worse. Rules that require full disclosure or that impose accounting standards help to prevent asymmetric information and improve market outcomes. Breaking up firms that are too large prevents exploitation of monopoly power (or prevents them from becoming "too large to fail") which can distort resource flows and distort the distribution of income. Making sure that labor negotiations between workers and firms are on an equal footing doesn't move markets away from an optimal outcome, just the opposite, it helps to move us toward the efficient, competitive ideal, and it helps to ensure that labor is rewarded according to its productivity (unlike in recent years where real wages have lagged behind). There is example after example where government involvement of some sort helps to ensure markets work better by making sure they are as competitive as possible.

I don't think it's necessary to give up on the idea of the market system as the best means of allocating resources in most cases. But markets can and do fail and it's up to the government to provide the foundation markets need to perform well (or, in cases where market failures are substantial such as in health care and social security, to step in and take a more active role). That's what has been missing under Republican leadership, the understanding of how to provide the foundation needed for markets to work for everyone. Democrats need to stress how that will change under their leadership, how they will improve the ability of the economy to function in a way that serves the interests of all participants in the economy rather than favoring some groups over others.

    Posted by on Tuesday, August 12, 2008 at 03:24 AM in Economics, Politics | Permalink  TrackBack (0)  Comments (36)


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