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Monday, August 19, 2013

The Polarized Economic Policy Debate: All Markets Fail, Some More Than Others

I make this point a lot, but it's worth emphasizing again given how polarized the debate over public policy has become. Here's the problem I see. I, and others like me, are more than willing to say that most of the time, markets work well and we ought to leave them alone. Government should stay out of the way. The right, of course, has no disagreement with that. But we on the left also recognize that sometimes markets can fail -- in fact all markets fail to some degree when measured against the requirements for the pure competitive markets found in textbooks -- and when those failures are severe enough, government intervention can make them work better, i.e. force them closer to the competitive ideal (or, when markets fail altogether, as with public goods, the government supplies them itself).

I could understand if the right wanted to debate where the line is between when we should intervene and when we shouldn't. For example, they likely view government as less effective than I do and hence would intervene only in the most severe cases of market failure. But to simply say that government should never intervene in any case at all gets us nowhere. As Jared Bernstein points out below, there is no advanced economy in which government doesn't play some role in shaping economic outcomes. I would love to be able to debate where the line between intervening, or not, ought to be, but that's a debate that doesn't seem possible right now due to the polarized, uncompromising position that one side has taken.

Here's Jared Bernstein:

Breaking Out of a Cramped Economic Policy Debate, by Jared Bernstein: The Justice Department’s decision to oppose the merger of American and US Airways caught a lot of people by surprise.  From the cruising altitude of 30,000 feet, it doesn’t look much different from previous airline mergers, so it’s not unreasonable for onlookers to wonder why this particular merger threatens consumers that much more than the others.
There are, in fact, some salient differences...
But what I found most interesting about this episode is what it says about the ways in which we shape economic outcomes.  This merger dust-up is a microcosm worthy of attention in an era wherein the debate over the scope of government intervention in the economy is confined, misleading, and uninformed.  The fact is we can and must shape outcomes—we do it all the time.  But because this fact is discomforting to the mythological ideology of “free markets,” we’re often in denial in ways that skew the debate and severely limit the scope of our policies.
If you dropped in from Mars and turned on cable news (though that in itself might lead you to hightail it back to Mars), you’d probably think that things break down like this.  On one side are those who want the government, the Federal Reserve, the Justice Department, the Environmental Protection Agency, Fannie and Freddie, Obamacare and all the rest of them to just get out of the picture and let the “free market” solve whatever problems those agencies and their interventions are misguidedly trying to fix.
On the other side are the interventionists, the tinkerers, the Bernankes and Obamas with their stimulus, their jobs programs, social insurance, safety nets, fuel standards, and so on, grabbing the “free hand” by the wrist and trying to move it this way and that.
Of course, reality is more complicated... Whether it’s Tea Partiers opposing Medicare cuts, politicians protecting tax-advantaged investment income, or the Justice Department intervening in such a way as to preserve market competition, you’d be very hard pressed to draw neat lines between those who seek more or less intervention.  When you drill down, it’s usually more a matter of who wins and who loses. ...
It’s a waste of time to argue about whether public policy is going to play a role in shaping market outcomes, from health care to airlines to stocks and bonds.  No advanced economies exist wherein policy does not play that role.  Adam Smith himself recognized that sometimes the “invisible hand” is all thumbs, and wrote incisively about the importance of distributional outcomes and regulating commerce (he might well have signed on with the Justice Department in opposition to the airline merger).
The question is whether the interventions will promote fairness, opportunity, and growth.  Too often, our political economy debate tries to preclude these choices in the defense of some pristine vision of unfettered markets.  We’re told we have to choose between growth and equity, innovation or regulation, factory jobs or globalization, budget deficits or private investment.  That’s all a ruse, and it has led to the cramped politics and limited policy debate in which we’re stuck today.  We can and must choose a better path.

    Posted by on Monday, August 19, 2013 at 12:25 PM in Economics, Market Failure | Permalink  Comments (37)


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