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Wednesday, May 8, 2019

Kleinbard: The Economic Question Voters Should Ask Themselves

AtlanticThe Atlantic: The Economic Question Voters Should Ask Themselves, by Edward Kleinbard (USC):

The 2020 presidential candidates will argue strenuously about important economic questions relevant to all Americans. These include wealth and income inequality, the design of health-care insurance, systems for financing higher education, and the relative tax burdens imposed on capital and labor. Even the Green New Deal is at bottom a proposed solution to an economic problem—that of “externalities,” where market prices do not reflect the full cost of human actions, in this case the costs of burning fossil fuels on the environment and society.

Many journalists, campaign operatives, and activists lately have framed debates around these issues as a struggle between “capitalism” and “socialism.” But these words have no meaning for most voters. We are not a nation of political theorists or economists; we are ahistorical and poorly read. We can no more discuss the views of Karl Marx and their continued relevance today than we can chat about quantum mechanics with a kangaroo.

Voters need a simple organizing principle for evaluating all the economic policy proposals, arguments, and counterarguments that blossom at campaign time. In this way, they might see past some of the rhetorical tricks and misleading phrases to understand better what they really want from the political process.

I propose that voters should ask themselves a simple question: Are markets friendly? Do they exist today to serve society’s best interests, or are they currently a hostile force? If voters believe the latter—as, I’ll explain, I think they should—they ought to support candidates who back more government intervention, and vice versa.

Are markets friendly? riffs on Albert Einstein’s famous (but apparently apocryphal) observation that to him the only important question was, Is the universe friendly? His question addressed our relationship to cosmic forces beyond our control; mine addresses our relationship to economic forces that seem beyond our control but that, in fact, are within our powers to alter.

My question will cause economists to choke on their cereal, because a “friendly” market is not an economic term. But it does work, I think, as a device to help organize voters’ thoughts along margins that otherwise are too abstract and too overwhelming to comprehend. ...

Individual markets may be competitive, but are American markets taken as a whole complete? That is to say, can reasonable economic desires find outlet in markets open to all under fair terms of participation? If the focus is on mobile phones or table lamps, the answer obviously is yes. But what about the local labor market, or private markets for health insurance or a college education? ...

If voters set aside charged and unfocused terms such as capitalism and socialism, and simply recognize that private markets are necessarily incomplete in areas that directly touch their welfare, they may then appreciate the need for greater involvement by the state in the form of public investment or insurance. Recognizing the importance of addressing otherwise incomplete markets also puts tax policy in the right context. The United States needs higher and more progressive taxes not simply to cut the rich down to size, but to fund public programs to round out markets that otherwise would be incomplete.

Too much energy is wasted on both the left and the right obsessing over tax policy in the abstract, as if the business of government were just to collect taxes and then set all those dollars on fire. It’s what government does with the money that’s important. By examining the conditions required to establish markets that are friendly to all Americans, the focus shifts to the positive side of things—those policies that would enable citizens to obtain affordable child care, health insurance, and higher education, by way of example. Genuine equality of opportunity requires these sorts of public investments. (In turn, these investments must be funded through higher taxes. The surprising result is both faster growth and more equal sharing of that growth.)

Competitive and complete markets can exist only in cooperation with government. Markets are creatures of the state, not laws of nature. Policy makers design rules that govern markets to make them work better for citizens, and thereby to offer citizens the opportunity to lead meaningful and productive lives. Pounding the table to eliminate “job-killing red tape” or claiming that everything would be great if only government got out of the way is like arguing that baseball would be better without the infield-fly rule. That rule was created to make the game work better, and the same is true of many of the rules that drive markets.

Friendly markets—markets bounded by rules and complemented by government where private markets are incomplete—advance the welfare of citizens, but will be unkind to businesses that cannot keep up in a world of fierce competition. That is unavoidable, given that in the American system there is no central command to allocate investment and production.

There’s a pervasive and pernicious myth that private markets, if left to their own devices, solve all problems. Adherents appeal to fuzzy memes such as “free enterprise” and “capitalism” to urge voters to drive government entirely out of markets. They still maintain that what’s good for General Motors (or to update, Apple) is good for America. And they see markets as largely complete and gaps as inconsequential. (After all, one can always find an example of the kid from a hardscrabble background who has graduated from Harvard, so that must prove that the market for Harvard educations is open to all.) Inequality becomes a feature, not a bug—or at worst, a necessary side effect.

America has come as close as a developed country can to instantiating that myth, and the results are obvious: a dysfunctional health-care system that costs 50 percent more as a percentage of GDP than the next most profligate country; rising market concentration and corporate profits; runaway growth in top-end inequality; job insecurity and poor job quality; and many other ills. Voters can make better political decisions, and encourage a better direction for the country, by asking whether proposed policies will lead to business-friendly markets, or instead to markets that are authentically friendly to their own values and aspirations.

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And here I thought Obama's government intervention cured our healthcare problems. How stupid I was not to realize what we really need is more (always more) government involvement to make the market "friendlier."

Posted by: R | May 9, 2019 5:07:06 AM

Friendly? Oh boy. Sorry for all you Trump haters, but the key statistic come November is something called JOBS. If unemployment rate stays low, Trump will win regardless of the number of times he sticks his foot in his mouth.

But I have a suggestion for you. Why not focus instead on making the law more friendly? I don't know if you have ever been party to a lawsuit, but they are mean, nasty, vile, and expensive. How about instead if everybody sat in a circle and passed the peace pipe around? That would be a lot more friendly.

Posted by: Dale Spradling | May 9, 2019 7:58:34 AM

What risible rubbish. I guess knocking down self-created straw men is what "scholars" do these days. I get around quite a bit, and have never met anyone who thinks private markets "solve all problems." After all, markets work perfectly only in the unicorn world of perfect rational behavior and perfect information. Indeed, only a few crackpots advocate against all regulation. The key is to direct and moderate regulation in ways that ensure that it does more good than harm, which is a pretty tough thing to do. Kleinbard's Harvard example serves up a delicious case in point. When I went to college, a kid from the south side of Chicago (meet yours truly) could pay for his own college by working summers, weekends, and some evenings. Loans and grants were tough to get, but they really weren't necessary if one was hardworking and ambitious. Private colleges presented a tougher challenge than state schools of course, but even those challenges were navigable if one was willing to take a year off to build a war chest or start out at a community college. Today the price of higher education is so high that kids coming from circumstances similar to mine must accept an unconscionable amount of credit, which of course is readily available. But the easy credit is not a happy coincidence; it's a tragic one. It is Kleinbard's "intellectual" ancestors who interfered in the higher education marketplace by insisting that capital be made easily available to all students, allowing colleges to bid up prices at a staggering pace. There are no villains in this story. Colleges have always competed for students and faculty by upgrading amenities creating pricing pressure, but for the past four decades that competition has been undisciplined by normal market constraints because, well, free money! The blame rests with policy-makers who created this environment with completely honorable intentions. They are not guilty of desiring the noxious outcome they accidentally created, of course, but they are not innocent either. Good intentions is not a substitute for critical thinking, and understanding and respecting how markets operate is an essential component of that.

Posted by: Mike Petrik | May 9, 2019 2:08:16 PM