Tag Archives: markets

It Depends And It’s More Complicated Than That

As I like to tell my students, I consider my Law and Policy class effective if, after taking it, they use two phrases more frequently than they did before they enrolled: “it depends” and “it’s more complicated than that.”

That measure of effectiveness would undoubtedly be incomprehensible to the voters who  installed as President of the United States a man who had neither experience with nor even a rudimentary understanding of government. Evidently, people who would agree that doctors need to attend medical school and serve a residency in order to treat the complexities of the human body think managing an organizational behemoth responsible for the common lives of over 350 million people can be handled by anyone able to fog a mirror and regurgitate talking points.

Brink Lindsey and Steven Teles disabuse readers of that idiocy in the book they recently co-authored: “The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality.” In it, they deconstruct the mindless mantra of “deregulation.”

When Republicans look at what they’ve gotten out of their current moment of unified government, they can point to cutting corporate taxes, some judicial appointments and … not much else. Beyond that, they claim that they’ve teed up the economy for explosive growth through the magic of “deregulation.” But deregulation is a term that should be banned from the nation’s policy lexicon, mixing as it does equal parts wholesome and foul — in this administration, almost exclusively foul.

As they proceed to explain, whether rolling back a given regulation will be helpful or damaging depends on the nature  and purpose of the regulation. It’s more complicated–much more complicated– than the one-size-fits-all “get government out of the way” zealotry that has increasingly characterized the GOP.

The wholesome justification for deregulation arises when government uses its power in ways that gum up the dynamic power of markets. In the long run, our nation’s wealth and the opportunity it provides for improving quality of life depend on the forces of creative destruction. In competitive, open markets, incumbent actors cannot prevent challenges from more nimble competitors, armed with new products or more efficient ways of organizing the production process.

The authors identify a number of regulations that do “gum up” markets, and agree that eliminating or relaxing them would be healthy for the economy and likely to reduce the growing gap between the rich and the rest.

They also note that those aren’t the regulations being eviscerated.

Unfortunately, this is not the kind of regulation that the Trump administration has been attacking. Instead, it has been sharpening its knives for precisely the kinds of regulation that, far from distorting markets, help to improve them. In particular, regulation is often necessary to a properly functioning market when, in its absence, businesses can make a profit by pushing costs onto others, in effect forcing others to subsidize their bottom line. In two areas, the environment and finance, these are exactly the sorts of market-improving regulation that the administration has put in its cross hairs, with the effect of increasing profits via freeloading.

In an article in the New York Times, Lindsey and Teles make the point that there is a critical difference between regulations that operate to protect dominant business interests and regulations that legitimately, if often imperfectly, address real problems of market failure.

Effective deregulation requires knowing the difference.

For that matter, effective government requires public managers who respect evidence, are committed to the common good, and understand how our complicated government works. The looters who are currently in control of all the levers of the state don’t come close to meeting those criteria.

Yep….

In the wake of November’s election, my biggest concern was the prospect of Donald Trump in charge of a unified government: with a Republican House and Senate, I was sure we would see legislation canceling progress on the environment, reversing rights for women, gay citizens and immigrants, and eviscerating public education, among other nightmares.

Jennifer Rubin, a conservative columnist for the Washington Post, recently explained why we have yet to see that legislation. Her column was titled “Here’s why, even with control of everything, the GOP can’t govern.” She began with a quote from the Wall Street Journal:

Many popular postelection wagers took a hit last month after Republicans failed to repeal and replace the Affordable Care Act, which highlighted the difficulties they could face advancing new legislation even while holding the White House and both houses of Congress.

She went on to describe the current situation.

If one had any doubt, this week’s events — a half-baked tax proposal that would not pass one let alone two houses, another failed effort at Trumpcare, White House bluffs and retreats on the budget — should have disabused observers of the notion that Trump’s agenda would sail through Congress…

Trump cannot manage to devise attractive legislation or get down in the weeds of negotiation, while House Speaker Paul Ryan (R-Wis.) seems willing to accommodate whatever group is currently rocking the boat, regardless of the likelihood of success. Neither Ryan nor Trump can lead a successful legislative effort. As a result, members of Congress figure there is little reason to stick their necks out for either one. “Members of Congress have watched with horror as Trump thrashed about in Washington with little predictability, guided by top aides with little experience in the trenches of government,” Time reports. “Staffers with decades of Hill experience find themselves sidelined by political neophytes who think barking orders can get Congress to act. More than once, White House officials have told Paul Ryan that his role as Speaker may be in jeopardy if he does not do more to help Trump.”

Rubin notes that –given his priorities–Trump’s inability to get things done is a gift; gridlock looks pretty good when balanced against this administration’s goals.

This is not to say we don’t have substantial problems or need competent leadership. However, this president and this Congress have not a clue how to proceed. They would potentially do much more harm than good. They are prisoners of extreme ideology, unrealistic expectations and their own incompetence.

Wonkblog recently came to a similar conclusion. In a column tracing the reasons that  financial markets aren’t betting on a big Trump stimulus anymore,  Matt O’Brian wrote

But a funny thing happened on the way to Trump’s making great deals. It turns out that everything is more complicated than anyone named Donald Trump knew. It isn’t easy to get Republicans to agree on a health-care plan when some of them think the problem with Obamacare is everything, and others think it’s just the name. Or to get the whole party to agree on which tax loopholes to close to pay for all their tax cuts. The result, according to Trump, is that health-care reform is always a week away, and tax reform, always two weeks.

In the meantime, though, the economy is still chugging along at the same 2 percent pace it has been the whole recovery. So when you add it all up — a government that’s doing nothing today, that looks as if it will be doing nothing tomorrow, and an economy that’s doing nothing different from what it has been the last decade — there’s no reason to expect the dollar to go up anymore. And it hasn’t. It has given back most of its post-election gains to now only be up 1 percent over that time.

I don’t know about you, but I’m gratified that these clowns seem unable to learn.

The Problem Isn’t Capitalism

‘Tis the season to bemoan crass capitalism. But we should think before joining that chorus.

Markets are wonderful things; as Adam Smith explained many years ago, the “invisible hand” channels self-interest toward socially desirable ends. Market competition has given us better goods at lower prices, and has demonstrably been a “rising tide” lifting many boats.

Why, then, is America’s capitalist economy generating so much criticism? What is the cause of the country’s growing and very worrisome inequality?

Two reasons are pretty apparent.

First, the system we currently have in the U.S. is not market capitalism. It is corporatism. Corporatism has been defined as the organization of society by major interest groups, specifically corporations. It isn’t exactly a secret that the last thing many of our captains of industry want is genuine competition. The legions of lobbyists sent to Washington and state capitals are not arguing for open markets; they are vying for competitive advantages and taxpayer subsidies.

The second reason is less obvious, but no less consequential. Markets don’t work for everything.

In the areas of the economy where market competition is appropriate—in the production of consumer goods and services, most obviously—markets operate as Smith’s theory suggests. But as every student of economics learns, there are areas where competition is unworkable.

Historically, for example, America has regulated utilities, and (at least since Teddy Roosevelt) tried to prevent domination of a market through monopolistic practices. (As technologies and markets change over time, these categories may shift, and it isn’t always clear that our governing institutions keep pace, but that is a subject for another day.)

What doesn’t change, however, is a foundational premise: In order for a market to function, there must be a willing buyer and a willing seller, both of whom are in possession of the necessary relevant information. When there is a significant and unavoidable asymmetry of knowledge or information, a true market cannot exist.

Health care is the poster child for that asymmetry. Not only does the consumer lack the information and expertise necessary to “shop” for a seller/provider, the realities of illness make it likely that she will lack the time needed to evaluate her options. Add to that the way in which the health insurance industry has developed, with “in network” and “out of network” providers, and you don’t have to be an economist to recognize that market principles are simply inapplicable.

Most Western nations came to that conclusion many years ago, and most have national health care systems. Here in the U.S., even the modest movement toward government-insured access to health insurance has met with hysterical resistance—and lots of rhetoric about creeping socialism and the superiority of markets.

The immorality of this refusal to make important distinctions was most recently highlighted by the actions of one Martin Shkreli, who bought the rights to a drug and raised its price 5500%. As several commentators noted, America is the only developed nation that lets drug-makers set their own prices — maximizing profits the same way that sellers of chairs, mugs, shoes, or any other seller of manufactured goods would.

Shkreli’s behavior underscores the irrationality—and yes, the immorality—of America’s healthcare system, where corporations set our public policies and insist upon market principles in an area where, by definition, genuine markets cannot function.

The moral of this story: don’t blame capitalism. This isn’t it.

 

 

 

Necessary Distinctions

I’ve spent a fair amount of time on this blog criticizing corporate interests–Big Oil, the Kochs, all the mega-corporations evading taxes by any means arguably lawful, and others of that ilk. But a recent story reminded me that markets often exert powerful pressure for good, and not just because competition tends to drive down prices and make goods and services affordable. The vast majority of businesses operate in competitive markets that reward good behavior as well as low prices.

A good example is the fight for equal rights for GLBT citizens. Business has been in the forefront of that fight.

The link in the first paragraph is to an article about Chik-fil-A, which is furiously backpedaling from the anti-gay remarks made last year by its founder and CEO. While it would be nice if that retreat was the result of some sort of moral epiphany, the truth is that it has been forced by the realities of the market. (As one consultant recently wrote,  “There are few more treacherous actions a CEO can take than to make derogatory comments about gay men and lesbians or to be publicly exposed for funding anti-gay causes.”)

Chick-fil-A’s socially conservative agenda, which formerly led the company to donate millions to charitable groups opposed to gay marriage, has been tempered. This, just as the company aims to quickly expand into Chicago, New York and Los Angeles. Southern hospitality must give way to urban reality as the 1,800 store chain moves to compete with big city success stories like McDonald’s, Panera Bread and Chipotle.

Homophobia, racism, anti-Semetism and the like are bad for business. That lesson has been learned by hundreds of thousands of entrepreneurs, middle-managers and HR folks–and along the way, many of them have become true believers in the value of valuing diversity. Their advocacy, in turn, has moved the entire culture in a more inclusive direction.

For every asshole who is buying politicians and squirreling profits away in the Cayman Islands, there are twenty companies genuinely making America a better place–by treating GLBT people fairly, by becoming more environmentally conscious, by adopting local schools or supporting civic and charitable causes.

We need to rein in the bad actors, but we also need to appreciate the good guys. Even the guys who are only being good because that’s what the market rewards.

Job Creators or a Tale of Two Big Boxes

There are job creators, and then there are job creators.

Debates about economic policies tend to center on concerns about job creation. Corporate CEOs often argue that raising tax rates or the minimum wage will suppress hiring. (I’ve often wondered why we can’t just offer a tax credit for each job created, rather than keeping rates low and hoping that will translate into additional employment. But I digress.)

The question that is too seldom addressed is: what kind of jobs do we want to incentivize? Because all jobs are not equal–not from the standpoint of the employee, and not from the standpoint of the taxpayer.

A recent study released by Congressional Democrats underlines the issue. According to that study, Walmart’s wages and benefits are so low that many of its employees are forced to turn to the government for aid, costing taxpayers between $900,000 and $1.75 million per store. As Mother Jones reports,

Walmart’s history of suppressing local wages and busting fledgling union efforts is common knowledge. But the Democrats’ new report used data from Wisconsin’s Medicaid program to quantify Walmart’s cost to taxpayers. The report cites a confluence of trends that have forced more workers to rely on safety-net programs: the depressed bargaining power of labor in a still struggling economy; a 97 year low in union enrollment; and the fact that the middle-wage jobs lost during the recession have been replaced by low-wage jobs. The problem of minimum-wage work isn’t confined to Walmart. But as the country’s largest low-wage employer, with about 1.4 million employees in the US—roughly 10 percent of the American retail workforce—Walmart’s policies are a driving force in keeping wages low.

Businesses do not have to be conducted this way. Good jobs that don’t require public support are not inconsistent with  healthy profits. A recent Business Week article reports on the very different business approach taken by Walmart competitor Costco.

Despite the sagging economy and challenges to the industry, Costco pays its hourly workers an average of $20.89 an hour, not including overtime (vs. the minimum wage of $7.25 an hour). By comparison, Walmart said its average wage for full-time employees in the U.S. is $12.67 an hour, according to a letter it sent in April to activist Ralph Nader. Eighty-eight percent of Costco employees have company-sponsored health insurance; Walmart says that “more than half” of its do. Costco workers with coverage pay premiums that amount to less than 10 percent of the overall cost of their plans. It treats its employees well in the belief that a happier work environment will result in a more profitable company. “I just think people need to make a living wage with health benefits,” says Jelinek. “It also puts more money back into the economy and creates a healthier country. It’s really that simple.”

Despite its higher wages and more generous benefits, Costco nets more per square foot than Walmart.

I have increasing numbers of students who believe that all business enterprises are at worst evil and at best unconcerned with anything but the bottom line. They look at Walmart and the many businesses that emulate its rapacious approach; more recently they point to the employers who are cutting workers hours in order to avoid having to provide health insurance under the terms of the Affordable Care Act, and they note the huge disparities between the salaries of CEOs and their employees, and they see those behaviors as an inevitable result of market capitalism. It isn’t.

Costco and many, many other enterprises demonstrate that concern for workers’ welfare is entirely consistent with a healthy bottom line. The problem is not with our markets, it is with our culture, and with public policies that enable and reward despicable behaviors.