Today’s Papers: Getting Capitalism Back on Track

September 2nd, 2012 at 2:42 pm

Some compelling economics to read about in today’s newspapers, especially a sweeping review of a bunch of books on what’s gone wrong by Steve Pearlstein in the WaPo.  More on that in a moment.

First, I found this piece on how to fix our fiscal policy to be a useful collection, with one big exception (re Medicare…see below), of the stuff we need to do to get on a sustainable budget path.  It’s a list of stuff that’s well known and basically falls under the heading of “what-we’d-do-if-we-ever-remembered-how-to-compromise.”  Raising new tax revenues, reducing the growth rate of the big social insurance programs, closing down some big tax expenditures.

It’s all cast as “simple and obvious” and I don’t disagree but to frame it as a problem of how our “supposed leaders won’t grow up” is way too scattershot.   It’s not hard to write down a list like this of common-sense fixes.  But if you don’t deal with the politics that’s got us into this mess, you’re just whistling past the graveyard.

And the “pox on both their houses” that you get here really doesn’t cut it.  The fact that the vast majority of Republicans have signed a pledge to a lobbyist never to raise taxes is more than germane—it’s almost the whole game.  Yes, there are Democrats who have said the same about entitlements, but they’re not the President.   In fact, he’s currently under fire for $716 billion of savings in Medicare in the Affordable Care Act, legislation supported by most D’s and no R’s.  Is that not awfully grown-up behavior that’s relevant to readers is this context?

Speaking of Medicare, one problem with the fiscal agenda offered up here is it only deals with excessive spending on end-of-life care and nothing on the broader question of health care delivery.  The end-of-life problem is real and huge, but man, that’s some high-hanging fruit.  And even if we somehow found an end run around the horrific politics of reducing spending in that area, you wouldn’t slow the unsustainable growth rate.  For that, you have to end the funding of quantity over quality in the whole system, reducing unnecessary procedures (and not just at the end of life), promoting bundling provisions (compensation schemes that incentivize providers to work together instead of staying in their current silos), using IT more effectively, ending overpayments to private insurers under Medicare Advantage–all savings on the delivery side.

And of course, there’s this other big problem here: we could get our fiscal policy right and still be economically screwed.  That’s where Pearlstein’s review comes in.

He reviews a bunch of books, most of which are about what’s gone wrong with capitalism and how to fix it.  It’s that latter, fix-it part that I found particularly useful here.  A number of these authors offer diagnoses and prescriptions that are both concrete and highly resonant.

You should read it yourself, but the theme is that bad policy has allowed the system to become rigged in ways that are anti-competitive.  In other words, it’s not that capitalism doesn’t work.  It’s that we’ve lost its fundamental, competitive elements such that whatever prosperity is generated finds its way almost exclusively to the top of the wealth scale, where it invests heavily in more of the politics and policies that are distorting the economic system.   Pearlstein writes:

Were he alive today, no less a free-marketeer than Adam Smith would readily acknowledge that a capitalist system forfeits not only its economic rationale but its moral justification if all its benefits are captured by a tiny slice at the top of society.

You should read it yourself, but a few points struck me as particularly important.

There’s a Roger Martin book arguing that in today’s economy, businesses can maximize returns in either the real market for the goods and services they produce, or in the “expectations market” in which the shareholder is the only stakeholder of importance.

As Martin sees it, the problem comes when the people who run big businesses are rewarded for winning not in the real market but in the expectations market. And what that means in practice is constantly raising expectations about future profits. Eventually, these expectations grow so inflated that they are impossible to realize without manipulating the books (think Enron) or taking undue risk (think Lehman Brothers or AIG). In either case, it requires diverting time and attention from the real market, where actual long-term value and wealth are created.

That just rings true, no?

I also liked the way Pearlstein merges the competitive paean by Univ of Chicago economist Luigi Zingales with Joe Stiglitz’s recent book on how inequality, itself the result of excessive “rent seeking” (anti-competitive compensation practices), is hurting growth and generating the vicious cycle I describe above, where greater wealth concentration purchases the politics that both exacerbate the problem (e.g., trickle-down tax cuts) and block corrective policies (e.g., more public investment, labor protections, progressive taxation).

Zingales’ work sounds surprisingly close to Dean Baker’s thematic that those marching under the banner of free-markets are not at all for the actual competitive markets that provide true opportunity to those with the best ideas and skills.  Instead, the system is full of distortionary subsidies that most benefit the already well off and powerful, like those for fossil fuels, factory farms, debt financing, home ownership, non-labor income, and so on.  Then, the politicians who defend these competitive distortions point at welfare programs as what’s ruining America.

As Zingales notes, American capitalism has become a victim of its own success. In the years after the demise of communism, “the intellectual hegemony of capitalism led to complacency and extremism: complacency through the degeneration of the system, extremism in the application of its ideological premises,” he writes. “Money — regardless of the way it was obtained — ensured not only financial success but social prestige as well. ‘Greed is good’ became the norm rather than the frowned-upon exception. Capitalism lost its moral higher ground.”

These arguments are, I believe, not only true but potential winners for those progressives who are pro-competition, pro-meritocracy, anti-inequality, and pro-opportunity.

Still, I thought Pearlstein fumbled the ball at bit at the end:

So where is a blueprint for a new American capitalism likely to come from? Probably not from economists or journalists, or even from politicians in Washington or on the campaign trail. …the genius of democratic capitalism, and democracy, is that the new norms of economic behavior are likely to emerge from executives and entrepreneurs, workers and consumers, money managers and bankers who find the courage to demand something better of themselves and others.

I’m not sure what that means, but it doesn’t sound right.  It sounds a lot like “let’s cross our fingers and hope enough smart, ethical people who somehow don’t respond to all the distortionary incentives in the current system come along to fix this thing.”

I can hear Steve, who I know and respect, responding, “OK, Jared.  What’s your theory of change?”

A fair question, of course.   First of all, do we really need a new blueprint?  I read Stiglitz, Baker, and Zingales as suggesting we get back to the basics of a blueprint that Adam Smith would recognize.   Is there something about globally connected and technologically advanced economies that militates against a simple progressive tax system that’s not fraught with distortionary subsidies, that generates ample revenue for investments in public goods, that provides regulatory oversight to dampen financial market volatility?  I think not, and I can easily find these principles in Smith and Keynes (and Minsky).

Ironically, I do believe that economists (including…especially!…econ profs), journalists, and politicians have an important role to play here.  They probably won’t do so absent pressure from the bottom up, and Steve and others may reasonably argue that the current deep-pocketed, Citizen’s-United-fueled power structure would never allow that to get very far.

But I can imagine a much better economics debate in this country, where newspapers don’t let politicians get away with the falsehoods that increasingly characterize their daily raps, where prominent economists stop making arguments that their own textbooks debunk as snake oil, where politicians don’t hypocritically call for sacrifice while cutting taxes at the high end and slashing spending at the other end—where they instead argue for returning to an economy rooted in the best of capitalism: competition, meritocracy, a hand up for the disadvantaged, and a strong pushback against concentrated wealth power that distorts all the above.

It ain’t going to happen tomorrow.  But that’s the goal and if enough of us insist on having that debate, perhaps we can do so.


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6 comments in reply to "Today’s Papers: Getting Capitalism Back on Track"

  1. Fred Donaldson says:

    End of life medical costs are high because we have a system that thinks $6,000 a year for one daily pill, and $40,000 injections are fair prices. Look not just at the healthcare industry, but at the investors who want their pound of flesh – or many pints of our blood, sweat and tears.

  2. Rima Regas says:

    I will share your optimism that reasonably informed discourse can take place, about twenty years from the date a major education overhaul is started. While the newspapers may have smart economics reporters (I often wonder), the readers are in desperate need of a better education in an increasingly complex economics environment. Unless you read Krugman, Stiglitz, DeLong, Thoma, Bernstein and a few others, you’re either being lied to, or the writer has no clue what they’re writing about. Local news, at least around my neck of the woods, have given up serious reporting on most topics. I guess they know best their audience’s tolerances. Sorry for the gloom, Jared. These are gloomy times.

  3. Kevin Rica says:

    Jared, You left out Pearlstein’s reference to the Skidelskys’ book, which as a long-time admirer of Veblen strikes me as the most interesting. It’s the new addition to my Kindle.

    But the real problem in economic and political thought in this country is that we confuse critical thinking with criticizing the other party’s thinking. Now the ideologies of both parties are so insular and dysfunctional that neither party can govern.

  4. The Raven says:

    Sigh…having thought long and hard about this, I think the reality is that what we have now is capitalism. What we had in the period 1950-80 was capitalism 2.0 or something. It wasn’t what capitalism was before, and it’s not what capitalism has reverted to.

    Is there something about globally connected and technologically advanced economies that militates against a simple progressive tax system that’s not fraught with distortionary subsidies, that generates ample revenue for investments in public goods, that provides regulatory oversight to dampen financial market volatility?

    Yes, unscrupulous wealthy people manipulating the political systems of the world. If you can figure a fix for this, we’ll make you dictator for life, but don’t buy your uniform yet. Seriously, guy, there’s no way for the mass media, anywhere, to take the strong stand you want: the big money would shut them down, and anyway they are the big money. The universities would have to reject big donations from the likes of the Koch Brothers. The politicians you want would have to have the moral courage and rectitude of Gandhi.

    “If the salt of the earth lose its savor, from where will you resalt it?”

    Where, indeed? We seem to need a well of moral courage, to heal the world.

  5. David C says:

    Hear, hear!

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