I’m glad to see the debate that Max Sawicky has touched off with his review of Steve Teles and Brink Lindsey’s new book, The Captured Economy: How the Powerful Enrich Themselves, Slow Down Growth, and Increase Inequality. The book, and the resulting debate, raises the question: can an attack on rent-seeking by the rich be the basis for a progressive agenda? This is a debate I’ve played some role in getting started, with several books, most recently Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer.
In my view, it’s an area of enormous potential, and it presents the only plausible path forward for progressive politics in the US and elsewhere.
The basic logic of the argument is that markets are pretty much infinitely malleable. The government sets rules that can lead to relatively equal outcomes or can lead to enormous inequality. In the last four decades, the Right has managed to use its control of the rule-setting process to engineer an enormous upward redistribution of income. The process involved the leadership of both political parties, so it’s certainly not a story in which right-wing Republicans exclusively can be seen as the villains.
Since there’s nothing intrinsic to the market that caused this upward redistribution, it doesn’t make sense to talk about using the government to rein in the market. Reversing the upward redistribution will in some cases involve more government, but in some cases it will require less. Most importantly, it will require that the government act differently when structuring markets.
To take the single most important and obvious area, monetary and fiscal policies effectively determine the unemployment rate. Not only does this matter for who gets jobs; the level of unemployment also has a huge impact on wage growth. The low unemployment years of the late 1990s boom were the only period since the early 1970s when workers at the middle and bottom of the wage distribution saw sustained real wage growth. With unemployment falling to comparable levels in the last year or two, we’re again seeing real wage growth at the middle and bottom end of the income distribution.
There’s nothing big- or small-government about monetary and fiscal policy. While a large budget deficit resulting from high spending is clearly big government, we could also run large deficits by cutting taxes. The same story holds with monetary policy. An expansionary monetary policy is not obviously bigger government than a contractionary monetary policy. (Teles and Lindsey choose not to talk about monetary policy in their book, although I know both to be proponents of expansionary monetary policy.)
To take this a step further, one cause of weak demand, and also a loss of relatively well-paying manufacturing jobs, is the trade deficit. This is the result of an over-valued dollar in international currency markets. The value of the dollar, relative to other currencies, is a policy choice with no obvious connection to the size of government.
Moving from the obvious to the more obscure, many of the richest people in the country made their money in large part due to government-granted patent and copyright monopolies. When I give talks, I like to ask how rich Bill Gates would be if he didn’t enjoy patent or copyright protection on Windows, Word, or other Microsoft software. Given his background and ambitions, it’s a safe bet Gates would still be doing fine, but he almost certainly wouldn’t be one of the richest people in the world. In fact, he might still be working for a living.
Over the last four decades, we have made patents and copyrights longer and stronger through a variety of mechanisms. (Read Rigged for the details, it’s free.) We could have made them shorter and weaker. We could also use different mechanisms to support innovation and creative work. In this scenario, we are likely talking about less government rather than more.
And we should recognize there’s a vast amount of money at stake. In the case of prescription drugs alone, the gap between the patent-protected price and the free market price is likely to be around $370 billion a year. That is just under 2 percent of GDP or more than 20 percent of after-tax corporate profits. If we add in medical equipment, software, and other sectors where such monopolies are a big deal, we get a sum that’s two or three times as large.
Another place where we see massive fortunes in this economy is the financial sector. A modest financial transactions tax (FTT) would raise a huge amount of revenue, but more importantly it would eliminate many of the rents in this sector. As even the International Monetary Fund has noted, the financial sector is under-taxed relative to other sectors. Using an FTT to replace some revenue raised through other taxes would not imply any bigger government, but it would mean a vastly different distribution of income. (Both Teles and Lindsey support an FTT, although this mechanism for reining in the financial sector is not mentioned in their book.)
The point in these examples is that reversing the upward redistribution doesn’t necessarily require more government intervention in the economy. It just means structuring markets differently.
Markets can also be used to put pressure on inequality-generating structures in the same way that the Right has sought to use markets to undermine wages. For example, state and local governments can look to buy generic drugs in India that often cost a tiny fraction of the US price. In the case of the Hepatitis C drug Solvaldi, the list price is $84,000 in the United States, while a high-quality generic is available in India for less than $500. A state Medicaid program could pay to send a patient to India for three months, with a family member, hand them an extra $10,000 for their trouble, and still end up way ahead. It might not take too many excursions like this to call more attention to the absurdity of patent financing of prescription drug research.
In a similar vein, if there were ever a billionaire or large foundation with an interest in public health, they could put up a few hundred million dollars to buy the rights to promising compounds and pay for the clinical trials of new drugs. They could then put any successful drugs in the public domain where they would be sold at generic prices. This could mean that the next cancer breakthrough drug sells for a few hundred rather than a few hundred thousand dollars.
We can also use the market to subject doctors (average annual pay of around $250,000) to competition, both reducing the income of many one and two percenters, and reducing health care costs for the rest of us, thereby raising real wages. The same is true for dentists, and to a lesser extent lawyers, all of whom tend to occupy the bottom rungs of the one percent and the next one to two percentiles of the income distribution.
There are many other areas where we could envision a different structuring of the market that results in a more equal distribution of income. Teles and Lindsey approach the issue from a perspective broadly similar to mine, even if we have different emphases and don’t come down in the same place on some issues. (For example, I think restructuring corporate governance rules to make it easier for shareholders to rein in CEO pay is a big deal.)
To me, the main takeaway is that we have to figure out how we can structure the market so it leads to more equalitarian outcomes. The Right has been doing the opposite with enormous success for the last four decades. At the very least, we force the Right onto indefensible intellectual ground when we oblige them to argue for government intervention to make the rich richer, even at the cost of sacrificing growth.
Source: CEPR
