By James Kwak
Last week Simon gave a talk sponsored by Larry Lessig’s center at Harvard. Afterward there was a dinner and then another question-and-answer session. Jedediah Purdy (another person to write a book while at Yale Law School; he is now a professor at Duke’s law school) asked a question that I have rephrased as follows (the words are mine, not Purdy’s; I may have also distorted his original question so much that it is also mine):
“You’ve criticized the government for withdrawing from the economic and particularly financial sphere and allowing private sector actors to do whatever they wanted. Do you think the government should simply act so as to correct the imperfections in free markets? Or do you see a positive role for government in determining what kind of an economy we should have?”
I think it’s noteworthy that the people you would probably consider the most outspoken critics of Washington and its capture by free market ideology in recent decades — Joseph Stiglitz, Simon and I, Yves Smith, etc. — take pains to insist that we are all, in fact, in favor of free markets. (It’s a caveat I’ve made in several interviews.) The usual argument is that markets have failings — due to information asymmetries, externalities, the works — and that government policy should correct for those failings, instead of pretending that they don’t exist, à la Alan Greenspan. The conceptual model is that the government policies should exactly correct for those market problems — for example, imposing carbon taxes that exactly account for the externalities of carbon emissions — and then get out of the way.
Dean Baker makes an observation in his book, False Profits: Recovering from the Bubble Economy, in a different context, that I think reflects the same issue. Discussing the political debate over the early 2009 stimulus package, he writes (p. 109):
“President Obama never gave the people of the United States the basic economics lesson they badly needed to understand the rationale for the stimulus. In a country that had been conditioned by both parties and the media to think that deficits are always bad, the idea that the government would deliberately run very large budget deficits didn’t make sense to most people.”
What lessons are we learning from this crisis and recession? So far, the lessons we are learning, if any, are modest, and are ones that many people (just not those in power) already knew, having to do with incentive structures under limited information, the distorting impact of implicit government guarantees, the limits of a disclosure-based regulatory regime, the problem of regulatory capture, etc. The thinking is that we’ll modify the system to take these factors into account, and then the magic economic machine will go on ticking. There don’t seem to be any big lessons.
What would such bigger lessons be? Purdy floated the idea that the government should promote equality of opportunity. “Doesn’t it do that already?” you might ask. It makes a small effort via the public education system, but I believe even the most outspoken advocates of public schools would acknowledge that they currently do little to correct for the massive inequalities in starting points across our society. For the most part, our government does little to level the playing field, we have low levels of social mobility as as result,* and our elected politicians are fine with that.
I spoke to Purdy after the event and he thought the strongest argument against a positive role of government is “the competence issue.” After all, Simon and I just wrote a book about how regulators and politicians became intellectually captured by a single industry; if that’s your basic view of the government, do you really want the government deciding what the economic goals of society should be? So on a practical level, most reformers who favor a more active governmental role usually limit the government to correcting known problems with the free market. That’s the conservative position, in the sense of Edmund Burke, probably my favorite conservative of all time. But it’s not terribly satisfying.
* For example: “By international standards, the United States has an unusually low level of intergenerational mobility: our parents’ income is highly predictive of our incomes as adults. Intergenerational mobility in the United States is lower than in France, Germany, Sweden, Canada, Finland, Norway and Denmark. Among high-income countries for which comparable estimates are available, only the United Kingdom had a lower rate of mobility than the United States.”