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The Conservative Nanny State

My favorite economist, Dean Baker (here's his blog), recently published a book that me and min read while we were in ireland. I recommend that you read it (you can even download it in pdf form for free) but i know you won't, so here are his arguments in a (very large) nutshell:

Conservatives, or the people who call themselves conservatives, claim to be against big government and proponents of the free market. However, while they do oppose government social programs, they aren't really against big government programs as a general rule. And while they use the concept of "free market" as a propaganda point when it serves their interest, they don't really act in accordance with a true free market philosophy either.

The problem with big government social programs is that they tend to distribute money downward, or provide benefits to large numbers of people. That is not the conservative agenda - the agenda is getting the money flowing upward, and for this, big government is fine. Of course, conservatives don't own up to the fact that the policies they favor are forms of government intervention. Conservatives do their best to portray the forms of government intervention that they do favor, for example, patent and copyright protection, as simply part of the natural order of things. This makes these policies much harder to challenge politically.

The problem that Dean Baker points out is that conservatives have framed their position so well that it is impossible for people to argue against these economic policies without looking like they are 'against free trade' and in favor of
inefficient government programs. The media already refers to trade agreements like NAFTA as 'free-trade' agreements. When you have to spend half the debate arguing against the terms, you have already lost.

So Dean Baker comes up with what i think is a very innovative solution. Conservatives have already convinced everyone that free-trade is a good thing. So why not also use the free trade argument to challenge the government programs that conservatives use to make the rich richer?

  1. Trade agreements like NAFTA allow corporations to import goods into our country very cheaply, effectively pitting our workers in the manufacturing sector against workers in other countries with lower wages. But at they same time, the government has restrictions in place that prevent professionals (doctors and lawyers, for example) from other countries from setting up shop in our country and competing against our professions. By removing those restrictions, there could be more competition in these fields, lowering the cost of doctors and lawyers, and giving americans more choices. We could ensure the same standard of quality by requiring that the foreign professionals pass the same qualifying exams (like the admission to the bar) as american professionals.

  2. I've talked previously about
    how the Fed manipulates interest rates to slow the economy and increase unemployment when they afraid of the risk of inflation. This is about as direct a form of government intervention as you can imagine, and is completely against the spirit of free trade.

  3. We all know that CEOs are paid too much.

    The conventional argument is that CEOs get multi-million dollar salaries because they are highly productive...

    This argument is implausible for several reasons. First, today's CEOs don't seem in any obvious way more productive than the CEOs of 30 years ago... Second, CEOs of foreign corporations don't get anywhere near as much compensation... Finally, many of the people who get these seven and eight figure salaries prove incompetent - even when the definition of success is defined narrowly as increasing profits.

    Baker goes on to argue that since corporations themselves are a creation of the government. In a free market, there would be no such thing as a corporation. Corporations are granted powers by the government, which then enforces laws that ensure corporations maintain those powers. Therefore, if we are going to allow corporations to continue to exist, there is nothing wrong with writing regulations that ensure that corporations behave in a manner that benefits the public good. One possibility he suggests is that shareholder elections be re-arranged so that shareholders who do not vote do not automatically have their votes counted as supporting the CEO's position (currently, if you own stock and don't vote in your annual shareholders' meetings, you are voting to allow the CEO to do whatever he wants). Once that change is made, Baker also suggest holding periodic votes to approve the CEO's compensation package.

    Baker's suggestions on how to regulate corporations are relatively straightforward, in my opinion, but i think his argument that since corporations are government creations and not some natural free market phenomenon, the government has the right to regulate them, is one of his most powerful arguments in the book. If individuals felt that government regulations were too stringent for corporations, they would not have to form corporations and could compete in the free market as a partnership.

  4. Patents and monopolies are another example of government intervention in the economy. Drug companies, for example, argue that if we did not defend their patents they would not be able to research new drugs. But the government, through the National Institute of Health, already spends an amount equal to what the pharmaceutical industry spends on research, and we could easily double that if we could buy generic instead of name brand drugs for Medicare. (And don't try the argument that government research is less efficient that private research, because the drug companies encourage and lobby for the government to spend even more money on drug research, because they rely on that research (we basically give away the research that we do to private corporations so if the public sector has some sort of breakthrough and a drug company uses that breakthrough to create some new drug, the drug company gets all the profits for that drug.)).

    Baker also argues here that we are not making efficient use of new technologies, such as the internet, as a way to distribute media, due to copyright laws. Enforcement of copyright and patent laws, which protect corporations against the public interest, are a very costly form of anti-free market government intervention (and yes, he proposes some alternative ways to support artists).

  5. Bankruptcy laws. When an institution gives out a loan, it is making an investment. It thinks that it will get a return
    on that investment. An occasional individual defaulting on a loan is always a risk, and is the cost of doing business. If the institution repeatedly makes loans to individuals that default on their loan, the institution has made a bad business decisions. If the government bails out companies that make bad decisions, it is preventing the free market from doing its job of weeding out the bad from the good. But bankruptcy laws are designed to take all the risk out of lending money to consumers, regardless of their ability to pay back the loans.

  6. We heard a lot about tort reform during the 2004 presidential election. Conservatives want to put a cap on the amount of money a lawyer can get from a client.

    In a market economy, people are supposed to be able to freely contract as they choose. This raises the question of why so many conservatives want the government to ban certain types of contracts. Specifically, "tort reform" laws... limit the type of contingency fees that clients could arrange to pay their attorneys. These laws restrict the percentage of a legal settlement that can be paid to a lawyer and impose other restrictions on the type of contracts that people can sign with lawyers, if they want to sue a corporation. These restrictions can make a difference in the public's ability to sue large corporations, because many clients do not have money to pay a lawyer in advance... Since there is often a great deal of risk in legal suits... and corporations can make suits extremely costly... the contingency fee (which depends on winning the case)... may be fairly large. Libertarians would not object to large contingency fees - if clients don't want to pay them, then they can look for another lawyer. However, the conservatives have promoted caps on contingency fees ostensibly as a way of protecting clients. In reality, such caps are an infringement on individual's right to freely contract. In a market economy, the government should not be determining which contracts are acceptable for people to sign.

  7. There are currently many laws that are designed to help small businesses. Some of these laws allow small business to ignore safety or environmental standards. Others simply allow them to pay less taxes. In a free market, there would not be a protected class of businesses. I had my hardest time with Baker here. He does make the point that large corporations often create small businesses to circumvent certain laws, and i agree that no one should be allowed to ignore environmental or safety laws, i do think it is important to help small businesses along due to the fact that corporations start off with such an unfair advantage.

  8. Baker argues against the conservative mantra that taxes are "your money" and you shouldn't have to pay them to the government, and that conservatives coddle corporate tax cheats but go crazy thinking about welfare cheats when the relative amounts of money lost to the government in the first case is incomparable to the second. While i agree with everything he says, i don't see how it fits with his jujitsu free market strategy.

  9. After the previous two chapters which i think are the weakest, Baker comes back with a kick-ass final attack.
    Conservatives acknowledge that in certain areas, the government can be more efficient than a private corporation (for example, policing and national defense). But why not let the government compete in other areas?

    The conventional view among conservatives is that the private sector is lean and mean, full of innovative and efficient business. By contrast, the government is composed of lazy and wooly-headed bureaucrats who couldn't make it in the business world (or they would be there). Given this view, they should have little concern about the prospect of having private business compete with the government... In reality, it is striking how worried private businesses often get over the prospect of competing with the government...

    Back in the late 1990s, several express mail companies actually went into court to try to force the US Postal Service to abandon an ad campaign that was proving very effective. The Postal Service ads pointed out that its express mail service was much cheaper than FedEx or UPS. After the courts refused to outlaw the ad campaign, the express mail companies went to their friends in Congress, who effectively tamed the competition.

    In a free market, competition serves as the way to ensure that the best (in terms of quality and efficiencies) services are provided to society. So let the government compete alongside private corporations. If the government can provide the best services, people will flock to it. If it can't, people will go elsewhere. That's the free market in a nutshell.

Overall it was a very enlightening read. It's nice to read something that actually proposes solutions, both in terms of how to debate as well as policies to implement. And while i don't agree with everything Baker proposes, it definitely got me thinking. The next question is how to get this book in the hands of the pundits and politicians that are supposedly on our side but are currently floundering because they are stuck in a conservative framing.

By fnord12 | June 29, 2006, 11:03 PM | Boooooks & Liberal Outrage


P.S. I am aware of your gratitude for my entertaining you with extra-long posts about economics. There's no need to thank me. I do it because i love you.

Does anyone really have a favorite economist?

i think the issue of the Fed is particularly relevant now when they just announced that they're raising interest rates.

wow, folks! it is jim shooter himself, honoring us with his presence!

It's very possible that I'm wrong here, but I believe that it's fairly easy for doctors and lawyers and most other wealthy, or soon to be wealthy) professionals to come to the US and start competing. Easy compared to 'unskilled' labor that is. The thing is American higher education is generally viewed as one of the best, if not the best, in the world when taken as a whole with pretty rigorous standards for accredidation. Any foreign born, foreign educated professional who passes any US or state board exams/bar exams/etc. could come here and practice. The issue comes in deciding what foreign schools are considered 'good enough.' and I believe they skew towards the European schools. Whether this is out right racism or just real results that look like racism is a different issue as well. Again, I have nothing specific to support this, but my experience has led to this likely being true. but I think this was one issue I heard brought up during the recent immigration debate. The US doesn't mind immigration of the sort I described above, just that 'dirty, unskilled, Mexican kind.' Never mind that most people who would say such a thing and mean it are, and are the descendants of, descendants the 'dirty, unskilled, Anglo kind'

If you're interested in reading more about his argument regarding doctors and lawyers, you can check out the html version of his book. Go here, and scroll down to the paragraph that begins "This may look like free trade, but it is only half the picture." I guess the key paragraph is:

"This does not happen. In fact, the exact opposite happens. In 1997 Congress tightened the licensing rules for foreign doctors entering the country because of concerns by the American Medical Association and other doctors' organizations that the inflow of foreign doctors was driving down their salaries. As a result, the number of foreign medical residents allowed to enter the country each year was cut in half."

So I was wrong. Sue me. I base all my info on ER anyway. And I hate the AMA anyway. So there.

speaking of medical professionals, while congress has made it harder for foreign doctors to enter the country and practice here, nurses are often recruited from other countries to try to fill in the shortfall of nurses in our hospitals now. and i think we all know it's not the nurses bringing home the big bucks. despite the fact that they have to undergo intensive training and are required to have an extensive knowledge of medicine. if it's only qualifications and not money they're concerned with, how come it's only the doctor's qualifications? an unqualified nurse could kill you just as quick.

Anyway, here's an Associated Press article that disputes you somewhat with the opening statistic "1 in every 4 Doctors...foreign born and foreign trained." It goes on to say that they come for residency and stay to practice. I know, it's associated press (and from something called phillyburbs.com), but I'm not good at these types of web-searches. (but I can find naked celebrities no problem). anyway, here's the link: http://www.phillyburbs.com/pb-dyn/news/94-10262005-560813.html

and nurses don't make as much as doctors, it's true. Doctors do go through more education and, theoretically a more rigorous education (not that nursing school isn't hard) which costs more and take other greater financial risks. in many ways, nurses are more important to the health of patients than doctors. but, they are seen, by most, as extremely secondary to the health of a patient. Whether this is a function of the AMA and similar organizations 'propaganda' is something to be discussed. Letting foreign trained nurses over foreign trained MD's I think is a function of the above belief (right or wrong).

again, I don't like the AMA, based on specific actions taken against my profession based only on fear of competition and not science (which, on reflection, helps your argument) and on the fact that they are big and powerful with no real checks on their power.