Jonathan Chait

The Trouble With Economics As Culture War

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Interesting concession today from AEI president Arthur Brooks:

What is that governing philosophy? Here is an answer from the great economist and Nobel laureate Friedrich Hayek: As regards the economy, the government should provide a minimum basic standard of living for citizens, and address market failures in cases where government action can do so cost effectively. That's all.

We should acknowledge that markets are not perfect. Market failures can occur when we have monopolies (which eliminate competition), externalities (like pollution), public goods (the military, for example), and information problems (such as when people cheat others in the marketplace). Nearly all economists agree these kinds of failures can justify some degree of state intervention. 

Why is that interesting? Because that is also a good summation of liberal thought on economic policy. And yet Brooks's book is centered on the premise that economic policy ought to be treated as a culture war battle between two irreconcilable visions. From my review:

The premise of The Battle is that America is fighting a “culture war,” but this culture war is not over social issuesit is over economic ones. A culture war, of course, is a zero-sum fight between two antithetical values in which compromise is impossible. That is how Brooks portrays the conflict between statism and free enterprise that has been unleashed by Obama’s radical attack on American values. “These competing visions,” warns Brooks, “are not reconcilable: We must choose.”

Back to Brooks's op-ed today. After conceding that free market principles accept the need for government intervention in a host of areas, he goes on to assert that numerous government interventions supported by Democrats lie utterly beyond any reasonable definition of market failure:

Obviously, there is plenty of room for debate in this philosophy. What is a minimum basic standard of living? And are certain servicesfor example, the Smithsonian Institutionpublic goods? How much waste can we find in the defense budget? These are the arguments we should be having.

But there are many others we shouldn't be having, because the answers are clear. Should we bail out car companies? (No: GM would fail precisely because markets are working, not because they are failing.) Should we leave the retirement age at 65 even though people are living much longer than ever before and taking more than they ever paid into the Social Security system? (No: This is middle-class welfare, not a minimum basic standard of living.) Should we continue to prohibit people from buying health insurance from companies across state lines? (No: This induces market failure.) Do we need high-speed trains to take us to St. Louis? (No: This is not a public good.)

Let's go through Brooks's list of policy issues where government is intervening despite a clear lack of market failure:

1. The auto bailout. Brooks asserts that GM's averted failure happened because markets were "working." In fact, GM fell into crisis because, at that moment in the financial meltdown, the credit markets had utterly frozen and normal bankruptcy was impossible. The problem was not that GM had no ability to restructure itself and turn a  profit, and subsequent events have shown.

2. Social Security starting at age 65, which he calls "middle-class welfare, not a minimum basic standard of living." Brooks does not say what age Social Security benefits should begin, but I don't understand why old age insurance starting at, say, age 70 addresses a market failure while old age insurance starting at age 65 does not. How is the answer here a "clear" implication of first principle? At what age would it stop being clear? 68? 66?

Moreover, the average Social Security recipient gets $14,124 a year from the government. What level would be low enough for such a program to be a "minimum basic standard of living"?

3. Prohibiting health insurance policies from being sold across state lines. There's a library of economics research showing how health insurance markets don't share most of the salient characteristics of other markets. The biggest single problem is adverse selection -- the most important factor in an insurer's profitability is the health of its customers, hence the enormous incentive to cherry-pick the healthy and leave insuring the sick to others. Allowing interstate purchase of health insurance would tempt any state to underbid the regulations of the others, designing the skimpiest possible requirements that pull healthy customers away from insurers in other states.

4. High speed trains to St. Louis. Well, even hard-core libertarians understand that roads are a public good. They are heavily subsidized. This reason alone, in addition to many others, suggests the need for some level of public subsidy for rail. Whether the Chicago to St. Louis route merits high-speed rail lies beyond my expertise, but again, the question of precisely which cities ought to be connected to high speed rail seems to be another question ill-suited to Brooks' Manichean frame.

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