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Home Publications Blogs CEPR Blog Ending Loser Liberalism and Restructuring the Market Economy

Ending Loser Liberalism and Restructuring the Market Economy

Written by Dean Baker   
Wednesday, 19 October 2011 15:00

The growing nationwide response to the Occupy Wall Street movement displays a widespread discontent with the direction the country is taking. The economy is experiencing the worst downturn since the Great Depression, after a decade of bubble-driven growth. The banks who were the main culprits in driving the bubble are largely back on their feet, with top executives again enjoying the same sort of pay and bonuses as they had before the crash. Meanwhile the bulk of the working population continues to suffer the fallout from the crash in the form of unemployment, underemployment, and underwater mortgages. It’s not surprising that people are unhappy with this situation.

What is most important to understand is that this outcome is not just an accident of the market. The banks - who took great risk in extending the credit that fueled the bubble - are back on their feet because of extensive support from the government. This includes not only the $700 billion that Congress appropriated through the TARP, but the trillions more that were lent by the Fed through its special facilities at the peak of the crisis. In addition, an even larger amount of guarantees provided by both the Fed and the FDIC ensured that the banks could survive the crisis that they had helped to bring on.

The extensive government intervention that has allowed the financial industry to survive largely intact is not an exception. In other areas of the economy the interventions may be less transparent, but it is easy to identify ways in which the government has structured the market to redistribute income upward.

For example, prescription drugs are expensive because of government-provided patent monopolies. We currently spend close to $300 billion a year on drugs that would cost around $30 billion a year if drugs were sold in a free market like other goods. The difference, $270 billion a year, dwarfs the sums that are typically debated by Congress in tax and spending bills. Patents serve a purpose in providing an incentive for research, but there are other mechanisms for supporting medical research that are likely to be less costly and lead to less inequality. (We already spend $30 billion a year on biomedical research through the National Institutes of Health.)

Our trade policy has also had the effect of redistributing income upward. It was quite explicitly designed to put manufacturing workers in direct competition with low-paid workers in the developing world. This has the predicted and actual effect of reducing the wages of less-educated workers in the United States. At the same time, highly educated workers, like doctors and lawyers, still benefit from a wide range of protectionist barriers that prevent their salaries from being driven down by international competition. The negative distributional effects of our trade policy become further magnified when an over-valued dollar gives the country a large trade deficit, as is currently the case.

These and other institutional structures should be the focus of a progressive economic agenda. Unfortunately, many progressives focus exclusively on tax and transfer policy that largely accepts the structure of the market as given. This has the appearance of taxing the winners to benefit the losers in the market economy. This approach faces enormous political obstacles, since the public generally has considerable respect for market outcomes. Taxing the wealthy to redistribute to low- and moderate-income households also has serious limitations as policy since redistributive measures will carry an economic cost. Conservatives hugely exaggerate this cost, but it is real.

It makes far more sense to reverse the rules that were put in place to redistribute income upward in the first place. This is not an easy task. The economic interests that rigged the deck in their favor will not stand by idly as progressives attempt to rewrite the rules. But at least the victories achieved will be enduring. And, it makes far more sense to be arguing for changes that will both produce fairer outcomes and make the economy more efficient. That could be a recipe for success at both the political and policy level.

This post originally appeared on Open Society Foundations' blog.

Tags: jobs | OccupyWallSt | patents | prescription drugs | recession | trade | Wall Street

Comments (2)Add Comment
Good Stuff
written by JSeydl, October 23, 2011 8:57
Good stuff, Dean. I love your writing style. Short, blunt, and specific. Keep up the amazing work.
and yet it's baffling....
written by vipersdad, October 27, 2011 11:32
the conservative messaging machine is spitting out misinformation and has been since 2008 when Obama was elected. Debt=Bad, Democrats=Big Spenders, Defense budget = "free of charge", roots of crisis = too much regulation and government spending.

Mr. Baker eviscerates these points quite easily in almost everything he writes, yet few in positions of power or influence seem to be reacting. We see this republican pablum being parroted daily by some of even the most liberal media outlets with little critical examination.

From a strictly political/populist perspective, I don't for the life of me understand why the points that Mr. Baker raises in this piece and his book(s) on the subject are not adopted and hammered over and over by Democratic leaders up to and including the White House. Mr Obama surely knows the power of the Fed and the Treasury and they role they play in our current situation. He also has other tools available to him to influence a variety of factors where the economy is concerned.

Instead, Obama and the Democratic Leaders in Congress prefer to buy in to or at least do nothing to refute the fallacious arguments pressed from the right.

It's as if they are either inept politically or are complicit. If there is a 3rd option here I don't know what it is.

When an overwhelming percentage of the US population is in favor of Social Security and Medicare, while at the same time, the Democrats and Republicans seem to be trying to figure out how to dismantle both systems, you have to conclude there is something more to the equation than simple democratic processes.

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