New Thinking on the Economy

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Dean Baker
Truthout, February 9, 2009

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Jeff Faux, my former boss at the Economic Policy Institute, tells a story from his days as a foot soldier in President Johnson’s War on Poverty. Johnson was asked by a delegation from Alaska if he had an anti-poverty program for their state. Johnson assured the delegation that he had a “great big program” for Alaska. As soon as the delegation left, Johnson rushed into Jeff’s office and told them that they needed to come up with a program for Alaska.

Unfortunately, many liberals have not moved beyond Lyndon Johnson’s thinking on the role of the government in the economy. They still tie progressive outcomes – the guarantee of good quality health care, education, child care, housing, and a secure retirement – directly to big government. While the government must play a role in ensuring these outcomes, the point should be to have good government, not big government as we usually conceive it.

There are a long list of ways in which the rules set by the government determine economic outcomes. While these rules have an enormous impact on the economy, they do not amount to “big government” in the sense of a large amount of taxes and spending.

Perhaps the most obvious example along these lines is patent protection for prescription drugs. The Centers for Medicare and Medicaid Services projects that the country will spend more than $330 billion in 2012 for prescription drugs. These same drugs would cost roughly $30 billion in the absence of patent protection. This means that the government’s patent monopolies will be redistributing roughly $300 billion in 2012 from patients to the drug companies. (There are alternatives to patent monopolies for financing the research and development of prescription drugs). 

To put this sum into perspective, after-tax corporate profits are projected to be less than $1,400 billion in 2012, so the amount at stake in preserving patent protection for prescription drugs will be more than 20 percent of all corporate profits. Alternatively, imagine getting Congress to appropriate $300 billion a year, or $3 trillion over a 10-year budget window, for our favorite government program(s).

However, in spite of the enormous amount of money at stake, this issue has received almost no attention from the vast majority of progressives. In fact, most progressives have probably never even gave the issue of patent protection for prescription drugs a moment’s consideration.

It is easy to find other examples of ways in which government rules determine who gets the money. Along the same lines as patent protection, the entertainment industry and software industry survive in their current form because of the government’s copyright protection. This form of government intervention has made thousands of people, from Rupert Murdoch to Bill Gates, very rich at the expense of the rest of us.

The trade agreements over the last three decades have been deliberately designed to put manufacturing workers, and non-college educated workers more generally, directly in competition with low-paid workers in the developing world. The predicted and actual result of this policy is to lower the wages of non-college educated workers in the United States.

Do we want to rebalance the field? Why not set trade rules that put highly paid medical specialists and other big “winners” in direct competition with their low-paid counterparts in the developing world. We can debate whether this is good policy, but there is no dispute that we can use this “market” outcome to bring down the wages of those at the top.

And speaking of wages of those at the top, we can also rewrite the rules of corporate governance so that CEOs and other top executives don’t get to write their own paychecks. The compensation packages of the top five paid executives could be subject to regular approval by shareholders in a vote where unreturned proxies do not count. My guess is that with these rules, much less money would go to those at the top.

There are many other ways in which we can change the rules so that less money flows to those on top, leaving more for the rest of us. Changing the rules does not require big government in the sense of large portions of GDP being collected in tax revenue.

It does require that government take an active role in the economy, but it is already taking an active role in the economy in these areas. The difference is that, currently, the conservatives have been setting these rules, while progressives have been polite enough not to pay attention. Instead, they have mostly focused their energy on matters that will have far less impact.

The economic crisis brought on by the collapse of the housing bubble offers progressives unprecedented opportunities. But we have to be prepared to actually think big, and not just think about big programs.


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy. He also has a blog on the American Prospect, "Beat the Press," where he discusses the media's coverage of economic issues.