Tag Archives: Heritage Foundation

Conservatives, Liberals, and Privilege

Utah Senator Mike Lee (R) delivered an important, and timely address at the Heritage Foundation this week. It was focused squarely on what he called “America’s crisis of crony capitalism, corporate welfare, and political privilege.”

It is a problem, he said, that “simultaneously corrupts our economy and our government.” He pointed to a number of ways in which it manifests itself, including “direct subsidies,” “indirect subsidies, like loan guarantees,” “tax carve-outs and loopholes,” “bailouts,” the implicit bailout of “too big to fail,” and “complicated regulations.”

The Senator is careful to point out that the problem has a long history:

Just like the crises of lower-income immobility and middle class insecurity, the crisis of special-interest privilege is not Barack Obama’s fault. It predates his presidency. And though his policies have made it worse, past Republican presidents and Congresses share some of the blame.

He also stresses that the problem is bipartisan:

Too many in Washington have convinced themselves that special-interest privilege is wrong only when the other side does it.

And he’s willing to call Republicans to task for the part they have played:

We [Republicans] have tried being a party of corporate connections and special-interest deal-making. And we’ve lost five of the six presidential popular votes since [Reagan left office].

But though he believes Republicans bear some blame, the Senator contends that government-granted privilege is fundamentally incompatible with conservatism:

Properly considered, there is no such thing as a conservative special interest.

While I agree, I have a more ecumenical view of the issue.

Yes, privilege is incompatible with properly-considered conservatism, but I also think it incompatible with properly-considered progressivism (and properly-considered libertarianism, for that matter). The Senator, on the other hand, believes that “Liberals have no problem privileging special interests, so long as they’re liberal special interests.” As evidence, he quotes progressive thinker Herbert Croly, who wrote:

In economic warfare, the fighting can never be fair for long, and it is the business of the state to see that its own friends are victorious.

I won’t dispute that many progressives continue to view things this way. But I think there is value in framing the elimination of government-granted privilege in terms that attract progressives to the cause rather than in terms that seem destined to repel them.

And there is plenty of evidence that many progressives are at least open to the anti-privilege agenda. As I note in the beginning of the Pathology of Privilege, both the Tea Party and the Occupy movements oppose corporate bailouts. Consider the way progressive economist and Nobel Laureate Joseph Stiglitz framed the issue in Zuccotti Park:

Our financial markets have an important role to play. They are supposed to allocate capital and manage risk. But they’ve misallocated capital and they’ve created risk. We are bearing the cost of their misdeeds. There’s a system where we socialized losses and privatized gains. That’s not capitalism, that’s not a market economy, that’s a distorted economy and if we continue with that we won’t succeed in growing, and we won’t succeed in creating a just society.

Those words could have come out of Milton Friedman’s mouth.

Or consider the way progressives Mark Green and Ralph Nader framed regulatory capture in 1973:

The verdict is nearly unanimous that economic regulation over rates, entry, mergers, and technology has been anticompetitive and wasteful.

The result, they wrote, is a system which “undermines competition and entrenches monopoly at the public’s expense.”

Green and Nader’s concern about regulatory capture wasn’t just an academic exercise. It helped propel one of the most successful eliminations of government-granted privilege in U.S. history: the deregulation of trucking, air travel, and freight rail in the late 1970s. To the considerable benefit of consumers, these industries were substantially deregulated and de-cartelized. And it happened because liberals like Ted Kennedy and Jimmy Carter eventually joined the cause.

Our task today is to get modern libertarians, conservatives, and progressives to once again rally against government-granted privilege.

Economic Freedom and Economic Privilege

Heritage indexLast week, the Wall Street Journal and the Heritage Foundation released their annual Index of Economic Freedom by Terry Miller, Kim Holmes, and Edwin Feulner. I was delighted to contribute a chapter on government-granted privilege. I began by noting that despite the manifest evidence of a strong empirical link between economic freedom and economic prosperity, large numbers of people still lack basic economic freedoms.

In the latest edition of the Index, for example, 92 countries—home to nearly 70 percent of all of humanity—were listed as “mostly unfree” or “repressed.” Even among the freer nations such as the United States, economic freedom in recent years has been declining.

Why? I suggest two answers. The first is that ideas matter and we are currently losing the battle of ideas.

The second answer is more difficult:

Put simply, some entrenched interests benefit from the current lack of economic freedom and are prepared to go to great lengths to maintain the unfree status quo.

If this is not immediately obvious, it may be because the advocates of economic freedom often fail to emphasize it. Too often, those of us who argue for freedom highlight the fact that taxes are crushing, that regulations are burdensome, and that government involvement in the economy is an impediment to progress. While this is typically true, it is also true that tax dollars line the pockets of some well-connected companies, that regulations often allow some firms to profit at the expense of customers and competitors, and that almost every intervention in the market creates both losers and winners.

The chapter, adapted from The Pathology of Privilege, can be found here.

There are other interesting contributions from Robert Barro on “Democracy, Law and Order, and Economic Growth”; James Roberts and John Robinson on how “Property Rights Can Solve the Resource Curse”; and by Myron Brilliant on how “Good Business Demands Good Governance.”

Also, don’t miss Miller’s OpEd from the Wall Street Journal. It offers a nice overview of the latest data and a summary of the chapters. Lastly, be sure to spend some time exploring the data and the website. They’ve done a brilliant job of bringing all of this information together and presenting it in a user-friendly way.

My thanks to Heritage and especially to Terry Miller for the opportunity.

What’s Good for General Motors May be BAD for the Country

Marketplace recently did a segment on the federal government’s announcement that it was getting out of the car business and would be selling off its stake in GM over the next two years. Marketplace reporter Nancy Marshall-Genzer first turned to Cato’s Dan Ikenson who noted that taxpayers would likely “need to assume a loss of $15 to $20 billion.”

Then, she turned to Sean McAlinden of the Center for Automotive Research who believes that taxpayers will break even.

“Is he math-challenged?” she asks. Not when you “look beyond the bailout cost” and consider that the bailout meant government ended up spending less on unemployment checks, that it got more income-tax revenue from auto industry employees, and “Then there’s the trickle-down effect.” To wit:

Without GM, auto parts suppliers would have struggled. Maybe gone under themselves. The carmakers use many of the same suppliers, so assembly lines at Ford would have ground to a halt. Dealerships would have suffered too.

A few things to note:

First, I love that she uses “trickle-down” in the way it should be used: in reference to a top-down government policy that transfers wealth from the taxpayer to well-to-do firms in hopes that the transfer will eventually “trickle down” to the little guy. I’ve long felt that if there were any justice in the English language, policies such as these would be called “trickle-down economics.” More commonly, of course, it is across-the-board tax cuts that don’t transfer wealth but instead abstain from taxing that go by the name “trickle-down.”

Second, as long as we are looking “beyond the bailout cost” let’s also look beyond the “trickle-down” effect (which I find dubious, but I’ll leave that to another day) and consider some additional negative consequences of a bailout. In my paper on government-granted privilege, I catalogue a host of problems that may arise when government bestows favors on particular firms or industries. These include:

  1. Less competition, yielding higher prices for consumers and less economic surplus
  2. X-inefficiency (i.e. higher production costs)
  3. Lower quality goods and less innovation
  4. Rent-seeking (people invest valuable resources asking for bailouts)
  5. Unproductive entrepreneurship (entrepreneurs busy themselves thinking of new ways to obtain bailouts instead of new ways to create value for customers)
  6. Moral hazard (firms are incentivized to make mistakes when they know that mistakes might entitle them to a bailout.
  7. Loss of innovation and diminished long-run economic growth
  8. Increased short-run macroeconomic instability
  9. Increased cronyism, which can erode social trust and diminish the legitimacy of both government and business

You can read my paper for arguments and citations for each of these claims (though this appropriately-titled paper is a good place to start).

Now let me add two more problems that are specific to the auto bailout:

  1. In choosing to give the union’s Voluntary Employee Beneficiary Association greater priority than claims by other unsecured creditors such as suppliers and unsecured bond holders, the Administration’s auto bailout overturned a bedrock principle of bankruptcy law (namely that those creditors with similar claims be treated equally). My Mercatus colleague, GMU Law Professor Todd Zywicki, has written about this with the Heritage Foundation’s James Sherk here, and here. It isn’t clear yet at this point what sort of precedent this will set. But if unions were the winners here, generality and the rule of law seem to have been the losers.
  2. The auto bailout seems to have radically shifted the Democratic Party’s position on the relationship between government and business. As Timothy Taylor pointed out in October, there was a time when Democrats openly mocked Republicans who claimed that “what’s good for General Motors is good for the country.” There was a time when Democrats believed that social safety nets were supposed to catch individuals who were down on their luck, not the firms at which these individuals happened to work. As Luigi Zingales points out in A Capitalism for the People, the Democratic Party’s one-time antagonism to business sometimes proved a healthy check on Republicans who too often confused being pro-market with being pro-business. Now that Democrats, too, think that their job is to help corporate America, there is effectively no organized political check on crony-capitalism.

Hear Me Talk About Government-Granted Privilege

Date: This Thursday, September 27.

Time: 11:00 AM to 12:00 PM

Location: Lehrman Auditorium, Heritage Foundation, 214 Massachusetts Ave, NE, Washington DC, 20002-4999

You can register for the event here (if you can’t be there in person, you may watch on line).

My thanks to the Heritage Foundation and to Ambassador Terry Miller, in particular. It should be a fun discussion.

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Update: A previous version of this post erroneously said that the event was at 12:00 rather than at 11:00.

AEI-Mercatus pension panel addresses need for reform

Yesterday Eileen Norcross participated in a panel discussion that was co-hosted by the American Enterprise Institute and the Mercatus Center. The event included two panels, one discussing the case for pension reform, and the second discussing the politics of reform for conservatives.

Eileen participated on the first panel, joined by Scott Beaulier of Troy University and Jason Richwine of the Heritage Foundation. They covered several points of the importance of pension reform, including the necessity for fund managers to use the correct discount rate when determining the pension liability, the importance of upholding fiduciary responsibility to workers and retirees, and the reality that public employee pensions are overly generous compared to private sector compensation.

Drawing on their previous research in pension reform, the panelists made a convincing case for the need for a shift away from defined benefit public pensions. Unfortunately, none were particularly optimistic that drastic reform measures will be undertaken. Scott pointed to Utah as a model states relative to others for responsible pension fund management but said that even their reforms do not go nearly far enough.