Tag Archives: Joseph Stiglitz

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.

The unseen costs of the Ex-Im bank

The great 19th Century French economist Frederic Bastiat had good advice when thinking about economics. Actions, habits, and laws, he said,

[produce] not only one effect, but a series of effects. Of these effects, the first alone is immediate; it appears simultaneously with its cause; it is seen. The other effects emerge only subsequently; they are not seen; we are fortunate if we foresee them.

The good economist, he said, “takes into account both the effect that can be seen and those effects that must be foreseen.”

So it is with the US Ex-Im bank.

The independent federal agency helps foreign firms finance the purchase of American-made products. They do this by selling insurance to these foreign purchasers, by directly loaning them money, and by guaranteeing loans that others like Goldman Sachs make to these firms.

Ex-Im’s activities produce some seen benefits and these are widely touted by the bank and it’s boosters, such as the National Association of Manufacturers. These seen benefits are:

The gains to foreign purchasers

Since most foreign purchasers are sub-prime borrowers (what could go wrong, right?), the bank’s assistance allows them to obtain credit that private lenders would otherwise be unwilling to extend. At least in the short run, this helps these foreign purchasers.

The gains to U.S. manufacturers

Ex-Im’s loans, loan guarantees and insurance all increase demand for some domestic manufacturers’ products. This allows them to sell more stuff and to sell it at higher prices than they otherwise would. The bank boasts that, on average, “87% of transactions benefit small business exporters of U.S.-made goods and services.” Note the use of the words “transactions” and “small.” The bank is slicing the data here in a way that isn’t entirely honest. More on which below.

But as Bastiat would tell us, these seen benefits are less than half the story. There are also a host of less-conspicuous effects, and all of them are bad. These include:

Excessive risk

Rational lenders are unwilling to finance risky bets unless they are compensated with higher rates of return. These higher interest rates, in turn, make risky borrowers think twice about undertaking bad investments. This is a feature of a well-functioning financial system, not a bug.

Like all goods, capital is scarce and this feature helps ensure it isn’t wasted, steering it to the projects where it can do the most good for people. Ex-Im’s activities, on the other hand, steer capital—at artificially low interest rates—to sub-prime borrowers so they can buy big, expensive products. This is bad for the world economy because it misallocates capital. But in the long run it’s bad for many of the borrowers themselves because it encourages them to take on risks they can ill-afford (which is why I hedged above when I said they gain “in the short run”). Another great French economist, Veronique de Rugy, highlighted this fact in a recent post. As she points out, this isn’t just a hypothetical concern:

In the 1990s, the Ex-Im Bank was so excited to “support” the people of the Republic of Nauru by extending financing assistance to Air Nauru to purchase some, you guessed it, Boeings. When Air Nauru defaulted in 2002, the Ex-Im Bank seized Nauru’s only jet straight off of the runway — leaving the country’s athletes stranded on the tarmac after the Micronesian Games.

Higher prices for manufactured products

Next consider the unseen effect on domestic purchasers. Like Air Nauru, domestic airlines such as Delta, United, Southwest, and dozens of others also buy Boeing aircraft. Unlike Air Nauru, these firms don’t receive loan subsidies. This hurts all of them once, and some of them twice.

First, the international carriers among this group like Delta lose market share to Ex-Im-privileged firms like Korean Air and Emirates Air. This explains why Delta has filed a lawsuit against Ex-Im.

Second, all US carriers—even those like Southwest that only serve the US market—end up paying higher prices for planes because Ex-Im privileges increase the demand for, and therefore the price of, airplanes. As Vero notes in this piece, this has many air carriers worried about a jet plane bubble. Simple economics, of course, predicts that some of this cost will be passed on to consumers in the form of higher ticket prices.

Privileges for banks

Presumably, many of the legislators who routinely vote to reauthorize Ex-Im do so because they want to subsidize domestic manufacturers. Unfortunately, the laws of economics dictate that the actual beneficiaries of a subsidy need not be the intended beneficiaries.

In the case of Ex-Im, a large chunk of the benefit is captured by privileged banks instead of by manufacturers. Thanks to Ex-Im’s loan guarantees, banks are able to make loans to foreign buyers while unloading most of the risk. This is yet one more way in which banks, “privatize gains and socialize losses” (to borrow a phrase used by Nobelist Joseph Stiglitz at an Occupy Wall Street rally).

This privilege sits on top of a pile of other privileges. The IMF recently estimated that in most years the biggest of these privileges—the too big to fail subsidy—is larger than bank profits!

Few gain at the expense of the many

Consider, again, the bank’s assertion that 87 percent of its “transactions” benefit “small business” exporters. Why focus on transactions? Wouldn’t it be more transparent to focus on the size of these transactions? When you break it down this way, as Vero does in this piece, you see that 81 percent of the value of Ex-Im assistance goes to “big businesses” as the bank defines them.

And just how do they define big and small business? Answer: not in the same way others like the Small Business Administration do. Ex-Im’s definition of “small” manufacturers and wholesalers is three times larger (by number of employees) than the SBA’s definition and it includes firms with revenues as high as $21.5 million a year.

A host of pathologies

As I emphasize in the Pathology of Privilege, these favors to a select few domestic manufactures and banks come with a host of problems. In short, privilege “misdirects resources, impedes genuine economic progress, breeds corruption, and undermines the legitimacy of both the government and the private sector.”

But Ex-Im and its beneficiaries don’t want you to see that.

Is There Room for Compromise on Unemployment Insurance?

Last night the Senate allowed unemployment insurance benefits to lapse for those Americans who have been receiving such benefits for 99 weeks or more. What will happen to the unemployment rate? Let’s look at it in the short-run and in the long-run.

Short Run:  

I would argue that in the short-run, it is unclear. On the one hand, Keynesians believe that unemployment insurance is one of the more effective forms of fiscal stimulus: by putting money in the hands of those who are likely to spend it, the Keynesian multiplier can work its magic, rippling throughout the economy leaving prosperity in its wake. That is, unless the estimates of the Keynesian multiplier are widely off-target. And there are some reasons to believe they are.

But even if we grant the Keynesians this argument, we have to consider the countervailing evidence. There are numerous studies that show that extensions in potential benefit duration are correlated with longer unemployment spells. Moreover, other studies show that the probability of finding employment rises just prior to the lapse of benefits.

Of course, aside from the macroeconomic effects, we have to consider the fact that unemployment checks help people. And maybe we should be willing to harm the economy at-large for the sake of helping those who are out of work.

Long Run:

The long run story is clearer. From 2000 to 2004, the U.S. unemployment rate averaged about half that of France, Germany, Italy and Spain.

 

In 2004, among the unemployed, the U.S. fraction that was unemployed for more than a year was about one-fourth that of other nations.

 

So compared with other nations, we have an extremely healthy labor market and we all benefit from this. As I have noted before, numerous studies attribute our relatively low long-term unemployment rate to our more competitive labor market. Compared with other nations, U.S. labor taxes are lower, labor regulations are less-burdensome, and unemployment insurance benefits are less-generous. Because of this, employers are more likely to hire and employees are more likely to accept offers. This is an incredible advantage. And we should not take it for granted.

Reconciling the Short with the Long Run:

So in the short run, unemployment insurance may help the economy while it undoubtedly helps those who find themselves unemployed. But how do we achieve this short-term aim without jeopardizing the competitive labor markets that have benefitted all Americans?

Perhaps there is room for compromise. One option may be to agree to extend benefits now in exchange for reform of the system. As Eileen has noted, we would do well to consider systems such as that of Chile. They have two systems that work side-by-side: one is a social insurance system that is similar to our own unemployment insurance program; the other is an Unemployment Insurance Savings Account (UISA) program in which workers are required to save a fraction of their earnings in a personal account. Workers have an incentive to get back to work quickly because whatever amount they leave in the account becomes theirs when they retire. Former Clinton Administration economist and Nobel laureate Joseph Stiglitz has made a similar proposal for the U.S. that would integrate unemployment insurance with retirement insurance. Maybe now is the time to give it a thought?