Conservative Economics

Jared Bernstein is discussing his new book at TPM Cafe this week, and he's been getting into it with a conservative economist over the concept of merit and how much people are paid.

Alan found principle #1 ambiguous, and since it’s central to a) the book, and b) my understanding of the economy, let me repeat the principle and try to clarify.

#1: Economic outcomes are generally thought to be fair, in the sense that market forces dole out rewards to those who merit them. But that’s not always the case. Power, whether it’s based on political clout, wealth, class, race, or gender, is also a key determinant of who gets what.

This seems crystal clear to me, but maybe that’s because I view many of the economy’s outcomes through this lens. Simply put, I see evidence of large and growing gap between overall economic growth and the living standards of working families. And I see disproportionate power—not merit, not marginal product, not efficient resource allocation—as one driving force behind it.

Probably the best indirect evidence that pay doesn't reward productivity is this chart showing income growth under Republican and Democratic presidents. The party of the president has a profound influence on who gets what, and unless higher wage earners become more productive than anyone else under Republican presidents, or unless everyone gets more productive under Democrats, politics and power has a lot to do with how much you're paid.

That said, is this a good argument for progressives to get into? If I had to answer, without much direct evidence, I'd say no, just because you're swimming against such a strong current. People, especially Americans, tend to believe in a just world, that people generally get what they deserve. Maybe with elites who buy conservative economics it's a good idea to have at it, but I doubt it'd play in Peoria. Conservatives will probably win, and it's better to talk about job quality and inequality on more favorable grounds.

This graceful E.J. Dionne column got me thinking about one more casualty of conservative economics: neoliberalism.

Conservative economics propped up the neoliberals. Many embraced a watered down version of the conservative understanding of market dynamics and government, while professing to keep their liberal moral compass. This now seems counterproductive, because they reinforced right wing ideas for the sake of short-term survival and compromised with an ascendant far-right that should have been blocked.

But there are some good things about neoliberalism that ought to be salvaged. An aggressive and confident liberalism would be great, but not one makes the same mistakes that the 60s and 70s liberals did. It should understand the new political and economic environment, that things have changed and we need something different, but that the answer is not to be more like conservatives.

Nobody I know has explicitly tried to combine the better elements of both perspectives. So what are some good things about neoliberalism and liberalism?

Two good things about neoliberalism, I think, are it's claim to the public interest and belief in pragmatism. For too long, these ideas have been tied to conservative policy and values, but they don't have to be.

Two good things about liberalism are its inclusiveness and idealism. Liberals believe in accepting and supporting outsiders, and that we, through government, can take active steps to make the world "as it should be."

To be sure, there are major tensions here. But both traditions can learn from each and serve as a check on excess. For the time being, neoliberals need the check that liberalism provides the most. They've become too anti-government and need to stress that interventionist policy can promote the public interest- by preventing a mortgage meltdown, for instance. And liberals could benefit from a pragmatic approach to integrating outsiders into the economic mainstream. Talking up the economy, as Margy argues, is a good way to do that.

And it should be instructive to remember what William F. Buckley did for conservatism- he combined and legitimized the warring factions of conservatism- the social conservatives and free-marketeers- by finding common ground. It turned out that they all started from the perspective of individualists. For liberals, that unifying force is the community- belief in its power and value, that everyone's fate is tied together and that we all need to look out for each other, that deep down we're all cut from the same cloth, and that everyone has something to contribute and an important role to play in creating a better society. Developing this common ground could bring together the disparate elements of the progressive movement, including anti-war folks, the environmentalists, the identity issues folks, etc.

There's one more core principle of conservative economics that's becoming incoherant: supply-side fiscal policy. The stimulus bill, though far from ideal, was a relatively progressive tax cut that principally targets the middle and working class. Turns out that encouraging them to go out and spend money isn't just fair- it's the best way to keep the economy growing. And making it more progressive would have been even better for the economy.

Supply-side-ism actually started coming undone under President Clinton. When he raised taxes on the wealthy, the sky didn't fall, and the economy grew faster than it has this decade. But new revenues weren't followed by increased spending. This, in a way, reinforced conservative economics, or stopped short of putting the nail in the coffin. After all, the argument for tax cuts for the rich is built on a trade-off. Letting the rich keep their money is supposed to be preferable to the government spending it. They would invest wisely but the government wouldn't. Clinton left this belief untouched by failing to invest in anything but deficit reduction.

Now it's clear that there are things more important than reducing the deficit, and that includes redistributing money downward. Out of fear of causing a deep recession, conservatives have lined up behind this agenda and abandoned their principles (though as Shawn has pointed out, they've never been all that true to them anyway). They've lost faith in their ideas, I think, and it's time progressives stood up forcefully for theirs.

Progressives can't rely on the deficit to save them from tax cuts for the rich, particularly in the middle of a recession. If we want to advance an agenda that matters, we have to find rhetorical ground that defends and advances, that affirms our basic beliefs and denies theirs. That may begin by asserting that tax cuts for the rich aren't good because, as the stimulus package begins to show, we can spend it better together than they can on their own.

Economist Martin Wolf in the Financial Times today recognized that governmental interference is in the public interest:

Remember Friday March 14 2008: it was the day the dream of global free- market capitalism died. For three decades we have moved towards market-driven financial systems. By its decision to rescue Bear Stearns, the Federal Reserve, the institution responsible for monetary policy in the US, chief protagonist of free-market capitalism, declared this era over. It showed in deeds its agreement with the remark by Josef Ackermann, chief executive of Deutsche Bank, that “I no longer believe in the market’s self-healing power”. Deregulation has reached its limits....

I greatly regret the fact that the Fed thought it necessary to take this step. Once upon a time, I had hoped that securitisation would shift a substantial part of the risk-bearing outside the regulated banking system, where governments would no longer need to intervene. That has proved a delusion.

The core principle of conservative economics is that individualism and the free market are good for everyone. Public-mindedness and government just get in the way. But the financial crisis is showing what a sad farce these ideas have become, so the economists that gave it to us are beginning to have second thoughts about their project. Perhaps government has an important role to play, they think. Maybe we need a watchdog to make sure everyone's playing fair. And down goes deregulation.

So which application of conservative economics is next? Robert Reich, in a way, suggests moral hazard and its implication that safety nets are unproductive. Tell that to Bear Stearns and the millions of homeowners who're losing their houses.