Monday, August 22, 2016

Free-market ideology: a reply to some replies

I recently wrote a Bloomberg View post about political-economic ideologies, and how society is quicker to change than individual human beings. The upshot was that free-market ideology seems - to many Americans, and also incidentally to me - to have mostly hit a wall in terms of its ability to improve our lives, and so society will inevitably embrace an alternative, despite the protests of diehard free-marketers.

Bryan Caplan is flabbergasted at the notion that free-market ideology (aka "neoliberalism") has actually been tried in the U.S.:
The claim that "free-market dogma" is the "reigning economic policy" of the United States or any major country seems so absurd, so contrary to big blatant facts (like government spending as a share of GDP, for starters), that I'm dumb-founded.  
This is pretty much exactly the attitude I described in my post! "Of course neoliberalism hasn't failed; we just never really tried it."

David Henderson has a longer and more measured response. He challenges the idea that free-market ideology has demonstrated any failures at all.

Now I could simply make a weak claim - i.e., that free-market ideology seems to have hit a wall, and that in the end, that general perception is much more important than what I personally think. But instead, I'll make the much stronger claim - I'll defend the idea that free-market ideology has, in fact, really hit a wall in terms of its effectiveness.

Exhibit A: Tax cuts. Tax cuts, one of free-marketers' flagship policies, appear to have given our economy a boost in the 1960s, and a smaller boost in the 1980s. But any economic boost from the Bush tax cuts of 2001 and 2003 was so small as to be invisible to all but (possibly) the most careful econometricians. Notably, a number of attempts to encourage savings - capital gains tax cuts, estate tax cuts, and the like - have not halted the steady decline in personal savings rates.

Exhibit B: Financial deregulation and light-touch regulation. It seems clear to me that under-regulation of derivatives markets and mortgage lending played a big role in the financial crisis. The counter-narrative, that government intervention caused the crisis, has never held much water, and has been debunked by many papers. This was a private-sector blowup.

Exhibit C: Light-touch regulation of monopoly. The evidence is mounting that industrial concentration is an increasing problem for the U.S. economy. Some of this might be due to intellectual property, but much is simply due to naturally increasing returns to scale.

Exhibit D: The China shock. While most trade booms seem to lead to widely shared gains, the China trade boom in the 2000s - which free marketers consistently championed and hailed - probably did not. High transaction costs (retraining costs, moving costs, and others) lead to a very large number of American workers being deeply and permanently hurt by the shock, as evidenced by recent work by Autor, Dorn, and Hanson.

Exhibit E: Faux-privatization. True privatization is when the government halts a nationalized industry and auctions off its assets. Faux-privatization is when the government outsources an activity to contractors, often without even competitive bidding. Faux-privatization has been a notable bust in the prison industry, and school voucher programs have also been extremely underwhelming. Charter schools have fared a bit better, but even there the gains have been modest at best.

Exhibit F: Welfare reform. Clinton's welfare reform saved the taxpayer very little money, and appears to have had little if any effect on poverty in the U.S.

Exhibit G: Research funding cuts. The impact of these is hard to measure, but cuts in government funding of research appear to have saved the taxpayer very little money, while dramatically increasing the time that scientists have to devote to writing grant proposals, and increasing risk aversion in scientists' choice of research topics.

Exhibit H: Health care. The U.S. health care system is a hybrid private-public system, but includes a proportionally much larger private component than any other developed nation's system. Free-marketers have fought doggedly to prevent the government from playing a larger role. Our hybrid system delivers basically the same results as every other developed country's system, at about twice the cost. Private health care cost growth has been much faster than cost growth for Medicare and other government-provided programs, indicating that much of our excess cost has been due to the private component of our system, not the public part.

I could go on, but these are the big ones I can think of. In some of these cases, free-market policies seem to have produced some gains in the late 20th century, but by the 21st century all appeared to be either having no effect, or actively harming the economy.

No, this is nowhere near as big a failure as that of communism (though in some ways, notably health care and financial deregulation, we've done worse than the somewhat-socialist nations of Europe). The analogy with communism was a way of illustrating a certain mindset, not to draw an equivalence between the results of neoliberalism and communism.

Also, I personally think there is still scope for many neoliberal policies to improve our economy. Reduced occupational licensing, urban land-use deregulation, simplification of the tax code, and various other kinds of deregulation all seem to show promise. If free-market policies have hit a wall, it's a porous wall - in real life, nothing is as cut-and-dry as in our ideological debates.

But overall, I think the last decade and a half have shown clearly diminishing returns, and sometimes negative returns, from neoliberal reforms. So our society is right to be looking for alternative policy packages. Though that doesn't necessarily mean we'll choose a good alternative - I think Sanders-style socialism would probably be a mistake.


  1. I think our policies are pretty good on a national level, partly because the get a lot of attention in the press. On the local level, though, there's a lot of room for improvement. What about housing regulation? I'm not sure if there's any examples of anyone that's actually tried large-scale deregulation, but cities that haven't enacted as much regulation have lower housing and rent prices.

    On the national level, I think airline deregulation has been a big success in keeping down prices.

    I have a knit to pick on Exhibit C. Natural monopolies occur due to economies of scale (e.g. utilities), and some are due to patents, but the ones we really have to worry about occur intentionally through consolidation, price wars, and collusion.

  2. Anonymous4:45 PM

    I kind of disagree with E: Vouchers do seem to be better than public schools. The students academic outcome doesn`t improve by a lot (if at all), but parent satisfaction and school diversity seem to be considerably higher with vouchers, while costs are considerably lower (specially in developing nations).

    And on H: while it is true that the US system is messed up I think it is possible to structure good private systems, Switzerland and Netherlands do it (doesn`t mean single payer is the worst idea in the world, I just think a swiss like system would be a lot easier to sell politically).

    And can we please not call Sanders a socialist? People are already confused enough without us messing with the definitions of stuff.

    1. I suspect the higher parent satisfaction may be confirmation bias - if it was your decision, you'll find reasons to be satisfied with the results.

  3. Anonymous5:13 PM

    How is faux-privatization a free market policy? Wouldn't the free market policy be just plain old privatization?

    1. ^This exactly. The faux-privatization point is an argument against Noah's claim.

    2. It's really another argument against the ridiculous regulation poured into government contracting. If the red tape weren't so thick, privatization via contracting would have competitive potential.

      Another strike against casting regulation as a *thing*.

    3. Real privatization would have people who think other people should be in prison paying for the prisons on an opt-in basis. Obviously, there would be a lot of free riders and a lot of crime, but that's the private sector for you.

  4. We know, as much as "knowing" can be a thing in economics, that free markets have a boom/bust cycle, and with mass democracy, that's not acceptable. Fascism is always around the corner.

    Noah is so self-evidently correct here that it's almost not even interesting.

    I think of capitalism as like democracy: the worst system, except for all the others. It has to be mitigated, at some cost to efficiency and other abstractions, because if that's not done, it'll kill itself by killing its society.

    1. Very few people believe it doesn't have to be "mitigated" in any way, but when it's mitigated beyond the point of functioning, then you lose the benefits of it functioning.

    2. Anonymous10:07 AM

      You've hit on an interesting point. The argument really isn't between regulating/not-regulating so much as degree of regulation. The degree of regulation one thinks desirable is, in turn, based on different opinions about how the market will function with or without a given regulation. That is, will this regulation bring our economy closer to collapse or explosion?

    3. I always think of free enterprise as being like fire. Fire is amazingly useful and powerful. It can do things that nothing else can, but you don't burn down your house to read after dark or burn yourself alive to cook dinner.

  5. Neoliberal economics seems to me at least, to be promoted for its political implications. Rather its a justification to keep power in the hands or peoples who currently have it.

    1. That's exactly the opposite of true. Regulations and governmental intervention do much more to keep the current powers in place than the free market does.

    2. No, bad regulation keeps powers in place. Good regulation does the opposite. A complete lack of regulation just has a different set of winners and losers decided by government inaction and defended as the status quo by the winners of that policy. Why do you think the fossil fuel industry invests so much money in "think tanks" and climate change skepticism? Because the status quo and the lack of meaning full action on carbon emissions is protecting market failure which results in a windfall for fossil fuel producers. It's the same way in any market which experience market failure (there are a lot). The lack of meaningful regulation by uncaptured regulators results in a windfall for a certain party which will then lobby HEAVILY for it to remain that way. Their arguments will often revolve around an idea of the "free market" when actually they want to continue to exploit a fixable market failure.

    3. @PRD: But isn't it amazing how quickly "good" regulation becomes "bad"? Regulation, good or bad, always people or entities with money to influence the market via the regulators. And many times, the sheer volume and costs of compliance ensure that only the major powers that be can afford to play. Not sure why you choose to paint fossil fuels and that market (which clearly is not failing) with the "bad" brush when in reality the regulators are the ones distorting that market AND the markets for renewables. Does ANYONE, other than corn farmers, believe the ethanol mandates are achieving desirable outcomes?

  6. Don't forget climate change in your list of free-market failures.

  7. OK, but what you think of brexit in the short run and long run.

  8. So much to comment on, but so little time and space. I very much liked Noah's View piece but less so what he's written here. The notion I came away from the View piece was that even if more or pure neoliberalism could solve today's problems, it won't happen given today's American society so any directional change in policy or beliefs will be toward something different rather than a more pure form of the free markets.

    This post seems to be more about claiming the free-market has in fact failed which is a stretch at best. Many things to comment on but I'll pick two.

    1. Noah mentions the "naturally increasing returns to scale." I think many of these "natural" returns are in fact a product of artificial barriers to entry and competition. Healthcare, finance, banking, pharma...are just some of the many industries in which it is almost impossible to do business without scale due to the costs of regulatory hurdles.

    2. Noah mentions our "hybrid private-public" healthcare system which is in fact vastly more public than private. The small portion that is private is so distorted by government policy that it can scarcely be called a failure of private markets.

    1. Think of it this way: Other healthcare systems around the rich world are more public than that of the US. And they get better results for less spent.

    2. @csning: Assuming that is true, it doesn't follow ipso facto that the private portion of healthcare is the problem. A key tenet of free markets is price discovery through supply and demand. I don't believe this happens effectively in the US, largely because of government policy.

    3. Oh come now. By almost every measure, the private insurance part of the US healthcare system is less efficient than Medicare.

    4. The problem of health insurance is that of insurance markets in general. Whether you mitigate that risk with wholesale government provision of health care or make insurance mandatory, coupled with regulation that people with preexistting conditions are not discriminated against, while preserving a role for private insurance is up to the individual country. But it's these properties of the health insurance market which must be addressed before health discovery can hope to make much of a difference.

    5. Have you ever shopped for an individual health insurance policy? I don't mean through the exchange but through a 3rd party payer. I've helped my two daughters (independent contractors who don't get benefits) do so and it's not much fun. Everything is moving to high deductible policies and restricted choice of doctors. The only good thing is that they get a tax deduction for the premium payment but that's about it.

    6. @Andrew: The "private insurance part" of the US healthcare system is not private in any real sense! That portion of the market is built on a framework which only exists because of the way the government has aligned the incentives through tax policy. You think it makes any sense that the vast majority of private healthcare plans are paid for by people's employers? Go ask your neighbor to buy your groceries for you. Or more realistically, go ask your neighbor to have your home owners' association buy them for you. See if you get the groceries you want at a lower price than you would pay if you did the shopping yourself.

    7. ' You think it makes any sense that the vast majority of private healthcare plans are paid for by people's employers? Go ask your neighbor to buy your groceries for you. Or more realistically, go ask your neighbor to have your home owners' association buy them for you. See if you get the groceries you want at a lower price than you would pay if you did the shopping yourself.'

      Not sure this is the right analogy. Employers get better deals than individuals do because they have better bargaining power/have a risk pool that is not too different from the population as a whole.

    8. The analogy is not perfect but the core of it is accurate. Employers get better deals FOR THEM, not necessarily for the end user. More importantly, the plans they buy are designed to be one-size-fits-all plans, which reduce options and choice in the market place. The removal of all of these middlemen in the market which only exist due to the unintended consequences of current policy would ultimately create a more robust market.

  9. The low hanging fruit has been picked.

  10. I like this much more than the original piece, more to chew on here. You'd probably think of me as a free market ideologue but I flatter myself that I'm a bit pragmatic.

    A. Tax cuts. At the risk of falling into the "not a true free market" fallacy from the get-go, I'll agree that tax cuts don't bring the economic benefits claimed for them. But I don't know what fee market principle favors financing government spending via debt instead of taxation, seems all the same to me. The spending and debt are the problem.

    B. Banking regulation. Point for your side, 2008 was caused mostly by terrible business decisions by the banks helped out by a plethora of fraudulent borrowers and some suboptimal regulation. The free market answer is, of course, screw you, your business goes under. But I get the externalities of banking and the motivation for bailout even if I opposed it. So yes, some better banking regulation is in order, unfortunately I'm afraid Dodd-Frank is following in Sarbanes Oxley's footsteps of confusing expensive and complicated compliance with making the system more robust.

    C. Monopolies. Increasing regulation motivates concentration by increasing returns to scale through expensive compliance. That said, I'm not sure what we have to fear from monopolies that a dynamic market wouldn't address. Remember Standard Oil became a monopoly precisely because it drastically lowered consumer prices through its hyper efficient supply chain. I'm not worried about monopolies absent more specifics.

    D. China trade. Another point for your side. I admit, I used to just say "Ricardo!" and drop the mic. While consumers have benefitted greatly from China's entry into WTO, the impact on producers has been more sudden and severe than they could reasonably cope with. TPP is intended largely to build a counterweight to China, but we should be wary of recreating the old woman who swallowed a fly. Similarly, I favor expanded legal immigration, but maybe we ought to work our way up to open borders.

    E. Faux privatization. Seems like you're describing exactly the kind of crony capitalism that free market types like myself hate.

    F. Welfare reform. I don't understand the free market angle here. I would think we would generally want to reduce the regulations on welfare recipients instead of increasing them, something closer to those basic income schemes.

    G. Research funding cuts. So yes, I will own government spending cuts. Again, without specifics hard to see what the problem is. What exactly is the optimal level of government sponsored research? Might be less, might be more.

    H. Health care. Wow, a lot of entanglement there. I'll just say you have to work a LOT harder to convince me that the problems in our health care system are caused by too much freedom.

    Good job, overall I concede a few points where some government is better than none, and I've adjusted my opinions accordingly.

  11. Zack M8:09 PM

    "Tax cuts, one of free-marketers' flagship policies, appear to have given our economy a boost in the 1960s, and a smaller boost in the 1980s. But any economic boost from the Bush tax cuts of 2001 and 2003 was so small as to be invisible to all but (possibly) the most careful econometricians."

    Why would this be surprising to a neo-liberal/free marketer? The Kennedy and Reagan cuts both reduced the top marginal income tax rate by 20 percentage points. The Bush cuts lowered the it by 4.6 points and the top corporate rate was unchanged. It's also strange that you would lump the 2001 and 2003 cuts together in this context. During the four years after the '03 rate cut , GDP growth averaged a little over 3% annually. Perhaps that's not spectacular, but it's considerably higher than anything we've seen during the current expansion, no?

    Also like some other commenters, I don't understand your point on "faux privatization."

  12. A very important place to look for the failure of free market ideology is where it doesn't even show up. Social security, WIC, and rural education in some areas are good examples. Also anything environmental, including global climate change as above (pro tip: Coase applies to low transaction cost scenarios). Barry Bozeman of science policy econ fame has a schema of public success/public failure/private success/private failure. (Tobacco regulation in the 1970s is an example of public failure, for instance.) But even that doesn't capture the failure of a no-show like elder poverty before social security: a non-diversifiable, irreversible, and widely experienced risk of being old and poor, possibly as a result of a bad sector/geography/business cycle/ genetics draw.

  13. Regarding the faux privatization;

    I dont know if Noah had this specifically in mind or not but a point I would make especially about the examples he chose would be that there is no other way to privatize the prisons. Privatization helps when the incentives for profit can actually help drive innovations or improve productivity. In the case of prisons that isn't possible. Privatization has simply meant taking an income stream form the govt and guaranteeing it to some private contractor. You cant get the incentives to line up in prisons. The goal of society is to keep people out of prison, we think it is a success (I would hope) if no one goes to jail this month. That means no one has done anything jail worthy. But private prison systems need customers so they will push for guaranteed quotas, which only the state can send them because only the state gets to adjudicate what is a crime and what the punishment will be, not private parties.

    Privatizing prisons was one of the worst ideas in human history. Allowing some private investors to profit off misery is about as sick as can be. there have been no innovations to come form this experiment. All that happens is an income stream gets diverted, cuts are made to services and workforce to trim "fat" and then someone gets the bright idea that people who have committed a crime and are "paying" with their lack of freedom (supposedly the highest goal of theses Faux conservatives) should also start paying monetarily for things. People actually have to start paying for their own bondage.

    The school privatizations aren't nearly as grotesque as the prisons but they also get the incentives badly skewed and should be scaled back.

    1. I think your arguments are ridiculous. Profit can be achieved through efficiencies and expense reductions too. And just because the private prison operators can "push for guaranteed quotas" doesn't mean the customers (government) has to provide them.

    2. Expense reductions....hah! Pay cuts to the workers and cheaper services (fewer meals etc) to the inmates. There is nothing that private prisons can do BETTER than the public ones..... and they have to pay stockholders.

      Again... its sick to have a for profit prison system. Profit off of punishment!! Lets get more punishment!!

    3. Wow Greg. Off the deep end there. The private prisons are not the entities issuing punishment! "Fewer meals etc."? Nothing to be gained through efficiency? Why not let the public run all of our institutions if the private sector can't do better? How about we....oh hang on...I have to go get in the bread line.

  14. In healthcare in the USA the feds subsidize demand and the state and local governments limit supply. That contributes to high healthcare spending in the USA.

    And that is why I think that any fix must come at the state level. More spending by the feds will encourage the states to try to increase healthcare spending in their states.

  15. Also why then does the USA do better on PPP adjusted median income than a place like Germany. Even though Germany is full of crazy white people. White people are crazy in that they work much more than they have to live. Some will spend their childhood focused on school so that they can grow up to have a high paid but incredibly boring occupation like accountant. Where more sensible blacks focus on more enjoyable things like sports and music.

  16. Regulation is too broad a brush to paint with. Instead of writing about it monolithically, you really have to dive into specifics. Some are helpful, many are not. I'm guessing absent some regulation, we'd see very small improvements in the economy, but certainly that's still worthwhile goal, no?

  17. The reply to Caplan is cavalier and shallow. Smith characterizes the zealots as those who suggest we keep doing more of X, even though we've already been doing more of X and results are getting steadily worse.

    By most broad, objective measures, we've been steadily applying *less* free-market ideology:

    I'm quite confident other broad measures, such as number of regulations, would show the same pattern.

    So, no, Smith's claims of putative symmetry here are totally wrong.

    1. Free market != less spending government. The government purchases things in the market (regardless of freedom) the way that everyone else does, generally speaking.

    2. @Andrew: Most of government spending is purchases made for the use of other people paid for by other people's money. That is not the free market ideology we have in mind.

    3. Ummm, no. This "other people's money" trope should die, but it won't because it's so convenient an answer to anything the government does. Money is debt and comes from government or private borrowing. Government borrowing is different from private borrowing because the Fed doesn't fail if it doesn't get paid back, but the source of money is always debt. What the government spends enters the private sector as an asset. Sure, one can see some government spending as redistributional, but you have a tough argument to make that such redistribution is bad from an economic point of view, as it tends to move money from people who aren't spending it to people who spend it immediately. Money held but not spent has no utility.

      None of this has much to do with a free market. In the US, people are free to purchase the goods and services they choose and others are free to produce most products in the way that they choose. Some here have made a big deal of government regulation. Sure, some government regulation may be detrimental, but certainly not all. The "free market" itself is in essence a government regulation in that we have law that establishes property rights, private control of resources, corporate functioning, public infrastructure, etc. Without such regulation, what, other than a bullet, is to prevent me from claiming that what you say is yours is actually yours?

    4. First, I never said anything about having no regulation whatsoever. As for everything you said before your final question, what an unbelievable load of garbage! Why not just have the government buy everything for us then? Free assets for the private sector! And why should the government worry about the price it pays if everything is rainbows and lollipops anyway? The "other people's money" trope is used because it's true!

    5. People who slam the needle to either extreme, "why not just have the government buy everything for us," etc, seem to be in denial about the nature of civilization. Which is that a hybrid of public & private institutions is a necessary condition of civilized life. "Free market ideology" is both an oxymoron and a dangerous fantasy.

      The fact that, as a rule, it's the 'free market' people--Republicans--who are eagerest to privatize government functions *without* competitive bidding if it means a sweetheart deal for them tells us a lot about the motives behind the movement.

  18. Trying to understand how you can put together you issue-by-issue conclusions with your final conclusion about Sanders-style socialism being bad. Perhaps what you think Sanders-style socialism is and what I think it is are two different things, but simply on the basis that you admit that Sanders-style (single-payer) healthcare works better than our blended alternative, you might cut his policy proposals some slack. Sure, some of any politicians' proposals might come across as undesirable, but it never struck me that Sanders spouted more silliness than any of the others. What, in particular, seems problematic about Sanders-style socialism given your preceding analysis?

  19. With the exception of his citation to the literature regarding cost to workers associated with the China boom, Noah mentions no sources at all.

    Can he (or another reader) let me know whether there's any evidence for the other 7 points that there's a causal link between Neoliberal Policy X and Bad Outcome Y (relative to Statist Policy Z)?

  20. "Exhibit F: Welfare reform. Clinton's welfare reform saved the taxpayer very little money, and appears to have had little if any effect on poverty in the U.S."

    "Twenty years ago President Clinton signed the Personal Responsibility and Work Opportunity Reconciliation Act. The ending of legal entitlement to welfare has had a dramatic effect on low-income children. Welfare rolls fell rapidly and never recovered even as child poverty roared back in the wake of the Great Recession. Only 26 percent of potentially eligible families received aid by 2013, compared to 68 percent in 1996 when the the law was passed."

    Little effect on poverty? The neoliberal "center-left" has become corrupt.

    You just can't make up your own facts and own history just b/c suits Hillary Clinton.

    That's what the Republicans have done for decades and it hasn't served them very well.

    I predict a coming split on the left between the reality-based, populist left and the more political, careerist center-left. And not just in the U.S.

  21. I think this whole discussion is so blinkered because it doesn't consider the political elements of political economy.

    Private property, the bedrock of the "free market" system doesn't just happen. It requires the buy in of the entire society (or an extreme police state I suppose. Unfortunately I don't think that bothers a lot of the free market uber alles people).

    Why would people who don't benefit from a society agree to its rules? I see a lot of people here bemoaning the spending, etc. But the spending is some of what ameliorates the problems for the losers of the capitalist system. Because there has to be losers, that's capitalism.

    I suppose there could be market based distribution like basic income. But there we are always going to have taxes and distribution because otherwise there are the guillotines.

    Regarding regulations, they are also necessary to retain support for the system. One way is it gives people a way to direct a counterbalance to the power of the big winners. Extreme deregulation removes the ability for most people to have a say in the direction of their society. One dollar one vote isn't the same as one person one vote. If government isn't allowed a say in the direction of the economy then most people loose the ability to have their say in the direction of the economy.

  22. Exhibit A: Sure, income tax rates are probably low enough now that cutting them further won't help growth (although there is always the payroll tax...) But what about corporate rates? We (meaning the U.S.A.) still have one of the highest rates in the Western world. Those of us on the "free-market still has work to do" side would argue this is where we can help boost growth. If you are worried about revenue, look to tariffs (I'm not hard-core when it comes to free trade) or some sort of V.A.T. which has much less economic distortion involved -- basic Econ 101 stuff.

    Exhibit B: Where to begin? It is hard to take you seriously when you can say with a straight face that you think "under-regulation of derivatives markets and mortgage lending played a big role in the financial crisis" -- as if our housing market at the time of the crisis was "under-regulated" (hello Freddie and Fannie and CRA and various home-ownership programs pushed by the Bush Administration, etc.) As for these mysterious papers you refer to, there are plenty of papers demonstrating the costs to our economy of Dodd-Frank and better ways to regulate our financial sector (here is just one:

    As for regulation in general, you carefully ignored the history of de-regulation that Henderson presented (presumably you applaud those examples?) and also seem to be unaware of serious economists who study our current situation and think there is plenty of ways in which the government is too big and could get out of the way of business to help productivity and economic growth. One guy who writes about this A LOT is John Taylor, of the famous Taylor Rule -- you should review his work and attempt to come to terms with his arguments:

    Another great economist who writes regularly about regulatory reform is John Cochrane -- here he is bemoaning the attempts by our current (and future?) President to federalize our labor policies:

    Exhibit C: Any evidence? This is intriguing -- but surely this would be reflected in pricing problems and loss of consumer choices/welfare? Let's see some examples!

    Exhibit D: "...lead to a very large number of American workers being deeply and permanently hurt by the shock" -- the paper you cite suggests only certain groups of low-skilled workers were hurt (by failing to find jobs that paid the same as their previous factory jobs at the textile mill.) But that same paper doesn't ignore the gains from trade -- there are still enormous consumer benefits to low cost goods. How to help the folks who lose their jobs to trade while retaining the benefits of trade is indeed a tough public policy problem. But let's not forget -- the vast majority of jobs lost in the manufacturing sector over the past 20+ years were due to automation, not trade (lots of studies back this up!)

    Exhibit E: No quarrel here, although maybe there are real opportunities for privatization to occur (e.g. selling federal land, or Henderson's example of the Post Office.)

  23. [finishing comment]

    Exhibit F: Here we have to agree to disagree -- if you focus on TANF (which is what Clinton's reform created) then from January 1998 to March 2014, the number of recipients decreased by 62%. That saved taxpayers money -- in the grand scheme of things (e.g. the cost of the war in Iraq) not much, but it was something. The problem is that you are correct, the reform didn't do much to our poverty rate (although that might be an artifact of the way we measure poverty), although it did cause many single women to enter the labor force -- at least in the late 90s -- always a good thing (now they need to stop having babies before they get married!!!) We also continue to spend money like drunken sailors on all sorts of other welfare programs for the poor (for example SNAP) so spending on the poor continues to rise (mainly do to health-care -- more on that below.)

    Exhibit G: I have no idea if your criticism makes sense, although the obvious question would be to ask whether or not the U.S. seems to be suffering from some sort of research deficit relative to other Western or advanced industrial countries.

    Exhibit H: "Private health care cost growth has been much faster than cost growth for Medicare and other government-provided programs, indicating that much of our excess cost has been due to the private component of our system, not the public part."

    This last comment was just a joke to make sure we were still reading, right? It's not like there is a vast literature on this subject dealing with the reasons for "private sector" cost growth (hmmm, I wonder if those "private" health-care businesses are regulated by anyone? And I wonder when those regulations are relaxed if we see costs go down? I just wonder if there is a John Goodman or Dr. David Gratzer paper or book that has looked at this phenomenon?)

    Anyway, you are smart enough that you can actually engage the free-market health-care proposals on their own terms, as opposed to this bizarre non-argument in your Exhibit. Needless to say, once again, to argue that the system we have now -- in its heavily regulated and subsidized form is in any way share or form anything resembling a "private system", or even a "free market system" is just silly. Which is not to say that all government-run systems are the same either -- from what I've read something like the Swiss system wouldn't be half-bad for the U.S.

  24. There is a simple way of making sure that our Hybrid health system costs as much as the European counterparts: mandate that no pharmaceutical or medical devices company can price discriminate. You can only sell here if you sell at the same prices across the world. The prices will drop very quickly. We will stop subsidizing the world for a change.

  25. Free market ideology is very different from communism. Over the years, There have been economies more or less close to the ideal and we can try and judge the effectiveness of the measures accordingly. Just look at Canada or Sweden with their little free market revolutions in the early 90's.

    Communism on the other hand has been tried over and over again with roughly the same mass-murdering consequences.

    1. Keep in mind that the state capitalism we saw in Russia and China were largely a reaction to free market policies. And don't forget the Late Victorian Holocaust where somewhere between 30 million and 60 million people died because of free market policies. People were literally starving to death on the railroad tracks leading to warehouses filled with grain.

      Life in Tsarist Russia was not so great, either. Fortunately serfdom had been abolished 60 years earlier, but still life for the Russian peasants was not so great. It is not something any sane person would want to go back to.

    2. Anonymous7:51 PM

      Huge quibble with your argument.

      Yes, the major instances of Communism involved states that engaged in mass-murdering.

      But weren't most of those states mass-murderers before Communism took over?

    3. Anon:

      Not at all. Cheka killed more people in one year than Okhrana managed in 150 years. Czarist Russia, however brutal it could be, did not casually practice genocide like Soviet Russia did over and over again. Neither did ancient Cambodia, North Korea and the like. China might be a slightly different case.

    4. T.J.,

      Great Leap forward or Dekulakization were a response to free market policies? How?

      As to Late Victorian Holocausts, this is confusing economic arrangements with political power and accountability. It was more indicative of random and bumbling response of British authorities.

      Yes, life in Tsarist Russia was no picnic, but what does serfdom have to do with free market escapes me. Either way, whatever its pleasures, unlike Soviet Russia, it did not resort to extermination of entire ethnic or social groups.

  26. Anonymous12:36 PM

    Health economist chiming in here. I largely agree with you point but have a quibble with Exhibit H. We're getting worse care for double the cost with peer countries:

  27. Free market advocated love to cite the rapid growth of the US before WW II when the US was very close to a free market economy with very small government. But this more rapid growth was essentially all due to more rapid population growth. From 1850 to 1960 the trend growth rate of per capita real GDP was 0.14%. Since 1950 it has been 0.21%, or approximately double the earlier trend when we did not have large government. Bu 1850 most of the essential elements of free market capitalism eaw in place-- fractional ownership of firms, large and efficient stock and bond markets, modern double entry bookkeeping, etc.--were in place. By making 1950 the end point the rapid growth of the 1940s had offset the negative impact of the depression so it is not a bias comparison.

  28. PeterH12:03 PM

    I have to say you're wrong about welfare reform, this review of the evidence found that it decreased poverty

    Other reviews have found the same thing

  29. Anonymous9:54 AM

    Both free market ideology and communist ideology are 19th century doctrines.

    Marxists are stuck in a time loop dating from the 1840s to the 1860s when everyone was still debating whether slavery was a good idea.

    Free Marketeers, similarly, have their clock stuck in the 1890s when Alfred Marshall wrote his Principles of Economics. Of course, the Free Marketeers were big supporters of child labor, and opponents of women's suffrage, workers compensation, and all forms of social insurance.

    Isn't it about time for economists to move out of the 19th century and into the 21st century? Both economic and social conditions are dramatically different now than 150 years ago. I, for one, can't see why anyone would want to return to the 19th century! It was a ghastly period in our history, finally culminating in the First World War. The Free Marketeers just want to return us to a time when life was nasty, brutish and short.

    Instead, we should realize the primary problem in economics has been solved. We are living in a post scarcity society. When the biggest decisions we face are whether to get a 4tb harddrive rather than a 2tb harddrive, or a 60 inch television rather than a 55 inch television, it can safely be said that scarcity is no longer a problem.

    Which leads to my questions -- If there is enough food for everyone, why should anyone starve? If we are bulldozing houses because we overbuilt, why should anyone be homeless? If we have enough doctors, hospitals and drugs, why should anyone remain untreated?

    It strikes me that our society has imposed artificial restrictions that serve no purpose other than to create the most misery for the greatest number of people.

    1. The last paragraph is an exaggeration, but thanks for the rest.

    2. This last paragraph is the truth. We have constructed artificial barriers. The neo classicals depend upon exclusion. We no longer need to do that, if we ever did.

  30. I'm a fan of Bill Mitchell and MMT. Is this a heterodox economics? From my perspective Mitchell's application of MMT looks a lot like applied economics. Monetary sovereigns have no need for taxation other than to draw down the money supply if necessary. They are not revenue constrained. They do not need to sell debt, dollar for dollar, on net spending. Inflation from MMT can only occur if the new money supply increases demand so much it overwhelms the ability to provide sufficient services and provisions. Last time that happened was when we rode unicorns to work (outside of wartime). Anyway, MMT appears to me true, very practical and very practicable.

  31. Free market failures are usually based on some company that has figured out a way to pass some of their costs on to society. The costs might be poverty, pollution, or excess risk, but in each case, the government is left to impose Pigovian Taxes in the form of regulation (or occasionally in the form of taxes).

    The example of government-funded research is simply the same process in reverse (public benefits instead of public costs.)

    America has a free market, if you compare it to, for example, North Korea. But our freedom pales in comparison to, say, Bangladesh (where the government can't even enforce basic property rights, much less environmental regulations).

    The term "free-market" clearly needs some fine-tuning. In Singapore, employers are required to comply with health and safety regulations, industrial relations guidance, and a variety of good employment practices and guidelines.

    If you read the laws and guidelines (not to mention the price controls and state-linked enterprises), you would assume that this was some Communist dystopia, yet Singapore is considered the most pro-business country on Earth (by a wide margin).

    So what gives? Easy. Instead of concentrating on bumper-stickers like "free trade", Singapore concentrated on education, and on weeding out corruption. As a result, Singapore has almost none of the problems mentioned in the article.

  32. Excellent post as always.

    I would go a bit farther. I think welfare reform caused an increase in deep poverty. I know the debate continues (all debates continue) but the evidence is quite strong. I think the strongest is a 50% increase in the fraction of people living in households with income (including SNAP & housing vouchers) under $2 a day. The fact that this number isn't zero in the USA is shocking already, but an increase in absolute severe poverty over 2 decades with increased per capita GDP is very shocking.

    Drum reads the 50% increase as very small because he put the sensible measure in a graph with silly measures (which ignore SNAP) so the scale is such that a 0.5 percentage point increase looks small. An unusual error for such a smart guy.

    Also on tax code simplification. Here I think there is a problem with advocating reduced tax expenditures which is similar to the problem with advocating reduced plain expenditures. We know of the costs (which also include the costs of finding loopholes and the compliance cost of demonstrating the legality of slipping through a loophole). We don't know the benefits.

    Here again I want to dump on someone I respect highly. Matt Yglesias argued that eliminating tax expenditures from the corporate income tax will cause managers to hire more engineers and fewer lawyers and accountants. So, he wrote, to encourage more research and development, we should, among other things, eliminate the research and development tax credit.

    "Simplifying" is a simple and appealing word. Actual simplifications have costs as well as benefits.

    Also on tax cuts and the 60s correlation is not causation. Can I claim that the war on poverty caused extremely rapid GDP growth and that the Kennedy tax cuts caused a crime wave and collapse of the family ? Not without embarrassing myself. Similarly, to argue that the tax cuts caused high growth, one really should claim there were behavioral changes which could be caused by tax cuts and cause high growth. For example, did average hours worked increase ? (no). Did high savings cause low real interest rates ? (no). Is there any evidence but the timing that the new low low 70% top marginal tax rate had beneficial effects ? Of course I agree with you that excellent GDP growth with a top rate of 70% is not convincing evidence for cutting tax rates now.