Topic: Government and Politics

The Surreptitious Socialism of the Strong

George Will despairs that we already have a good bit of the socialism that John McCain warned about in the waning moments of his decade-long quest for Rooseveltian power. That is, we already have a lot of government redistribution of wealth, though we have almost no overt advocacy of socialism:  ”This is partly because Americans are an aspirational, not an envious, people. It is also because the socialism we do have is the surreptitious socialism of the strong, e.g., sugar producers represented by their Washington hirelings.”

Rent-seeking, economists call it–using the government to get privileges, such as a grant, a subsidy, a tariff, or a restriction on one’s competition. It’s one of those things we free-marketers rail against all the time, in papers on free trade, corporate welfare, government spending, and virtually every other activity of the modern state. More broadly, we point out, as Will did, that it’s impossible to have nonpolitical allocation of trillions of dollars of taxpayers’ money handed out by government. If you don’t want the powerful to lobby and manipulate in order to get their share of the money, then leave it in the marketplace. If you put it in the hands of politicians, expect political allocation.

Responding to Will, Christopher Orr at the New Republic says, “insofar as there are two kinds of spreading the wealth around, ‘rent-seeking’ (which we can all agree is bad) and ‘socialism’ (which Will implicitly concedes is less bad), conservatives are relatively more friendly to the former and liberals are relatively more friendly to the latter.” Hmmm. Is that so? I suppose if you think of the Bush administration as “conservatives,” then you have a good case. And Orr may be too young to remember actual conservatives back in the days B.G.W.B.

But I’m not. And I recall, for instance, the first program that Democrats rallied around when the Reaganites stormed ashore in 1981 with their pitchforks and meat cleavers in hand. Nexis confirms that a day after the administration made a broad budget-cutting proposal, these words led page A1 of the Washington Post: “The entire Democratic leadership in the House joined yesterday in warning the Reagan administration to keep its budget-cutting hands off the synthetic fuels subsidy program Congress created last year.” Democrats love corporate welfare, and even liberal intellectuals are far less critical of it than are libertarians and free-market conservatives.

And it’s not just corporate welfare. All the elements of the liberal interventionist state are both product and generator of rent-seeking. You can say that rent-seeking is an unfortunately inevitable by-product of having the government do good. But to want a $3 trillion federal government with vast regulatory powers that isn’t awash in rent-seeking is, as Milton Friedman wrote, like saying “I would like to have a cat, provided it barked.” Cats meow, and government money flows to those with political power.

No Experience Needed

The Washington Post reports today that job-seeking Americans who peruse employment listings for the ensuing holiday shopping season are likely to find far fewer openings than last year. That is hardly a surprise: unemployment is rising, and people are looking for work in places and industries that they wouldn’t have considered previously.

It is far more surprising that President-elect Obama’s job listings for personnel to fill the top posts in his new administration seem to all be prefaced with ”only experienced persons need apply.” This from a man whose lack of experience did not block his path to the Oval Office, and might ultimately have cleared the way.

Don’t get me wrong: I much prefer a skilled surgeon to one who is performing his first operation. An accountant who has worked for dozens of clients will likely make far fewer errors than the person who has just started her own practice. But experience doesn’t automatically translate into competence; wisdom and insight might actually be impeded by years of working in the same field, exposed only to the canon of the profession.

New thinking is particularly needed in new industries. Most of the people that Jeff Bezos hired to staff his start-up had never worked in the Internet business, and quite a few had never worked in any business at all. Today, is a retailing juggernaut. 

New thinking – and new faces – are also welcome in old, tired industries that have run out of new ideas. (Yes, that means you Detroit automakers.)

Alas, the Washington foreign policy community has also largely run out of ideas, and the men and women in both established institutions and those newly created are still marketing products that Americans no longer want to buy. Ignoring the manifest lessons of Iraq, “experienced” Washingtonians on both the left and the right are clamoring for new and better ways to build foreign countries and fight other people’s wars; Beyond-the-Beltway Americans want to build our own country, and bring an end to our own wars.

Given his recent victory, Barack Obama clearly understands the public’s desire for change. But that applies to both foreign and domestic policy. The debacle known as the Iraq War won the support of left-leaning think tanks and academics – and 29 of 50 Senate Democrats – and yet the President-elect appears to be turning to this same, small cadre to staff his new administration. Maybe he didn’t mean it when he said that good judgment matters more than experience? Or maybe he doesn’t fully appreciate just how harmful our foreign policies since the end of the Cold War have been, and therefore misses the urgency of the need for change at Foggy Bottom and the NSC?

Would an Auto Bailout Lead to National Greatness?

There have been plenty of criticisms here of neoconservatism and “national greatness conservatism,” but two of the occasional targets, Charles Krauthammer and David Brooks, have just published devastating critiques of the auto industry bailout. Here’s Krauthammer in the Washington Post:

First, the arbitrariness. Where do you stop? Once you’ve gone beyond the financial sector, every struggling industry will make a claim on the federal treasury. What are the grounds for saying yes or no?

The criteria will inevitably be arbitrary and political. The money will flow preferentially to industries with lines to Capitol Hill and the White House. To the companies heavily concentrated in the districts of committee chairmen. To clout. Is this not precisely the kind of lobby-driven policymaking that Obama ran against?

Second is the sheer inefficiency. Saving Detroit means saving it from bankruptcy. As we have seen with the airlines, bankruptcy can allow operations to continue while helping to shed fatally unsupportable obligations. For Detroit, this means release from ruinous wage deals with their astronomical benefits (the hourly cost of a Big Three worker: $73; of an American worker for Toyota: $48), massive pension obligations and unworkable work rules such as “job banks,” a euphemism for paying vast numbers of employees not to work.

The point of the Democratic bailout is to protect the unions by preventing this kind of restructuring. Which will guarantee the continued failure of these companies, but now they will burn tens of billions of taxpayer dollars. It’s the ultimate in lemon socialism.

Democrats are suggesting, however, an even more ambitious reason to nationalize. Once the government owns Detroit, it can remake it. The euphemism here is “retool” Detroit to make cars for the coming green economy.

Liberals have always wanted the auto companies to produce the kind of cars they insist everyone should drive: small, light, green and cute. Now they will have the power to do it.

And David Brooks in the New York Times:

This is a different sort of endeavor than the $750 billion bailout of Wall Street. That money was used to save the financial system itself. It was used to save the capital markets on which the process of creative destruction depends.

Granting immortality to Detroit’s Big Three does not enhance creative destruction. It retards it. It crosses a line, a bright line. It is not about saving a system; there will still be cars made and sold in America. It is about saving politically powerful corporations. A Detroit bailout would set a precedent for every single politically connected corporation in America. There already is a long line of lobbyists bidding for federal money. If Detroit gets money, then everyone would have a case. After all, are the employees of Circuit City or the newspaper industry inferior to the employees of Chrysler?

It is all a reminder that the biggest threat to a healthy economy is not the socialists of campaign lore. It’s C.E.O.’s. It’s politically powerful crony capitalists who use their influence to create a stagnant corporate welfare state.

Hear, hear. The intellectual case for the bailout–if there was one–surely can’t survive these two clear and analytical critiques in the nation’s most influential newspapers. But then, protectionism couldn’t survive the analytical critique of Adam Smith in 1776, and yet it persists. So we can’t assume that members of Congress will read Brooks and Krauthammer and sheepishly drop the idea of handing a big pile of taxpayers’ money to corporate managers, stockholders, and unions who have dug themselves into a deep hole.

Krauthammer and Brooks both make a careful distinction between the financial bailout and the proposed auto industry bailout. Krauthammer posits the Wall Street intervention as “an emergency measure to save the financial sector on the grounds that finance is a utility. No government would let the electric companies go under and leave the country without power. By the same token, government must save the financial sector lest credit dry up and strangle the rest of the economy.” But bailing out Detroit is put forth as a scheme to save jobs, and where does that process stop? Krauthammer warns that the “drift toward massive industrial policy threatens to grow into the guaranteed inefficiencies of command-economy maximalism.”

For those of us who opposed all the taxpayer bailouts, starting back with Bear Stearns―or with Chrysler in 1979―all these bad ideas may seem to run together. Bear Stearns, AIG, the general financial industry, the auto industry―it’s all government intervening with taxpayers’ money to favor some businesses or industries that made mistakes. Perhaps because they weren’t so critical of the measures to deal with the financial crisis, Krauthammer and Brooks find it easier to see what’s very different about the Detroit bailout. And they both make crucial points: the dangers of political allocation of resources, the benefits of bankruptcy and restructuring, the industry’s partially self-inflicted wounds, the desire of some Democrats for political power over corporate decisionmaking, the dangers of corporate capitalism. Let’s hope members of Congress read and underline both columns.

Obama the Open?

A coalition of liberal, conservative, and libertarian groups has issued an excellent report encouraging the Obama administration to make reforms to create a more open, transparent, and accountable government. Candidate Obama has made extensive promises to further those principles, so let’s make sure he follows through.

The new report focuses on executive branch openness, but greater openness is needed in Congress as well. For tax wonks, the congressional Joint Committee on Taxation is the epitome of government secrecy. That secrecy causes serious problems, including the greater likelihood of passing bad tax laws. I don’t know how likely JCT reforms are in the new Congress or administration, but you can read more about the problems in this Cato report and this Heritage book.

Pelosi Power

Politico declares Speaker of the House Nancy Pelosi “the most powerful woman in U.S. political history.” I once suggested that White House aide Karen Hughes, “the most powerful shaper of the words and message of a president of the United States whose own command of the language seems weaker than average,” held that position and got altogether too little attention for her accomplishment.

But Politico is probably right these days. And along with the breakthrough campaigns of Hillary Clinton and Sarah Palin, it’s the sign of a new era in American politics. Women are going to be major players. But it remains to be seen whether that will make much substantive difference. Pelosi seems to wield her power in much the same way that male speakers did, on behalf of policy positions that match the center-left of the Democratic party.

P.S. One of the best moments capturing the rise of Clinton and Palin this year was this exchange between Tina Fey (Palin) and Amy Poehler (Clinton) on Saturday Night Live:

Sarah Palin: Just look at how far we’ve come. Hillary Clinton, who came so close to the White House… and me, Sarah Palin, who is even closer. Can you believe it, Hillary?

Hillary Clinton: [ forcing a hard smile ] I cannot!

Diseconomies of Scale vs. Network Effects

I was very interested to read Roderick Long’s opening essay for this month’s Cato Unbound. Long draws a distinction between genuine free markets and policies such as corporate welfare and protectionism that favor the interests of incumbent businesses at the expense of the general public. Almost all libertarians draw this distinction, of course, but Long suggests that many libertarians too readily classify as “free market” policies that are more properly regarded as corporate welfare.

What caught my eye about Long’s article was his claim that in a genuinely free market, businesses would be significantly smaller than they are today. He points out that large, hierarchical businesses are subject to many of the same inefficiencies that plague government bureaucracies. The executives of the largest corporations cannot possibly have enough knowledge to make good decisions about the thousands of different projects various parts of their companies are undertaking, and so it’s inevitable that large companies will suffer from inefficiencies greater than those that afflict smaller firms.

I think this is an important point, and indeed is a theme that runs through my own work. For example, one of the key arguments of my Policy Analysis on network neutrality, which Cato released on Wednesday, is that the Internet’s success depends on the fact that it isn’t owned or managed by any single entity. Back in the 1990s, when the Internet was competing with proprietary online services like AOL and Compuserve, the Internet’s lack of centralized control turned out to be its most important strength. The hierarchical decision-making processes of the AOL and Compuserve companies simply couldn’t keep up with the spontaneous order of millions of Internet users acting without central direction.

Indeed, one of the fun things about writing about technology is that thanks to the rapid pace of change, Silicon Valley is one of the few places where very large and very small companies compete on a roughly equal footing. And I think the experience of Silicon Valley bears out Long’s observations. The most innovative ideas almost never come from large, established firms. Silicon Valley is full of firms like HP, Digital (now part of HP), Microsoft, AOL (now part of Time Warner), Yahoo!, Netscape (now part of Time Warner) that began their lives as nimble startups selling highly innovative, disruptive technologies and wound up as large, bureaucratic companies struggling to keep up with the efforts of smaller competitors with a tiny fraction of their R&D budgets.

Central planning doesn’t work very well. And Long is right to point out that this is true of large companies as much as it is of the federal government. But having found a theoretical hammer he likes, Long seems to see public policy nails everywhere he looks. He puts forward the even stronger claim that large firms are so inefficient that only government interference in the economy could explain their existence. Not only does this conclusion not follow from his premises, it’s not difficult to come up with counterexamples.

Google, for example. Google’s success certainly can’t be attributed to a sweetheart deal from the city of Mountain View. Nor does Google particularly benefit from low wages or government-funded roads. Even if we grant Long’s premise that copyright and patent law are unjustified interference with the free market, these can’t explain Google’s wealth either. Google’s products are available for free, and Google has yet to assert any of its patents against competitors.

The reason Google is so profitable, in a nutshell, is network effects. Google sits at the center of a vast network of users, website operators, and advertisers who are locked in a virtuous circle. More advertisers prompt the creation of new websites, which attracts more users, which in turn attracts more advertisers. As the matchmaker between these parties, Google is able to capture a small fraction of the social surplus created by the virtuous circle.

Now over time, Google will succumb to the same diseconomies of scale that have been dragging Yahoo!, Microsoft, and other companies down. Already, if you talk to people who have worked at Google, they will tell you that the company is slowly losing the freewheeling spirit of its early days. It’s gradually becoming more bureaucratic, risk-averse, and strategically incoherent. But it will take a long, long time for Google’s bureaucracy to become so inefficient that it will cease to be a profitable company in the absence of government favors. If Google simply rests on its laurels, its existing customer base will continue generating a healthy revenue stream for the foreseeable future.

I think the same thing is true in other sectors of the economy. The choice of Wal-Mart as a poster boy strikes me as particularly ill-considered. To be sure, Wal-Mart is far from a paragon of libertarian virtue. I will be (and have been) the first to condemn them for their abuse of protectionist policies such as eminent domain at the local level. But blaming Wal-Mart for policies such as publicly-funded roads and labor market regulations that have nothing in particular to do with it strikes me as grasping at straws. Wal-Mart happens to be extremely good at logistics, and have managed to wring larger economies of scale out of the retail industry than anyone had previously been able to do. Wal-Mart, like Google, benefits from the network effects that come from bringing together tens of millions of consumers with hundreds of manufacturers.

Of course, we don’t know precisely how much of Sam Walton’s profits are attributable to these economic forces and how much are attributable to government favoritism. No doubt, Wal-Mart would be a somewhat less profitable company in a world without eminent domain abuse. But it’s simply not plausible that none of Walton’s profits were attributable to his savvy business decisions. And it’s certainly overstating the case that Hayekian considerations dictate that Walton’s profits must be attributable to government favoritism because a company of Wal-Mart’s size could not exist in a free market.

Wall Street Bailout Promotes More Washington Corruption

Naive and/or deceptive politicians often claim that sleaze is the enemy of good government, but the real truth is that government is the biggest friend of corruption. Simply stated, when politicians redistribute more than $3 trillion (and more indirectly via regulation), lobbyists and interest groups will line up to stick their snouts in the trough. The Wall Street bailout is an excellent example of this distasteful practice. The headline of a recent New York Times story summarizes the problem, noting “Lobbyists Swarm the Treasury for a Helping of the Bailout Pie.” The excerpt below reveals some of the corruption that is so pervasive in Washington. The most absurd part of the story is the quote from a Treasury Department official who says the government shouldn’t pick winners and losers - a rather strange statement since the bailout exists so that government can pick winners and losers:

When the government said it would spend $700 billion to rescue the nation’s financial industry, it seemed to be an ocean of money. But after one of the biggest lobbying free-for-alls. in memory, it suddenly looks like a dwindling pool. Many new supplicants are lining up for an infusion of capital as billions of dollars are channeled to other beneficiaries like the American International Group, and possibly soon American Express. …The Treasury Department is under siege by an army of hired guns for banks, savings and loan associations and insurers – as well as for improbable candidates like a Hispanic business group representing plumbing and home-heating specialists. That last group wants the Treasury to hire its members as contractors to take care of houses that the government may end up owning through buying distressed mortgages. …”Unfortunately, I don’t have a lot of good news for them individually,” said Jeb Mason, who as the Treasury’s liaison to the business community is the first port-of-call for lobbyists. “The government shouldn’t be in the business of picking winners and losers among industries.” Mr. Mason, 32, a lanky Texan in black cowboy boots who once worked in the White House for Karl Rove, shook his head over the dozens of phone calls and e-mail messages he gets every week. “I was telling a friend, ‘this must have been how the Politburo felt,’ ” he said. …The first wave of lobbying came in early October when Mr. Paulson announced the plan to buy troubled mortgage-related assets from banks. The Treasury said it would hire several outside firms to handle the purchases, and would dispense with federal contracting rules. Law and lobbying firms that specialize in government contracting fired off dispatches to clients and potential clients explaining opportunities in the new program. Capitalizing on the surge of interest, several large firms, including Patton Boggs; Akin Gump; P & L Gates; Fried, Frank, Harris, Shriver & Jacobson; and Alston & Bird, have set up financial rescue shops. Alston & Bird, for example, highlights its two biggest stars – former Senator Bob Dole and former Senator Tom Daschle. Mr. Dole “knows Hank Paulson very well” and has been “very helpful” with the financial rescue groups, said David E. Brown, an Alston & Bird partner involved in its effort. “And of course, Senator Daschle is national co-chair of the Obama campaign,” Mr. Brown added, noting that because Mr. Daschle is not a registered lobbyist, his involvement is limited to “high level advisory and strategic advice.” Ambac Financial Group, in the relatively obscure bond insurance business, never needed lobbyists before, said Diana Adams, a managing director. But its clients persuaded the company to hire two Washington veterans – Edward Kutler and John T. O’Rourke – who helped arrange a recent meeting with Phillip L. Swagel, an assistant Treasury secretary. “We haven’t really asked for much in the past,” Ms. Adams said. …Some lobbyists, Mr. Mason said, had called him even though they did not have any clients looking to get into the program or worried about its restrictions. They were merely seeking intelligence on which industries would be deemed eligible for assistance. He suspects they were representing hedge funds that wanted to trade on that information.