Political debates in the United States are routinely framed as a battle between conservatives who favor market outcomes, whatever they may be, against liberals who prefer government intervention to ensure that families have decent standards-of-living. This description of the two poles is inaccurate; both conservatives and liberals want government intervention. The difference between them is the goal of government intervention, and the fact that conservatives are smart enough to conceal their dependence on the government.
Conservatives want to use the government to distribute income upward to higher paid workers, business owners, and investors. They support the establishment of rules and structures that have this effect. First and foremost, conservatives support nanny state policies that have the effect of increasing the supply of less-skilled workers (thereby lowering their wages), while at the same time restricting the supply of more highly educated professional employees (thereby raising their wages).
This issue is very much at the center of determining who wins and who loses in the modern economy. If government policies ensure that specific types of workers (e.g. doctors, lawyers, economists) are in relatively short supply, then they ensure that these workers will do better than the types of workers who are plentiful. It is also essential to understand that there is direct redistribution involved in this story. If restricting the supply of doctors raises the wages of doctors, then all the non-doctors in the country are worse off, just as if the government taxed all non-doctors in order to pay a tax credit to doctors. Higher wages for doctors mean that everyone in the country will be forced to pay more for health care. As conservatives fully understand when they promote policies that push down wages for large segments of the country’s work force, lower wages for others means higher living standards for those who have their wages or other income protected.
Conservatives don’t only rely on the nanny state to keep the wages of professionals high, they want the nanny state to intervene through many different channels to make sure that income is distributed upward. For example, conservatives want the government to outlaw some types of contracts, such as restricting the sort of contingency-fee arrangements that lawyers make with clients when suing major corporations (conservatives call this “tort reform”). This nanny state restriction would make it more difficult for people to get legal compensation from corporations that have damaged their health or property.
Conservatives also think that a wide variety of businesses, from makers of vaccines to operators of nuclear power plants, can’t afford the insurance they would have to buy in the private market to cover the damage they may cause to life and property. Instead, they want the nanny state to protect them from lawsuits resulting from this damage. Conservatives even think that the government should work as a bill collector for creditors who lack good judgment and make loans to people who are bad credit risks (conservatives call this “bankruptcy reform”).
In these areas of public policy, and other areas discussed in this book, conservatives are enthusiastic promoters of big government. They are happy to have the government intervene into the inner workings of the economy to make sure that money flows in the direction they like – upward. It is accurate to say that conservatives don’t like big government social programs, but not because they don’t like big government. The problem with big government social programs is that they tend to distribute money downward, or provide benefits to large numbers of people. That is not the conservative agenda - the agenda is getting the money flowing upward, and for this, big government is just fine.
Of course, conservatives don’t own up to the fact that the policies they favor are forms of government intervention. Conservatives do their best to portray the forms of government intervention that they favor, for example, patent and copyright protection, as simply part of the natural order of things.1 This makes these policies much harder to challenge politically. The public rightfully fears replacing the natural workings of the market with the intervention of government bureaucrats. This stems in part from a predisposition not to have the government meddle in their lives. In addition, the public recognizes that in many cases the market will be more efficient than the government in providing goods and services.
It is not surprising that conservatives would fashion their agenda in a way that makes it more palatable to the bulk of the population, most of whom are not wealthy and therefore do not benefit from policies that distribute income upward. However, it is surprising that so many liberals and progressives, who oppose conservative policies, eagerly accept the conservatives’ framing of the national debate over economic and social policy. This is comparable to playing a football game where one side gets to determine the defense that the other side will play. This would be a huge advantage in a football game, and it is a huge advantage in politics. As long as liberals allow conservatives to write the script from which liberals argue, they will be at a major disadvantage in policy debates and politics.
The conservative framing of issues is so deeply embedded that it has been widely accepted by ostensibly neutral actors, such as policy professionals or the news media that report on national politics. For example, news reports routinely refer to bilateral trade agreements, such as NAFTA or CAFTA, as “free trade” agreements. This is in spite of the fact that one of the main purposes of these agreements is to increase patent protection in developing countries, effectively increasing the length and force of government-imposed monopolies. Whether or not increasing patent protection is desirable policy, it clearly is not “free trade.”
It is clever policy for proponents of these agreements to label them as “free trade” agreements (everyone likes freedom), but that is not an excuse for neutral commentators to accept this definition. Back in the 1980s, President Reagan named the controversial MX missile system the “Peacekeeper” to make it more palatable to the public. Thankfully, the media continued to use the neutral “MX” name to describe the missile system. However, when it comes to trade agreements, the media have been every bit as anxious to use the term “peacekeeper” as the proponents of the agreements, using the expression “free trade” almost exclusively to describe these agreements. (In using this term, reporters disregard their normal concern about saving space, since “trade agreement” takes less space than “free-trade agreement.”)
In fact, the media have even gone one step further – they routinely denounce the opponents of these trade agreements as “protectionists.” This would be like having the New York Times refer to the opponents of the MX missile as “warmongers” in a standard news story covering the debate over the new missile. You’re doing pretty well in a public debate when you get the media to completely accept your language and framing of issues. It’s not easy winning the argument over the MX, when the media and policy experts describe opponents of the missile as “warmongers.”
Unfortunately, the state of the current debate on economic policy is even worse from the standpoint of progressives. Not only have the conservatives been successful in getting the media and the experts to accept their framing and language, they have been largely successful in getting their liberal opponents to accept this framing and language, as well. In the case of trade policy, opponents of NAFTA-type trade deals usually have to explain how they would ordinarily support “free trade,” but not this particular deal. Virtually no one in the public debate stands up and says that these trade deals have nothing to do with free trade.
Remarkably, the public has enough good sense to recognize that these trade agreements do not in general advance their interests (unless they are in the protected minority), so that NAFTA-type trade deals remain unpopular. If the public voices in the debate would ever stop accepting the conservative framing of the argument, it is very likely that these protectionist pacts could no longer be slipped through Congress. Even with a debate that largely accepts the conservative framing, it is getting increasingly difficult to pass these agreements.
While trade policy has been the topic of many heated public debates in recent years, it is just one of the areas in which the nanny-state conservatives have been able to tilt the framing of the debate to favor their goals. In nearly every important area of economic policy, conservatives have set the terms of debate in ways that make the liberal/progressive opinion unpalatable to the bulk of the population. Unless the debate is reframed in a way that more closely corresponds to reality, conservatives will continue to be successful in their agenda of using government intervention to distribute income upward. This book examines the areas in which the hand of the nanny state is most visible in pushing income to those at the top.
The first chapter deals with the most basic issue, how the nanny state ensures that doctors and other highly educated professionals are in short supply, and that the supply of less-skilled workers is relatively plentiful. A big part of this story is trade. The conservative nanny state makes it easy to import goods as a way to replace much of the work done by workers in manufacturing, such as autoworkers, steel workers, and textile workers. Twenty-five years ago, manufacturing was an important source of middle class jobs for workers without college degrees, typically offering health care and pension benefits, in addition to a middle class wage. If goods produced by workers in developing countries (who typically earn only a small fraction of the wages of U.S. workers) can be imported, then the demand for the manufacturing workers in the United States will be reduced, placing downward pressure on the wages and compensation not only of manufacturing workers, but of workers without college degrees in general.
Immigration is another part of the story. The conservative nanny state allows many less-skilled workers into the country to fill jobs at lower wages than employers would be forced to pay the native born population. While allowing immigrant workers into the country can be seen as part of the free market, like allowing imported goods into the country, this is only half of the picture. The conservative nanny state puts on strict controls to limit the extent to which doctors, lawyers, economists, journalists, and other highly paid professionals must face foreign competition. These restrictions take a variety of forms, which will be discussed more thoroughly in Chapter 1, but the key point is that not everyone’s labor is placed in international competition. Those at the top of the wage ladder get to enjoy protected labor markets. This both raises their wages and means that everyone else must pay more money for their services.
The conservative nanny state also involves itself in other ways to ensure that highly skilled workers are paid well, and the rest of us pay the taxes in the form of higher prices for the goods and services they produce. For example, licensing requirements, like admission to the bar for lawyers, often are designed more to restrict supply than to ensure quality for consumers.
On the other side, the conservative nanny state beats up on less skilled workers when they push too hard to restrict their supply in the same way. One way the nanny state hampers efforts by less-skilled workers to push up their wages is by outlawing many types of union activity. For example, secondary strikes are illegal. This means that one group of workers can’t stage a strike in support of a second group of workers (e.g. truck drivers can’t refuse to deliver food to a restaurant where the workers are on strike). In the case of a secondary strike, the conservative nanny state will fine or even imprison workers for being too aggressive in pushing for higher wages. Apparently, employers are too weak to be able to bargain with workers without help from the government.
Of course, this is all supposed to happen behind the scenes, no one is supposed to notice these forms of government intervention. The conservatives want the public to believe that the differences in pay between doctors and dishwashers result from nothing other than the natural workings of the market.
The second chapter focuses on the Federal Reserve Board, a tremendously important, but little understood government institution. The Fed effectively controls the number of people who have jobs by adjusting its interest rate policy. While it is not always easy to boost the economy by lowering interest rates, the Fed can generally slow the economy and limit employment by raising interest rates.
Higher interest rates reduce home and car buying, and make it more expensive for firms to borrow money to finance new investment. When the Fed perceives inflation as being too great a problem, it raises interest rates to limit employment growth. If it raises interest rates far enough, then it can actually cause the economy to start losing jobs, thereby raising the unemployment rate. A higher unemployment rate puts downward pressure on wages. If wages start to drop, then there is less inflationary pressure in the economy and the Fed has accomplished its goal, although it comes at the cost of higher unemployment and lower wages.
This is not the whole story. The Fed’s interest rate hikes do not affect all workers evenly.
When the Fed raises interest rates to slow the economy and increase unemployment, the people who disproportionately lose their jobs are the more disadvantaged groups in society, specifically workers with less education and racial and ethnic minorities. Firms do not lay off their CEOs and top managers when business slows, they lay off assembly line workers, custodians, sales clerks and other workers viewed as disposable. This means workers without college degrees are far more likely to end up unemployed when the Fed raises rates than workers with college or advanced degrees.
Hispanic and African American workers can also expect to take a hit when the Fed cracks down. As a rule of thumb, the unemployment rate for Hispanics is about 1.5 times the overall unemployment rate. For African Americans, the ratio is typically 2 to 1, and for African American teens the ratio is 6 to 1. This means that if the Fed’s interest rate hikes raise the overall unemployment rate by 1 percentage point, then they will likely raise the unemployment rate for Hispanics by 1.5 percentage points, for African Americans by 2 percentage points, and for African American teens by 6 percentage points.
The impact on wages follows the impact on employment. The low unemployment years of the late 1990s were the only time in the last quarter century when most workers, including those at the bottom, enjoyed consistent gains in real wages and saw improvements in living standards. Employers complained that they were being forced to accommodate workers’ needs for child care and even parental care in the case of some workers with frail parents. The Fed usually stands ready to address employers’ concerns about such demands by raising rates, thereby raising unemployment and reducing workers’ bargaining power.
There is clearly a need to prevent inflation from spiraling out of control, but how urgent the need is at any point in time is a matter subject to political debate. Since some segments of the population are asked to pay a high price in the form of unemployment and lower wages, they may view the Fed’s anti-inflation policy differently than the investors and better-situated workers, who are unlikely to suffer. It may also be worth trying other mechanisms to restrain inflation that distribute the costs differently. (In the old days, governments tried wage-price guidelines and controls.) While there are economic costs associated with other tools aimed at stemming inflation, there are also massive economic costs associated with a Fed policy that deliberately keeps millions of people out of work. The nanny state conservatives don’t want the public to even notice that the Fed is making fundamental policy decisions, but in a real debate over economic policy, the truth must come out.
Pay for CEOs and other top corporate executives in the United States has soared in recent years, even as the wages of ordinary workers have stagnated. The conventional argument is that CEOs get multi-million dollar salaries because they are highly productive - firms are willing to pay these executives what their services are worth.
This argument is implausible for several reasons. First, today’s CEOs don’t seem in any obvious way more productive than the CEOs of 30 years ago, who were well compensated, but not nearly as well as today’s crop of top executives. Second, CEOs of foreign corporations don’t get anywhere near as much compensation. Even the most successful executives in Japan and Europe don’t get the ten and hundred million dollar pay packages that are the standard for top executives in the United States. Finally, many of the people who get these seven and eight figure salaries prove incompetent – even when the definition of success is defined narrowly as increasing corporate profits. When top executives walk away in failure they are often given bonuses in the millions of dollars – more than a full lifetime of earnings for a typical worker. In short, there seems little basis for the claim that the pay of top executives reflects their productivity.
The more obvious answer is that the pay of CEOs is determined by corporate boards, many of the members of which are appointed by, or serve at the whim of, the CEOs. Ostensibly, corporate boards are accountable to their shareholders. But with ownership increasingly concentrated among investment funds, whose managers have little time or interest in running individual companies (it is easier to sell the stock than change corporate managers), the CEOs often get free run to do what they want, including giving themselves high pay.
The conservative nanny state plays a big role in allowing high CEO pay, because the corporation is itself a creation of the government. While nanny state conservatives don’t like to call attention to this fact, in a free market corporations do not exist. In a free market, individuals can form partnerships and engage in whatever trade and commercial relations they please, but they cannot establish a new legal entity that exists independently of the individuals who own it. Only a government can create a corporation as a legal entity with its own rights and privileges, the most important of which is limited liability.2
The privileges of corporate status are clearly valuable to shareholders. We know this because individuals form corporations, even though it means that they have to pay a corporate income tax in addition to the income tax paid by individual shareholders.3 As a condition of gaining corporate status, the government can and does set rules for corporate governance. (For example, there are extensive rules on the rights of minority shareholders.) Rules of corporate governance could easily include provisions that put a check on runaway CEO pay. For example, it would be relatively simple to require that pay packages be periodically subject to approval by a majority of shareholders, in an election in which only the shares that are actually voted count. (Most corporations count shares that are not voted as supporting the management’s position.)
Whether or not such rules on corporate conduct are desirable is a debatable issue, but in a world where the government by definition sets the rules for corporate governance, any set of rules necessarily involves government intervention. The nanny state conservatives would like the public to believe that the current rules of corporate governance were part of the Ten Commandments and should never be altered. In a serious national debate over economic policy, these rules must be part of the discussion.
In policy discussions, patents and copyrights are usually treated as part of the natural order, their enforcement is viewed as being as basic as the right to free speech or the free exercise of religion. In fact, there is nothing natural about patents and copyrights, they are relics of the Medieval guild system. They are state-granted monopolies, the exact opposite of a freely competitive market. The nanny state will arrest an entrepreneur who sells a patent-protected product in competition with the person to whom it has granted a patent monopoly.
Patents and copyrights do serve an economic purpose – they are a way to promote research and innovation in the case of patents, and a means of supporting creative and artistic work in the case of copyrights. However, just because patents and copyrights can be used for these purposes, it does not follow that they are the only mechanisms or the most efficient mechanisms to accomplish these purposes.
Both patent and copyright protection have led to increasing inefficiencies and abuses in recent years, exactly the effects that economists would predict from government-granted monopolies. Drug patents have been especially problematic. Because drug companies stand to make such enormous profits from patented drugs, there is a continuous stream of scandals involving efforts to conceal negative research findings, to falsely tout the benefits of specific drugs, and payoffs to experts, regulators, and politicians. In addition, drug patents lead to drugs being priced at levels that make them unaffordable for much of the population in the United States and around the world. While drugs are almost invariably cheap to manufacture, and therefore would sell for a low price in a competitive market, patent monopolies allow drug companies to sell life-saving drugs for thousands or even tens of thousands of dollars per prescription.
Copyrights similarly make items that would otherwise be cheap, or even free over the Internet, very expensive. The cost of transferring recorded music, movies, video games, or software is trivial in the Internet age. However, instead of allowing consumers to benefit from breakthroughs in technology, the entertainment industry has sought to make it illegal to produce certain types of hardware and software, precisely because they facilitate the transfer of material.
Patent and copyright protection also has the effect of making certain companies and individuals very rich. Bill Gates is incredibly rich because the government will imprison anyone who makes copies of Windows without Mr. Gates’ permission. Many other rich people have similarly benefited from the government’s willingness to prevent free competition. Similarly, huge corporations like Pfizer, Merck, Time-Warner, and the New York Times Company are completely dependent for their profits on the nanny state’s protection from competition.
It is necessary to have mechanisms for supporting innovation, and many alternatives to patents and copyrights already exist. The government directly funds $30 billion a year in biomedical research through the National Institutes of Health, a sum that is almost as large as the amount that the pharmaceutical industry claims to spend. A vast amount of creative work is supported by universities and private foundations. While these alternative mechanisms would have to be expanded, or new ones created, in the absence of patent and copyright protection, they demonstrate that patents and copyrights are not essential for supporting innovation and creative work. The appropriate policy debate is whether they are the best mechanisms.
True libertarians want to minimize the role of the government in people’s lives. If such people exist, they were staunchly opposed to the recent revisions of the bankruptcy laws that make it much more difficult for people to eliminate their debts by declaring bankruptcy.
Part of being a good businessperson is being able to assess a customer’s creditworthiness. If a business consistently extends credit to people who can’t pay it off, then it is obviously not a good judge of credit risk. In a market economy, such businesses should go out of business, they should not be allowed to run to the government to act as their debt collector. Making the government into a debt collector leads it to become involved far more extensively in people’s lives.
Historically, most loans were attached to physical property, such as houses or farms. This made the issue of debt collection relatively simple. If a debtor fell sufficiently behind in repaying a loan, then the creditor simply asked the court to turn over to them the deed for property that provided collateral (a house or a farm). This was a one-time transaction that ended the government’s involvement in the case.
However, the new bankruptcy statute gives the courts the responsibility of acting as a debt collector on a continuous basis. The courts must continually monitor the earnings of a debtor who has declared bankruptcy to determine how much money should be turned over to creditors. It must assess factors like their requirements for necessary work-related expenditures (a car, for example), medical care, or for supporting children. Needless to say, this process will bring the government directly into the lives of millions of people. It will also provide a serious disincentive to work for people who have declared bankruptcy, since being forced to pay money to a creditor has the same disincentive effect as being required to pay taxes to the government. For these reasons, people who like to minimize the role of government should support bankruptcy rules that make one-time transfers, thus allowing people to get on with their lives. The International Monetary Fund (IMF) is the international counterpart to the domestic bankruptcy laws. Investors typically get a much higher rate of return on money they invest in developing countries, precisely because there is a higher risk associated with these investments. It is far more likely that the government of Argentina or Russia will default on their bonds than the United States or Germany.
However, the IMF has actively worked to reduce this risk. It regularly threatens countries that consider defaulting on debts or restructuring them in ways that are less favorable to creditors. It seeks to act as an agent of a credit cartel, for both public and private creditors, ensuring that debts in the developing world will be repaid to the greatest extent possible. Just as with domestic bankruptcy laws, those who favor a minimal government would like to see investors held responsible for their own bad investment decisions. If they invest in a country that subsequently defaults on its debt, then this should be the problem of the investor, not a public institution like the IMF.
Nanny state conservatives don’t think that businesses can be trusted to make smart lending decisions. They think that businesses need the nanny state to help them collect bad debts, whether from individuals in the United States, or from businesses and governments in other countries.
In a market economy, people are supposed to be able to freely contract as they choose. This raises the question of why so many conservatives want the government to ban certain types of contracts. Specifically, “tort reform” laws at both the state and national level limit the type of contingency fees that clients could arrange to pay their attorneys. These laws restrict the percentage of a legal settlement that can be paid to a lawyer and impose other restrictions on the type of contracts that people can sign with lawyers, if they want to sue a corporation.
These restrictions can make a difference in the public’s ability to sue large corporations, because many clients do not have money to pay a lawyer in advance. They instead must pay them following any settlement, if they win one. Since there is often a great deal of risk in legal suits (it is difficult to know how a judge or jury will rule), and corporations can make suits extremely costly by filing many motions, the contingent fee (which depends on winning the case) that a lawyer requests may be fairly large.
Libertarians would not object to large contingent fees – if clients don’t want to pay them, then they can look for another lawyer. However, the conservatives have promoted caps on contingency fees ostensibly as a way of protecting clients. In reality, such caps are an infringement on individuals’ right to freely contract. In a market economy, the government should not be determining which contracts are acceptable for people to sign. But conservatives want the nanny state to make it more difficult to collect damages from big corporations, so they have no problem with this form of governmental intervention in the market.
In recent years, many conservatives have expressed concern about governmental “takings” in which regulations or zoning restrictions (often for environmental purposes) lower the value of a person’s property. They have argued that property owners should be compensated for any takings.
There are two important problems with this argument. First, there is a basic asymmetry; the government takes actions all the time. Some of its actions may lower property values, but others raise values. For example, creating a park increases the value of the property near the park. Similarly, building a highway that makes it easier to commute to a major city increases the value of land that can be sold for suburban development. The government doesn’t get compensated by private landowners when it increases the value of their land, therefore the payments would be entirely one-sided if the government was forced to compensate landowners when it reduced the value of their property. Of course, this is exactly the sort of nanny state that conservatives want – it only gives them handouts, it never takes anything away.
The second problem with the “takings” argument is that a policy that allows property owners to be compensated every time the government does something to reduce the value of their property would flood the courts with lawsuits. Can someone sue if the government opens an airport ten miles away, shuts a school, or allows a sports stadium to be built in the area? A reasonable conservative argument is that intelligent property owners understand that there is a risk that the government will take actions that will affect the value of property. In principle, this risk is built into the price of the property. If property owners are too dumb to understand the risk when they purchase property, why should the nanny state come to their rescue?
In fact, the traditional legal theory on takings, espoused by most clearly by Richard Posner, a conservative legal scholar, is that the government should compensate property owners only in extreme cases where the government’s actions amount to a near-total taking of the value of the property (e.g. building a hazardous waste dump on nearby property). This minimizes the role for government, and encourages property owners to be mindful of potential risks before they buy property.
Entrepreneurs do not have to pass competence tests or get government approval for their business plan before opening a small business. This is as it should be. However, it means that many people, who have no idea what they are doing, start businesses with business plans that cannot possibly succeed. It is, therefore, not surprising that most small businesses close after just a few years; that is the way a market economy works.
However, small businesses have a privileged place in conservative ideology. Conservatives shower them with tax breaks, low interest loans, and exemptions from a wide variety of regulations covering everything from workplace health and safety to environmental concerns. As a practical matter, it is not always clear what public interest is served by preferential treatment for small businesses. For example, it is not clear why it would be desirable for workers at small businesses to have weaker workplace safety protections than workers at larger companies. It is also not clear why the public should subsidize small businesses with special tax breaks, some of which may in fact just be subsidies for the personal consumption of small business owners. (The tax deduction that many small business owners take on company cars often are just subsidies for their family car.)
Small businesses can provide a valuable service for larger corporations – they can provide a pleasant face that advances their interests. Large corporations will often make public arguments against rules that affect them negatively by arguing that the rules will hurt small businesses. This argument has been especially effective with minimum wage laws. While higher minimum wages may hurt the profits of small businesses, the biggest losers are typically large corporations, like McDonald’s, that employ many low-wage earners. It is very helpful to these companies to hide behind the small businesses that could get hurt by higher minimum wages.
Another example is the effort to abolish the estate tax. Proponents of repeal have routinely argued that the tax causes many families to lose their businesses. In reality, almost by definition, small business owners will not owe any estate tax – their estate will be too small. Yet tens of millions of people support repealing the estate tax because they are worried about the effect it has on family businesses.
Because small businesses serve this important political purpose, and small business owners are a largely conservative constituency, nanny state conservatives will continue to shower government largesse on small businesses. And then they will insist that we should leave everything to the market.
Conservatives have often used the refrain “It’s your money” in reference to the money that taxpayers owe to the government. This refrain is used to justify various tax dodges, including outright evasion. In fact, once the tax laws have been set, the money that people owe the government is not “their” money, it belongs to the government. In this way, tax liabilities are like the condominium fees that individual units are assessed. This is money owed to the condominium association, it does not belong to the owner of the individual condominium.
The nanny state conservatives want the country’s tax cheats to be treated with kid gloves. Most of the serious tax cheats are relatively wealthy (this is true almost by definition – poor people don’t owe much money in taxes). While most nanny state conservatives are anxious to throw the book at a welfare recipient who gets $1,000-$2,000 more than what she is entitled to, they would coddle tax cheats who owe the government tens or even hundreds of thousands of dollars. One can argue about how the tax law should be structured and what rates should be set, but the fact that there are disagreements on these issues does not mean that the tax laws should not be enforced.
It is important to remember that there is no free lunch in this story. The government needs a certain amount of money to pay its bills. If it gets less from one person, then it has to get more from everyone else. It’s very nice to give people a tax break on the money they make from selling their home or to lower the tax rate on capital gains or dividends, but these tax breaks mean that taxes must be higher on the people who don’t benefit from them, since the government still needs the same amount of money. Coincidentally, conservatives tend to argue that people should not pay taxes on the types of income that most rich people get (capital gains and dividends). They would rather have all taxes be paid out of wage income, which happens to be the major source of income for most low- and middle-income people in the country.
While the nanny state conservatives ostensibly want to limit the role of government, there are some areas in which they acknowledge that government can provide services more efficiently and effectively, most obviously policing and national defense. Of course, even these services could be provided through the private sector, albeit far less efficiently. People could contract with the policing or defense corporation of their choosing, which would protect them in the manner they view as most appropriate.
Just as the government is the most efficient provider of policing and national defense, it is often the most efficient provider of other social and administrative services. There are sectors where the advantages of a single centralized system can lead to large economies of scale. In such cases, it is more efficient to have a service (e.g. Medicare and Social Security) provided by the government, instead of having a large number of competing firms.
It is not always clear whether the government will be a more efficient provider of a service than the private sector. In some cases this determination can be left to the market, albeit not with policing, national defense, or Social Security. This is happening at the moment with Medicare, where beneficiaries have the option to stay with the government-managed system or to sign up with private insurers. (The vast majority of beneficiaries opt for the government-run system, even though the government subsidizes private insurers in the program.)
In principle, the government could offer the option in other sectors. For example, it can expand the Medicare program and let every person or employer in the country buy into it on a voluntary basis. Similarly, it could establish a nationwide voluntary pension system (with both defined benefit and defined contribution options) as an add-on to Social Security. Individuals and employers that prefer the public system to the options available from the private sector would have the option to contribute to this system. Those who prefer private sector pension plans and savings vehicles could stay with their existing plans.
The conventional view among conservatives is that the private sector is lean and mean, full of innovative and efficient businesses. By contrast, the government is composed of lazy and wooly-headed bureaucrats who couldn’t make it in the business world (or they would be there). Given this view, they should have little concern about the prospect of having private businesses compete with the government. If the conservative view of the greater efficiency of the private sector is right, then it should quickly defeat any competitor sponsored by the government.
In reality, it is striking how worried private businesses often get over the prospect of competing with the government. For example, when Congress was debating a Medicare prescription drug benefit in 2003, private insurers (and the pharmaceutical industry) insisted that Medicare not be allowed to directly offer its own insurance program for prescription drugs. They got this prohibition written into the law.
Back in the late 1990s, several express mail companies actually went into court to try to force the U.S. Postal Service to abandon an ad campaign that was proving very effective. The Postal Service ads pointed that its express mail service was much cheaper than FedEx or UPS. After the courts refused to outlaw the ad campaign, the express mail companies went to their friends in Congress, who effectively tamed the competition.
It benefits the economy as a whole to have these services provided in the most efficient way. Of course, the firms that stand to profit by providing these services do not care about inefficiency, they care about their profits. And this means that they do whatever is necessary to ensure that they never have to compete against the government.
The idea that conservatives trust the market while progressives want the government is a myth. Conservatives simply are not honest about the ways in which they want the government to intervene to distribute income upwards. Once this myth is exposed, it allows for a whole different framing of a wide range of policy issues. We can recognize that both conservatives and liberals favor a wide variety of government interventions in the economy – and also want many decisions left to the market. This view can allow us to look at a wide range of policies from a different angle.
In trade policy, we can decide which areas should be placed in competition, and how. At the moment, the nanny state conservatives are the biggest protectionists around. If we want workers in the United States to compete directly with workers in the developing world, then it probably makes the most sense to start at the top. Trade policy should focus on putting our doctors, lawyers, and economists in competition with professionals in the developing world, not our least-skilled workers. This strategy offers the greatest opportunity for economic gain, in addition to distributing income downward.
Regarding Federal Reserve Board policy, we may consider other ways than high unemployment to ensure that inflation remains tame. And, we may be willing to take more risks with inflation than the nanny state conservatives want.
Corporations are an effective governmental tool to facilitate economic growth and the accumulation of wealth. The government certainly has the prerogative to set rules that limit the ability of high-level corporate executives to pilfer from the corporation. Remember, no one is forced to form a corporation.
There are many ways to support innovative and creative work. There is no reason to believe that patents and copyrights (or any other relics from the Middle Ages) are the most efficient mechanisms in a 21st century economy.
In a free market, the government does not act as an all-purpose debt collector. Creditors must be taught that they are taking risks and they cannot count on the government to bail them out.
In a free market, people must be allowed to collect damages from those who have harmed them. Reforms to the legal system that make this process more efficient are desirable. The public has no reason to support changes in rules that stack the deck in favor of big corporations so that it is more difficult for those who have been harmed to win compensation.
Most small business owners are honest, hardworking people, just like most other people who work for a living. The government has no special obligations to small business owners, many of whom will inevitably lose money and go out of business.
Finally, there are many areas in which the government can provide services more efficiently than the private sector. There is no reason to apologize for providing a service in the most efficient way. If private businesses can’t compete with the government, it is their problem.
Exposing the truth of the conservative nanny state opens up a whole new range of policy options, only a fraction of which will be discussed in this book. However, it should be clear that if progressives ever want to start winning national debates on economic policy we must stop using scripts that were written by conservatives. The market can be a fantastic force for promoting economic growth and allowing an arena for individual freedom, but it exists in a structure set out by the government. If we cannot question the structure established by the nanny state conservatives, then we are not really debating the policies that determine the well-being of hundreds of millions of people in the United States and around the world. We’re just putting on a show.
1. Of course patent and copyright protection serves a purpose as do all forms of protectionism. They are a mechanism that the government uses to provide incentives for innovation and creative work. However, the relevant question from the standpoint of determining public policy is whether these are the best mechanisms for this purpose. It isn’t possible to seriously answer this question, unless we first recognize that there are other possible ways to finance innovation and creative work and then to compare the costs and benefits of the various alternative mechanisms.
2. Limited liability means that the shareholders in a corporation cannot be personally held liable for the debts of a corporation. For example, if a factory blows up and destroys the surrounding neighborhood, the people in the area can seize any assets held by the corporation, but if these assets are not enough to compensate for the damage caused, they cannot collect any money from the individual shareholders.
3. Nanny state conservatives like to describe the corporate income tax as a form of “double taxation” since profit is taxed both at the corporate level and when it is paid out to individual shareholders. In reality, the corporate income tax is a voluntary tax that is a payment to the government in exchange for the privileges granted by corporate status. If shareholders did not feel that the value of these privileges exceeded the tax, then they would restructure corporations as partnerships, which are not subject to a separate income tax.