Sam Hammond of the Niskanen Center wrote an excellent piece analyzing the under-appreciated complementarity of a strong social safety net and free market policies. Separating labor market and business regulation from social spending, Hammond goes on to argue that there is a steady equilibrium correlation between how free a country’s economy is and how generous their social safety net is. While I applaud his line of thinking on how free market policies and social insurance can be mutually reinforcing, I am not as convinced that there is necessarily a strong equilibrium relationship between the two, nor that the US is in an unsteady state that could lead it down the road to further reactionary populism.

Why the Market Economy Benefits from a Strong Safety Net

As an economy grows and adapts to changing demands, Joseph Schumpeter observed, a process of “creative destruction” leaves newly obsolete industries and skills in the dust. The displaced workers from this process can be enticed by populist revolts that threaten to counteract the productive forces of a market economy. Hammond’s paper “argues that the countries that have eluded Schumpeter’s dreary prediction have done so by combining free-markets with robust systems of universal social insurance.” In other words, if any polity wants to enjoy the fruits of a well-functioning market economy, it needs to cushion the blow for those that are harmed by the inherent dynamism that allows it to prosper. With its relatively stingy cash benefits, the United States is at risk of sliding into a policy environment that removes its unique dynamism.

Hammond argues a more generous social safety net can complement, rather than work against, the power of markets by, among other things: 1) promoting entrepreneurial risk-taking by spreading out risk across society; 2) address the painful adjustment costs embedded in a dynamic globalized market economy; 3) replace policies that ostensibly increase economic security but inevitably decrease economic flexibility; 4) increase labor market flexibility by detaching “important social benefits…from any particular employer or market structure.”

The False Dichotomy of Economic Policy-making

Many tend to incorrectly see economic policy regimes as necessarily being a bundled package. One political party may favor stronger unionization, have a more interventionist approach to industry, a more progressive taxation scheme, and a more generous welfare state, while the other wants to decrease the power of unions, privatize more government functions, lower top marginal tax rates, and cut social spending. In reality, it’s not one bundle or the other. It’s possible to have a generous social insurance system as well as a lightly-regulated economy. Hammond makes a distinction between a Swedish “social insurance state” that has generous social insurance policies but a relatively unregulated marketplace, with a Venezuelan “interventionist state” that relies on nationalization and inflexible labor markets. Both can be referred to as “socialist” or “social democratic” in political discourse, but of course their policy combinations are far from identical. The ideal scheme, according to Hammond (and one I agree with), is one that combines the powers of the market economy with a generous welfare state.

[As a slight aside, this overall point is something I want to increasingly shout from the rooftops. Opponents of “capitalism” or market economies tend to associate pro-market reforms with skimpy welfare states, neoconservative foreign policy, and low environmental regulation. The Niskanen Center is great at producing work that combines ideal policies outside this false dichotomy.]

What Economic Freedom Should Really Mean

Often times, country rankings of “economic freedom” from the Heritage Foundation or Fraser Institute imply a necessary bundling of economic policy decisions. Both of these foundations, Hammond notes, value economic freedoms related to economic regulation, but they also value low government spending and skimpy social safety nets. To better get to an analysis showing the kind of government presence he’s talking about, he develops an index that separates social expenditures and pro-market institutions from “government size.” The economic freedom index thus values government transparency, rule of law, and regulatory efficiency while the social welfare index suggests higher income transfers. Economic freedom does not need to mean low taxation and social spending. We’re left with this graphic:

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The graphic suggests a correlation between his measure of economic freedom and income security. But instead of just saying this is a correlation, he believes the relationship is in fact an equilibrium, and countries that diverge from the path by becoming either economically less-free or decrease welfare spending are at risk of falling down the path to populism found in the bottom left quadrant. In theory, these countries are in disequilibrium, as I see it, because an economically less-free country with generous welfare spending would have low-growth that couldn’t support its welfare state. Meanwhile, an economically free country with skimpy benefits wouldn’t be able to cushion the blow from an ever-changing economy.

But is there a Steady-state Equilibrium?

This is where I’m skeptical. The United States is a significant outlier here. An atypical amount of our government spending goes towards military ventures, but I don’t think that collapsing military spending would result in a more generous welfare state. I’m drawn to this Glaser et al paper suggesting that skimpier US welfare state spending comes from historical and cultural realities that are hard to undo by overnight Federal policymaking. Specifically, the paper suggests that “racial fragmentation is a powerful predictor of redistribution” across countries, and America’s cultural/racial heterogeneity could lead to an unwillingness to provide strong social welfare benefits that is difficult to overcome. The United States is atypical in many regards to other OECD countries, and a big difference is this diversity. Scandinavian countries with relatively homogenous populations could be seen as more willing to provide a social safety net because people perceive their tax dollars as going to people just like them. Countries like Italy or Spain, with relatively less national unity than Denmark or Norway, have administratively weaker welfare states.

Although Nordic countries have recently experienced a surge in “otherness” migration – and with significant frictions politically as they try to protect their natives and welfare states – it’s not clear to me that the dust will settle with these countries having their generous welfare states remain in place. I don’t mean to argue against diversity or say it can’t coexist with strong social spending; instead, I want to assert the common tension between the two and point out that America’s atypical cultural heterogeneity could be an endogenous force working against political willingness to increase social spending. Further, as Hammond notes, Sweden was in an equilibrium in the 70s and 80s more in line with the bottom left quadrant of his graphic than the top right. A particularly bad recession in the early 90s shocked the country and resulted in liberalization of markets but preserved strong social insurance programs. But if Sweden can suddenly switch quadrants, what makes Hammond so sure it can’t just as easily switch back?

A further argument against the inevitability of this equilibrium is in the United States’s long history. Sure, countries in the Anglo world are today on a more authoritarian path with Trump/Brexit than many other OECD countries, likely stemming from an inability to protect citizens who were displaced by globalization. But the United States has never had a particularly strong welfare state? The “pull yourself up by your bootstraps” mentality is a part of what is deemed American exceptionalism. The United States transitioned from an agricultural country to industrial without falling out of this bottom right quadrant. The transition didn’t come without side effects – agricultural subsidies today can be seen as a historical concession towards farmers harmed by the change – but the United States still never left its unique quadrant. Now, maybe I’m oversimplifying United States economic history here, or not involving the nuances of European economic history either. But if I really am misunderstanding history, it begs the question of whether Hammond can show that his graphic is robust enough throughout time in order to prove that this is indeed an equilibrium.

To say that a more robust welfare state counteracts the forces that led to Trump and Brexit also seems like a stretch to me. Specifically, Hammond believes that a well designed welfare state could alleviate “search and adjustment costs…with a system of subsidized employment for the long-term unemployed, combined with job search and relocation supports for geographically locked workers.” I’m skeptical the proverbial rust-belt Trump voter that used to thrive in a coal-fueled world or manufacturing-based American economy will be helped much by this. These workers have a strong connection to the identity their job provides them. I don’t just mean the purpose or community employment gives them. A coal miner isn’t suddenly going to become a male nurse just because that’s where the economy is producing jobs, no matter how much assistance the government gives them. The assembly line worker in West Virginia isn’t going to start to learn Python and move to Silicon Valley. The fact of the matter, as I see it, is that the economic displacement from globalization and automation interacts with a stubbornness of human nature that leaves many workers potentially unable or unwilling to participate in the new economy, regardless of government support. [I’d note that this job-identity relationship extends to professional-class workers who probably refused to work retail jobs during the Great Recession. Our employment opportunities are tied to how we see ourselves, and I think government spending can only do so much here.]

Hammond writes that “unregulated open economies are vulnerable to reactionary populist backlashes when the forces of creative destruction leave large swaths of society behind.” But take a look at his graphic showing OECD countries and their level of “cash minimum-income benefits.”

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Greece paints a picture of an unstable populist backlash, but what about other countries on the left-side of this distribution? Is Canada unstable? South Korea? Hong Kong and Singapore are atypical city-states, but I don’t see them as being at risk of going in a more authoritarian direction, either. Perhaps it’s possible for countries to exist as free-market states without having pressures to increase its social welfare spending. History, culture, demographics, or even size/government setup – something particularly unique about the United States – could lead countries to a steady-state outside the correlation Hammond’s graphic suggests. And if there is no equilibrium, can we really think of these as being necessarily reinforcing rather than just a correlation?

How to Improve American Social Insurance

Outside any theoretical equilibrium, I would like to see the policies Hammond argues for. While I may not be convinced the United States must do this in order to avoid becoming more of an authoritative populist country, I still believe a stronger safety net can complement the wonders of the market economy discusses previously. So how can the United States transition into more a top-right quadrant country? Hammond argues that social insurance schemes can be more politically viable and successful if they are designed to be “neutral” and “universal.” It’s important to be neutral – in the sense that as little as possible is left up to the discretion of policymakers that will likely pander to special interests – to avoid favoritism and cronyism. It’s important to be “universal” because programs perceived to be designated only for the poor are typically poorly-run and underfunded. Making social insurance schemes something that everyone benefits from and pays into will ensure more forces that lead to beauracratic quality and efficiency. Federalism and American attitudes could make this a relatively difficult process, but still one worth pursuing.

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Harvey Weinstein, Bill O’Reilly, Donald, and on and on and on. There can no longer be any doubt about the existence of male privilege and how it breeds sexual entitlement. Something has to change.

The obvious answer for men on the individual level is to call out instances of misogyny and loudly condemn any sexual assault within our own immediate vicinity (in addition to not being a pig). But what to do on a systemic level? A lot of the commentary coming out now casually connects misogynist culture with some notion of capitalism, but it’s not clear to me what role the American economic system plays in all this.

[Anyone who has ever read this blog knows my sympathies to the market economy, though I’ll admit it’s not perfect and there can always be productive tinkering.]

Capitalism, in most real world manifestations of the word, allocates resources based on consumers’ preferences. When inequality is such as it is in the United States, rich people’s preferences are overrepresented massively because consumption is a function of income. If the consumers’ dollar is their vote, people with more dollars have a lot more votes. Money is power and I don’t think this is up for debate. In this sense, movies will be made that reflect men’s view of the opposite gender because they write the checks for the movies to be made and have more money to spend on movie tickets. If those with more money don’t want to see football players kneeling in social protest, then the profit-maximizing action for the NFL is to make a rule disallowing kneeling during the national anthem. Essentially, a capitalist system will shake out to reflect the interests of those with money and power, even if those interests are discriminatory and completely exploitative like in the case of Harvey Weinstein. Under these scenarios, I admit, the market economy is a system that rewards and perpetuates unethical behavior. [Not all corporate behavior is done under profit-maximizing conditions, however.]

On the other hand, I’m cognizant of arguments that show the market economy as being a force for good in this debate. Money talks, but this can go both ways. Bill O’Reilly was effectively forced out from Fox News because advertisers were boycotting. They didn’t want to be associated with such a vulgar human being. Were their decisions based on ethics, or just avoiding bad PR? Either way, the boycott worked. Similarly, Harvey Weinstein was forced out from his own company and seemingly blacklisted from the entire industry. Compare this to the President: his first wife alleged marital rape, he’s had countless sexual assault allegations, and the Access Hollywood tape was a smoking gun showing what kind of person he is. But he’s still in power. He’s not the only politician or person in government to retain their position after doing terrible things. We can all choose to support companies that we think are ethical and not use our dollar votes to support unethical ones, yet we are all bound to pay taxes to the same government.

So then I wonder: Under what circumstances do market forces punish men for this behavior better than the democratic process? It’s easy to look at the very real faults of a consumer-driven market economy and see an alternate system based on public control as the antidote. But if culture is the real problem, a new economic system might not make much of a difference. In fact, high-quality legislation from the democratic process could be disappointingly ineffective if the underlying culture is so engrained. If you think of different countries around the world with less ‘capitalist’ economies, how much of an improvement is there? For European countries that boast higher female participation in corporate boardrooms or the legislature, was it because of their culture or some sort of tinkering in how their economy is structured? I’m skeptical that replacing the current US economic system with, say, a full-on Bernie Sanders system will improve much. A sexist culture will still put sexist men in charge, though often we assume the right democratic outcome weeds them out.

The economy is not always a zero-sum game. We can both be better off without it coming at the expense of someone else. But power is a zero-sum game. So the asymmetric power of men, reenforced by their asymmetric holdings of money and connections, does come at the expense of women. Closing this power gap absolutely needs to be a policy priority, but more importantly it must be a cultural priority. Market forces should be used in tandem with legislation and the democratic process; anyone suggesting only markets or only a new economic system will cause the change which we would like to see should rethink their approach.

I recently assigned Milton Friedman’s classic article “The Social Responsibility of Business is to Increase its Profits” to one of my more advanced classes, which got me thinking about Friedman’s argument for the first time in a while. Then, just the other day, Matt Yglesias wrote this:

[Friedman’s argument] implies that a business executive has not only the right as a citizen of a democratic country but a moral obligation to dedicate his energy and that of the firm he manages toward erecting regulatory barriers to competition and to begging for bailouts and subsidies…. [A]n entrepreneur who’s obsessed with creating great products is… guilty of some kind of ethical failing… my point is basically that for the system to work you need some kind of thicker ethics than “greed is good.”

From the very same article that Yglesias links to, Friedman makes it clear that he recognizes this. He concludes with this quote from his book Capitalism and Freedom: “there is one and only one social responsibility of business–to use it resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud”.

Friedman may be partially to blame for the initial appearance of a disagreement on this point, since he chose to advance his position (in terms of what he emphasizes in this article and in interviews on the subject) by basically saying “businesses should try to be greedy and increase profits” without necessarily following up with the obvious caveat that this is only a tenable position if businesses are conforming to certain basic rules.

Egalitarians often point to wealth inequality as a sign that society is not doing enough to improve the conditions of the poorest. But inequality and standard of living are completely different and should be treated as two separate issues.

I remember in my AP political science class we were told that psychology tests proved that people – despite what they believed – were more concerned about relative wealth than absolute wealth. In other words, picture these two situations: I get $40 and you get $70 in situation A. In situation B, I get $30 and you get $45. In Situation A, we both have more money. We are both wealthier in absolute terms. In situation B, the inequality of our respective wealths is less, but our absolute wealth is lower; on the other hand, my relative wealth is better in B than in situation A.

I think – or at least I hope – that we all can agree that situation A is a preferred outcome, since both of us have more money which means a better standard of living (in the material sense).

One of the biggest fallacies about economics is that it is a zero-sum game. What I mean by this is that if I become ten dollars richer, I have taken it away from someone else. In other words, Bill Gates having X billions of dollars means that we are X billions of dollars poorer. Au contraire!

Market economies thrive on quite the opposite; the total amount of wealth in society is never a fixed amount. The idea is, at least in theory, that instead of artificially redistributing the “slices of pie,” making “the pie” bigger is a better way to help the worst-off in society (as Rawls himself even admitted). History, I believe, is on my side when comparing capitalism with extreme socialism or communism: the poor in the Soviet Union, East Germany, North Korea, or any African socialist utopia are much worse off than in America. In the last few decades, China and India have lifted hundreds of millions of people out of poverty by embracing market reforms. At the same time, wealth inequality has increased. Shouldn’t that be considered a necessary evil instead of something to combat, at the possible expense of further growth?

In my internship this summer for an education think tank, I remember reading a great piece (though I can’t find it now) arguing that achievement gaps shouldn’t be considered as much as proficiency gaps between races/income groups. In other words, instead of caring about the difference in test scores between rich kids and poor kids, we should just be making sure that every child is proficient in all the necessary areas. Caring about the achievement gap can create a false sense of progress, as Carson noted in a previous post, because if the best-off people actually decrease their well-being the inequality has gone down without actually improving the standard of living for the worst-off.

Ok, so that’s my first point: absolute wealth should be considered over relative wealth. But the measurements by which we look at inequality also need to be reconsidered. Will Wilkinson recently wrote an excellent paper questioning the often-reported rise inequality in the United States, saying that, among other things:

  1. The level of real economic inequality is lower than popular treatments of the issue have led many of us to think.
  2. The level of economic inequality is an unreliable indicator of a society’s justice or injustice.
  3. Inequality distracts us from real injustices that are given too little attention.

Check it out if you’ve got time.

An example of a pie that can represent wealth distribution

An example of a pie that can represent wealth distribution

I just got back home from seeing Michael Moore’s  Capitalism: A Love Story, and I almost walked out (I probably would have, had I not been watching with my mom and brother).  I’m not a Michael Moore hater; I actually kind of liked some parts of Bowling for Columbine and Fahrenheit 9/11.  But this was just awful.  The gonzo stunts that Moore has become known for were uninspired duplicates of scenes from his previous films, and he didn’t have any particularly funny jokes.  Humor took a backseat in this film to Moore’s incredibly misguided critique of capitalism.

Moore highlights some tragic, probably legitimate injustices in the movie (although their presentation is surely slanted), but the movie overall is not just misleading; it’s a truly despicable piece of trash that makes people who watch it stupider and reduces the quality of public discourse.

As W. Jerome wrote last month, Moore conflates capitalism with corporatism throughout the film.  Among the vignettes that Moore uses to condemn capitalism are a judge who takes cash payments to imprison juveniles and increase profits of his detention facility owning friends, legislators and cabinet officials who get special deals on home loans, and former Wall Street executives who use their powerful posts in the treasury department to funnel taxpayer money to their old employers.  Moore uses the word “capitalism” to refer generally to “things that are evil” (he even says, “capitalism is an evil, and you can’t regulate evil”).

For reference, here is Wikipedia’s definition of capitalism: “an economic and social system in which the means of production (also known as capital) are privately controlled; labor, goods and capital are traded in a market; profits are distributed to owners or invested in new technologies and industries; and wages are paid to labor.”  Moore uses this movie to obscure for his viewers what the word “capitalism” actually means.  Therefore, when a free-market friendly person defends capitalism, people who have seen Capitalism: A Love Story will attribute a different meaning to that person’s words than that person herself intends.  It’s impossible to have a meaningful, productive conversation when the participants are literally not speaking the same language.  Moore cultivates confusion on a topic which badly needs conceptual clarification.

There is nothing wrong with a critique of free market economics (see?  I can’t even use the word capitalism here, because I’m afraid that it will be unclear!) on its merits, but Moore’s movie is nothing of the sort.    And I’m honestly ashamed (although not at all surprised) that one of my beloved home state’s senators (Bernie Sanders) makes a cameo appearance.  Yuck.

No, I haven’t seen Capitalism: A Love Story yet, so I can’t give an honest review of it. But I have gathered a few things from the people who personally have seen the movie. First of all, Moore concludes it with:

Capitalism is an evil, and you can’t regulate an evil.

Woo, doggies. I really like capitalism.

One teaser for the movie is this video:

There, Mikey, is mistake #1. Capitalism’s passionate and true defenders were against bailouts. They also are against giving any specific private entities like corporations special preferences. There’s a huge difference between crony capitalism and the true capitalism that I and other libertarians argue for.

Honestly, I probably won’t see the movie. But I thought I should write about such a glaring mistake.