Posted by: jackslife | September 14, 2009

Pro-Business or Pro-Market?

There is a fantastic article written by University of Chicago economist Luigi Zingales that was published in National Affairs. Thanks to Rod Dreher for posting about it on his blog, because this is certainly not a publication I have read in the past.

I have had this uneasy feeling about the state of our free market economy for a while now, and I think Zingales does a great job of giving an informed voice to my misgivings.  The long and short of it is that there is nothing wrong with the free market, but that is not really what we have been moving towards, even pre-Obama.  I will readily admit that I am not the most informed person when it comes to the deeper details of economic matters, but what he says here makes a lot of sense.  He claims that we have shifted towards policies that have increased centralization of power and have decreased some of the checks and balances that have existed within our economy.

There are so many good points in this article that I don’t really think I could possibly do them all justice, so I hope you will read the entire article (it is somewhat lengthy).  He talks about how important it is that the populace sees the system as being equitable, and the effects that scandal and government involvement have on that perception.  Here is one excerpt from the article about this –

When the government is small and relatively weak, the way to make money is to start a successful private-sector business. But the larger the size and scope of government spending, the easier it is to make money by diverting public resources. Starting a business is difficult and involves a lot of risk — but getting a government favor or contract is easier, and a much safer bet. And so in nations with large and powerful governments, the state tends to find itself at the heart of the economic system, even if that system is relatively capitalist. This tends to confound politics and economics, both in practice and in public perceptions: The larger the share of capitalists who acquire their wealth thanks to their political connections, the greater the perception that capitalism is unfair and corrupt.

Another point that is made is that the prominence and financially lucrative nature of the finance industry has created an imbalance in the number of our “best and brightest” within a single industry.  This has lead to an imbalance in our government, which seems to create an environment that views the economic prison as the only measurement of good policy.  Again from the article –

The explosion of wages and profits in finance also naturally attracted the best talents — with implications that extended beyond the financial sector, and deep into government. Thirty years ago, the brightest undergraduates were going into science, technology, law, and business; for the last 20 years, they have gone to finance. Having devoted themselves to this sector, these talented individuals inevitably end up working to advance its interests: A person specialized in derivative trading is likely to be terribly impressed with the importance and value of derivatives, just as a nuclear engineer is likely to think nuclear power can solve all the world’s problems. And if most of the political elite were picked from among nuclear engineers, it would be only natural that the country would soon fill with nuclear plants. In fact, we have an example of precisely this scenario in France, where for complicated cultural reasons an unusually large portion of the political elite is trained in engineering at the École Polytechnique — and France derives more of its energy from nuclear power than any other nation.

A similar effect is evident with finance in America. The proportion of people with training and experience in finance working at the highest levels of every recent presidential administration is extraordinary. Four of the last six secretaries of Treasury fit this description. In fact, all four were directly or indirectly connected to one firm: Goldman Sachs. This is hardly the historical norm; of the previous six Treasury secretaries, only one had a finance background. And finance-trained executives staff not only the Treasury but many senior White House posts and key positions in numerous other departments. President Barack Obama’s chief of staff, Rahm Emanuel, once worked for an investment bank, as did his predecessor under President George W. Bush, Joshua Bolten.

There is nothing intrinsically bad about these developments. In fact, it is only natural that a government in search of the brightest people will end up poaching from the finance world, to which the best and brightest have flocked. The problem is that people who have spent their entire lives in finance have an understandable tendency to think that the interests of their industry and the interests of the country always coincide. When Treasury Secretary Henry Paulson went to Congress last fall arguing that the world as we knew it would end if Congress did not approve the $700 billion bailout, he was serious and speaking in good faith. And to an extent he was right: His world — the world he lived and worked in — would have ended had there not been a bailout. Goldman Sachs would have gone bankrupt, and the repercussions for everyone he knew would have been enormous. But Henry Paulson’s world is not the world most Americans live in — or even the world in which our economy as a whole exists. Whether that world would have ended without Congress’s bailout was a far more debatable proposition; unfortunately, that debate never took place.

Compounding the problem is the fact that people in government tend to rely on their networks of trusted friends to gather information “from the outside.” If everyone in those networks is drawn from the same milieu, the information and ideas that flow to policymakers will be severely limited. A revealing anecdote comes from a Bush Treasury official, who noted that in the heat of the financial crisis, every time there was a phone call from Manhattan’s 212 area code, the message was the same: “Buy the toxic assets.” Such uniformity of advice makes it difficult for even the most intelligent or well-meaning policymakers to arrive at the right decisions.

As I said, there is too much here for me to cover it all, but I think it is well worth the time to check it out in its entirety.

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Responses

  1. So I finally got around to reading the article 🙂

    It was a long read, but I thought it was very well written. The author brings up a lot of interesting points and I agree that the public opinion of Free Market Capitalism has been soured to some degree over the last year.

    The piece of the story I found most intersting had to do with the $3.5 the financial industry spent lobbying the government over the last 10 years. You know my distaste for lobbying within our political system, so I’ll spare you any ranting. Also, the infiltration of key political positions by people who have come out of the financial distrinct and have a clear conflict of interest when it comes to policy decisions. As stated within the article:

    “When Treasury Secretary Henry Paulson went to Congress last fall arguing that the world as we knew it would end if Congress did not approve the $700 billion bailout, he was serious and speaking in good faith. And to an extent he was right: His world — the world he lived and worked in — would have ended had there not been a bailout. Goldman Sachs would have gone bankrupt, and the repercussions for everyone he knew would have been enormous. But Henry Paulson’s world is not the world most Americans live in …”

    That is precisely what I have thought from the begining of this whole bailout process. Just a massive overreaction from people to closely tied to those involved and looking to protect their interest over that of the country as a whole.

    Also when I read: “Compounding the problem is the fact that people in government tend to rely on their networks of trusted friends to gather information “from the outside.” If everyone in those networks is drawn from the same milieu, the information and ideas that flow to policymakers will be severely limited. A revealing anecdote comes from a Bush Treasury official, who noted that in the heat of the financial crisis, every time there was a phone call from Manhattan’s 212 area code, the message was the same: “Buy the toxic assets.” Such uniformity of advice makes it difficult for even the most intelligent or well-meaning policymakers to arrive at the right decisions.”

    I had to stop and wonder if there really is any hope for the future. All major industries, health, financial, agriculture etc. seem to be so closely tied to our political system that the interest of the people will be drown out by those elite few amongst the inner-circle who shape and make future policy.

    I like capitalism and our free market system, but for me personally, a lot will have to change before my faith can be restored in it.


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