This is a thought piece. And so it’s going to be relatively) brief since I haven’t fleshed out all of my ideas here. But I want to run something by you based on a piece Matt Klein wrote over at FT Alphaville on macro policy.
Let me point to the key extract from Matt’s piece on this:
Here’s the gist of what Matt wrote, as I understand it. We have reached a point in advanced economies where macro really doesn’t grow the pie anymore and simply is a means of redistribution. Maybe, it’s because advanced economies are so rich already. Maybe there are other reasons that the benefits of macro tweaks to growth have diminished. No matter, the fact is a lot of people have believed we were optimizing in response to the trauma of 70s era stagflation by deregulating and promoting and defending free and open markets. But what if, in fact, we were just redistributing?
This brings me back to a piece I wrote several years ago on corporatism masquerading as liberty. The gist there was that free and open markets are a means of increasing individuals’ freedom. They are a way of increasing our choices, lowering prices and promoting shared economic prosperity. But to work, deregulation cannot be combined with desupervision and the de facto decriminalization we saw in the US in the post-subprime crisis era. That leads financial market actors to perverse incentives of gaming the system, concentrating power and extracting rents instead of innovating.
Let me give you a few examples. A few months’ back Noah Smith wrote a piece at Bloomberg View complaining about the wrong kind of entrepreneurship flourishing in the regulatory environment we have created in the US. His complaint: crony capitalists were trying to generate profits, but without actually producing anything of value. I noted his post on Twitter and gave my example via Amazon – a normally innovative company.
See, Amazon was granted a patent that prevents store shoppers from online price checking. A patent to stop comparison shopping could be useful to Amazon as it builds out its brick and mortar businesses starting with Whole Foods – but only as a means of thwarting competition. Now Amazon has actually been a leader in in-store price comparison apps like these. It has price check functionality rolled into the Amazon mobile app. And the goal is to get price data and respond with a lower price when competitors lower price, so that shoppers buy from Amazon. Try shopping on Amazon competitor Newegg, for example. They are a go-to retailer for me in the electronics space. Every temporary deal price there is matched by Amazon because of Amazon’s price comparison algorithms. Ultimately that’s a win-win for Amazon, who gets a sale, and for consumers, who get lower prices.
But Amazon’s patent on price comparison prevents competitors from being able to do this. This is anti-competitive. This patent for “Physical Store Online Shopping Control” is not innovation. It is a tool for market control and concentration that – down the line – would enable rent seeking behaviour. It is not what patents are for.
You can read my twitter thread on this in June here.
In the corporatism masquerading as liberty post, I mentioned another case I want to hone in on: “Kelo v. City of New London, Conn. If a state or local government deems a private project – funded by private monies and profiting private enterprises – to be in the public interest, it can seize your property to allow this project to occur. In the New London case, residents were evicted to make way for a luxury hotel and up-scale condos, from which private developers would profit handsomely. Kelo was an outrageous example of cronyism completely at odds with the ethos of the Dartmouth College Case of 1819. Because of Kelo, government can now abuse its power to enrich specific private interests. That’s corporatism at work.”
To me, it seems like we have a situation where the open market values that resulted from the economic transformations that began in the late 1970s are now no longer being accompanied by effective or coordinated regulatory frameworks. Lax regulatory supervision and decriminalization have turned businesses into lobbying machines, looking to tilt the playing field of macro policy in ways that redistribute economic gains to them. And it has encouraged wide-scale fraudulent behaviour, some of which tanked the world economy in 2007. Kelo shows the judiciary aiding and abetting this process.
My view here is that most of the bitter politics we see in Europe and North America result from this. It’s not so much that ordinary working people are ‘envious’ of the wealth of the rich in this age of increasing inequality. It’s more that they suspect – rightly in my view – that much of this wealth is gained through tilting the playing field.
So that’s my riff on Matt’s piece. Macro policy in the advanced countries has turned into a vehicle for redistribution. And most of that redistribution has gone to people who are already wealthy. Ordinary people see this going on and become angry – particularly after a damaging financial crisis for which – outside of Iceland – no individuals took the fall. That’s why electorates are radicalized. Meanwhile, so-called political change agents like Donald Trump in the US, who run on a populist platform, once in office, promote tax ‘reform’ ideas that – again – benefit the rich. Or they are bludgeoned into acquiescence like Alexis Tsipras in Greece.
Watching all of this unfold is frustrating, because it doesn’t have to be this way. And the sense I get it is that it will only change when our economic system comes under extreme stress, a stress even more extreme than the Great Financial Crisis we just lived through. None of us wants that. But I fear there will be no major changes in macro policies until this second Great Depression or something like it occurs.
Post-script: For my part, I will continue to defend open and free markets because I support liberty – and I think we all benefit from them. But I will also champion the idea that for capitalism to work well, we need effective regulatory frameworks, appropriate policy coordination, and robust prosecution of violators. That is my prescription for a future of shared economic prosperity.