Rules of the Game

Eliot Spitzer makes an effective argument against much of the corruption that has taken root in our economy and society over the last three decades. However, he makes a fundamental error in portraying his agenda as a case for government intervention. Attributing a belief in free-market principles to those who have been setting economic policy these 30 years is far too generous. During that period the role of the government in the economy has changed, and in some cases grown, just not in ways that protect ordinary workers and consumers.

Let’s start with the most obvious example: the financial industry, or, at least, its biggest actors, which have the benefit of too-big-to-fail protection from the federal government. Banks such as J.P. Morgan and Citigroup were arguably too big to fail even three decades ago, before growth and mergers expanded their size several-fold. In the last decade they grew so big that their collapse would undoubtedly have jeopardized the health of the financial system. Everyone knew that, so creditors could lend them money without concern for the banks’ soundness: The government, ultimately, would stand behind their debts. This has nothing to do with Ayn Rand’s libertarianism. Huge financial institutions simply took advantage of taxpayers by getting insurance without having to pay for it.

Similarly, the quest for less regulatory control of banks that hold FDIC-insured deposits is not a story of deregulation. It is an effort by banks to exploit the government’s insurance policy. It is comparable to running a fireworks factory out of a home where the owner pays the standard residential insurance rate. This insurance rip-off has nothing to do with the free market.

The government’s involvement in the economy has grown substantially in important areas, including patent and copyright protection. The percentage of GDP that is diverted to holders of patents and copyrights has increased enormously over the last three decades as Congress has approved a number of measures that increase the length and scope of these protections. Increased patent and copyright protection has been felt internationally as well. Virtually every trade pact since Ronald Reagan took office has imposed more stringent patent and copyright protection on U.S. trading partners.

The impact of these measures is most visible in the case of prescription drugs. The country is projected to spend close to $260 billion this year, just under 2 percent of GDP, on prescription drugs. Without what amounts to government-granted patent monopolies, the cost would be close to one-tenth of this amount. Individuals and insurance companies pay the extra cost, and not just with their cash: Many Americans who would have no difficulty paying the free-market price for generic drugs cannot afford to buy drugs at their patent-protected prices.

The government’s role in protecting intellectual property has led to increasing interference with the free market in other ways. The Internet has made copyrights far less enforceable, yet rather than modernizing our system for financing creative work, the government has taken extreme measures to preserve copyrights—pushing schools to promote courses on the importance of honoring copyrights; sending police into college dorms and the bedrooms of high school students in search of unauthorized copies of recorded music; and even arresting a Russian computer scientist for giving an academic lecture on ways to break encryption software.

Treating patents and copyrights as simply facts of nature rather than government intervention into the economy is very helpful to the corporations that profit from these policies. It puts them beyond the realm of public debate. However, patent and copyrights were not given by God or nature. They are government policies for promoting innovation and creative work. Are they the best policies to accomplish these goals? It is not possible even to ask the question until we acknowledge that they are policies that can be changed.

The example of patents and copyrights is instructive because it shows how completely government policy shapes the economy. There is no “free market” economy without government intervention. The government sets the rules, and it can set the rules in ways that benefit the vast majority of the population, or it can set the rules in ways that have the effect of redistributing wealth and income upwards, as it has done over the last three decades.

Let’s take another example, one that Spitzer uses: the argument that we need the government to intervene in the market in order to prevent pollution. Regulations are in place, but they are designed to protect the property of wealthy landowners. I cannot build a slaughterhouse across the street from Bill Gates’s house because of zoning restrictions that prevent me from engaging in activities that reduce the value of Gates’s property. How are these zoning restrictions any different from restrictions on greenhouse gas emissions or any other form of pollution? How many conservative politicians think that I should be able to erect a slaughterhouse in front of Bill Gates’s home?

Progressives undermine their cause when they frame their agenda as one that imposes government constraints on the market. Market outcomes, as opposed to the dictates of government bureaucrats, have substantial appeal, especially in the United States. And the market is an incredibly valuable tool. We should be looking to restructure the market in ways that produce outcomes that are more desirable. Focusing on government intervention to override the market is both bad politics and bad policy.

DEAN BAKER is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of Plunder and Blunder: The Rise and Fall of the Bubble Economy and False Profits: Recoverying From the Bubble Economy.

This column was originally published by The Boston Review.


Dean Baker is the senior economist at the Center for Economic and Policy Research in Washington, DC.