Friday, September 12, 2008

Why a Left-Libertarian Coalition Is Possible

In a comment to my post yesterday, ECL writes about Libby's advocacy of trust-busting:

She immediately goes for the nuclear option. Let alone the fact that the anti-trust measure should not ever be considered with a free market motive (not only is a government fix to a government-caused problem, it's also an anti-competitive measure used by rent seekers), she does not consider alternatives that could be considered reasonable (maybe) under certain conditions of, say, natural monopoly (i.e. rate regulation) where a genuine public interest is affected (as opposed to what passed off as a public interest in Nebbia v New York).

I generally agree with this critique. However, I think Libby's arguments - even to the extent I disagree - show something important about why a left-libertarian coalition that would replace the longstanding right-libertarian coalition is both possible and likely.** While Libby hardly speaks for the Left as a whole, and is in general one of the more libertarian-friendly liberals around, much of what she writes in her post is fairly typical of many liberals that I know.

So, if I disagree with the arguments and believe the arguments are fairly typical liberal critiques of capitalism, why do I think Libby's post demonstrates the possibility for a left-libertarian coalition? The answer is that the principal underlying her arguments is an essentially libertarian principal - the principal that economic competition is desirable, and that more competition is inherently good.

This is a far cry from the socialism and fetish for central planning that once animated the American Left. In those days, the Left viewed competition as an essentially zero-sum game in which only government intervention could create progress. Libby's post demonstrates that those days, for the most part, are gone. The Left has, by and large (though by no means completely), moved from trying to plan against competition to trying to plan for competition (even if we think those plans will do more harm than good, the fact is that the goal is to enhance private competition). Devotees of Hayek will understand the immense importance of this distinction.

Simply put, the ends of contemporary liberalism/progressivism have in large part been restored to their classically liberal roots, even if we libertarians may think that their preferred means are not particularly consistent with classical liberalism.

I would also add that there is one point Libby makes which libertarians would do well to internalize - and that is the creeping destruction of choice that results from monopolization (particularly where that monopolization occurs as a result of government protectionism). I think Libby is correct in suggesting that this can be as big a threat to liberty as direct government action - one need only look at the warrantless wiretapping program to understand this.

If we accept the dangers inherent in a symbiotic relationship between government and corporate monopolies, then libertarians in large part need to have a shift in priorities. While we can maintain our opposition to the social welfare state, the fact is that the corporate welfare state (including anti-competitive regulations, subsidies, and, notably, the military-industrial complex) must become our biggest priority in the field of economic policy. After all, a welfare recipient doing the government's bidding is a lot less of a threat to liberty than a corporate rent-seeker doing the government's bidding, particularly when that rent-seeker has access to all sorts of records and communications that the government would typically be prohibited from obtaining without a warrant.

In fighting the corporate welfare state, especially to the extent it includes government contracting, I would hope libertarians could all agree that the political Left is a more natural ally than the political Right.

**As always, when I refer to a right-libertarian or left-libertarian coalition, I refer only to libertarians in the broadest sense, with the full recognition that libertarian purists would never align with either coalition.

Thursday, September 11, 2008

Big Business, Government, and Coercion - Peas in a Pod

Blogging at AOTP, beloved lefty-blogger Libby Spencer writes that her disagreement with libertarians often boils down to - in her estimation - beliefs in whether a free market exists, rather than whether a free market should exist. Many/most libertarians, of course, would probably point out that their major beef with liberals/Progressives is over the liberal/Progressive assertion that the last 25 years have demonstrated the failure of free markets because free markets have not, in fact, existed. So in this sense, Libby seems to be different from other liberals/Progressives, and in fact in agreement with libertarians.

Where she differs from libertarians, however, is in her belief that the biggest impediment to a free market is corporate monopoly AND that therefore trust-busting (and regulatory control) is a legitimate function of government:

Today many major multinational corporations have an annual revenue that exceeds the GDP of at least 30% of the third world nations. Free market principles can’t exist under these conditions. I hear a lot of talk from libertarians about the coercion of big government when regulatory controls and monopoly busting comes up but I believe corporate coercion is of much greater concern and is the one area of the market that does require government intervention, assuming we can break the stranglehold the corporations already have on our government that has allowed these monopolies to form in the first place. In fact, I see it as an essential first step in breaking the excessive governmental interference in our private lives.

In the comments section, Libby adds:

"[I]sn’t the reason government regulation right now favors corporate interests because the corporations and their lobbyists are the ones writing the regs in order to subvert the free market. It’s a catch-22 and I’m thinking if we break up the conglomerates, they won’t have the economic power to control government policy."

This of course begs for a response from someone with an unnatural fixation on lobbying, corruption, and interest group politics. Someone like, uhh, me.

The first point of disagreement is that I think the latter assertion, which most Americans accept as a truism, does not match up with existing political science, which overwhelmingly shows that economic clout (such as that thrown around in campaign donations) doesn't so much buy control as it buys access. This is a less important point, though, because it's not as relevant and requires an awfully long explanation. Also - regulators are more often than not career bureaucrats who have no need for campaign donations (and there is little evidence to support the idea that they are frequently bribed).

The more important point of disagreement, though, is that I think the evidence shows that as long as you have government regulators, you will have interested parties seeking to influence those regulators. The problem is that the parties interested in a particular set of regulations will almost entirely come from the regulated industry itself (with some exceptions, of course). This fact holds true whether those parties are a handful of large conglomerates or a group of relatively small businesses.

Except in relatively rare circumstances, these parties will be the only group that is both interested enough and organized enough to effectively push for or against a given regulation. Even when a group of particularly interested businesses is not well organized, the prospect of regulatory authority will almost always lead them, or at least a large sub-group of them, to quickly become well organized. This is not difficult, since you are usually talking about only a tiny subset of the population that shares some form of common network, whether it be a trade magazine, distribution network, or whatever. Because regulations typically pertain to a significant portion of the group's livelihood, they will be willing to expend tremendous amounts of time and money to influence the outcome of the regulations.

Meanwhile, to the extent others are interested in the regulations, they are likely to be not only relatively small in number, but also extremely disorganized, as only rarely will they share common lines of communication. Additionally, the regulations will almost never affect them in a way that will have an impact on a substantial portion of their lives. Which means they will be less willing and able to expend time and money on the issue even if they are able to organize.

Importantly, this holds true whether or not the regulated industry is dominated by a handful of large conglomerates. Indeed, the existence of regulatory powers alone can - and I think frequently does - have the effect of encouraging consolidation, collusion, and monopoly rather than competition. The existence of regulatory powers creates a unity of interest amongst potentially regulated businesses - whether that unity is centered on fighting against regulation or, frequently, fighting for regulation that will in some way increase the costs of entry into the industry (which is obviously a deterrent to competition). This unity of interest results in a situation where group members work together against outsiders even as they nominally compete against each other. There are some clear examples of this sort of behavior, perhaps the most infamous being the Realtors' Association. There is even one example I can think of that is far more powerful within its field, and far more relevant to this topic, because there are no constituent businesses within the organization that have more than a few thousand employees - and all but a handful have far less than that.

Meanwhile the group most negatively affected by regulations almost never has the incentive and ability to work for or against a regulation. This group of course consists of those who may in the future wish to become involved in the now-regulated industry. Few, if any, members of this group will get involved in the regulatory process because they, by definition, are not yet involved in the industry, and only rarely will they already have an interest in becoming involved in the industry. Even those who do already have this interest will lack any kind of a network that would allow for the requisite organization and activism.

The result? The regulatory authority (which, I might add, usually consists of people closely linked to the regulated industry) only hears one side of the story. To the extent it hears other sides, those other sides are drowned out by the hue and cry coming from the well-organized industry members, as well as the politicians they have persuaded to intervene on their behalf.

Trust-busting will not solve this problem, though. Instead, it will result in an informal, de facto monopoly that cannot be destroyed without violating the freedom to associate and to petition the government since you would have to prohibit industry members from joining what are essentially trade groups. This de facto monopoly will be worse than a naturally occuring monopoly, which is still usually subject to market forces and can (and often is) still be brought down through normal competition. In many instances, the de facto monopoly will even have more control over government regulation than an actual monopoly because the former example will have the weight of thousands of theoretically independent businesses behind it whereas the the latter will have the weight of only one (admittedly massive) business.

Ultimately, I suspect that monopolies are both created and sustained by government's regulatory authority. To the extent a monopoly could exist in a free market, it would not be nearly so insidious as it is in a regulatory environment where it can use its clout to raise the entry costs of prospective competitors and thereby behave like a true monopoly.

Monday, September 8, 2008

Don't say we didn't warn you...The Frannie Edition

Matt Ygelesias writes:

A broad ideological point while I continue to try to figure out what’s actually going on with the government’s re-acquisition of the GSEs — they say there are no atheists in foxholes, and by the same token there are no free marketeers in a financial crisis. Which reminds us that while we (mostly) use market mechanisms to set the prices of (most) stuff and do so for the very good reason that this encourages people to produce goods and services people want in appropriate quantities, that market activity doesn’t add up to anything like the “free market economy” of popular myth. Market transactions take place within a legal and institutional framework that involves many public choices at many points, choices that can (and are) made in different ways at different times and with different beneficiaries. We mostly don’t notice this stuff either because it operates silently in the background (copyright and patent law, say) or else because the changes tend to be small at any given point (Fed interest rate shifts) but when crisis strikes it leaps into the foreground.

And there’s nothing wrong with that, in principle. Faced with something like the Bear Stearns meltdown, it would be absurd for public officials to step aside and just “let things play out” irrespective of the damage done to the economy merely in order to bring practice into closer alignment with free market rhetoric. But by the same token, an obligation exists to make sure not just that the economy “works” instead of collapsing, or works just for the richest and best connected, but rather works for everyone who’s willing to work hard and contribute constructively to society insofar as he or she is able. At various points in the past, the economy has worked like that. In recent years it has not. We need to make it work like that again. Whether or not the current tendency of the rewards of economic growth to accrue almost exclusively to a small minority is the result of some kind of malfeasance is not, at the end of the day, really relevant. Insofar as it’s the result of shifting structural factors, the correct response is to use public policy to create counter-structures that will rebalance the situation...

Yglesias weak criticisms of advocates of capitalism notwithstanding(1), he boldy suggests that there are no free marketers in a financial crisis. Does the situation with Fannie Mae and Freddie Mac (collectively "Frannie") prove him correct? I would say that the answer to that question is a resounding "No".

Frannie are government sponsored entities that enjoyed competitive advantages that were brought about not through natural market mechanisms but from government: 1) the expectation that the GSE debt was guaranteed by the federal government meant that risk premiums were low and the entities had a lower cost of borrowing compared to other financial insitutions (and a $2.5 billion line of credit from the US Treasury doesn't hurt), and 2) the capital requirements were as a percentage of total assets is less than other financial institutions. Also, common with government programs, Frannie took on a life of their own, greatly deviating from their original purpose of trying to fill gaps in the mortgage markets, mainly with providing affordable loans. Frannie, from these origins, evolved into dominant players in mortgage finance market, holding nearly half of the mortgages in the U.S. Because of the turmoil in the mortgage markets, Frannie, entities that were the creation of the government, evolved into the entities they are today because of the government, enjoyed special anti-competitive privileges because of the government, are coming under the control of the government to prevent an economic catastrophy. In the words of The Cato Institute's Ed Crane, "this is a government failure, pure and simple."

In the face of this abject failure of government, Yglesias boldy makes a case for more government, suggesting that it is appropriate public policy to create counter-balances to mitigate perceived inequalities so that everyone benefits (read: engage in Kip's Law). Does he not realize that Frannie were intended as these sort of "counter-balances" he describes? Does his apparent enjoyment of dismissing supporters of capitalism for engaging in mythological fantasy blind him to the fact that Frannie makes for a great case study for capitalists and opponents of limited government like me to look to those who look to government to create a society in their own image and say "Don't say we didn't warn you..."? Sadly, Yglesias' entire ideological argument either 1) grossly misdiagnoses the problem, or, worse, 2) ignores it because, again, none of this has anything to do with a market failure.

While I am not a fan of government interventionism, I think the federal government's actions in this case were necessary in the short-term (the least worst alternative). I think allowing Frannie to fail (and I think they would have failed had the government not intervened) would have been disastrous (Tyler Cowen lists some reasons why and Paul Krugman's column on deleveraging is a helpful read in this context as well). I don't think I am necessarily violating my own free market principles if 1) I believe, in the big picture, the problem is not the bailout per se but the fact that we reached this point in the first place, and 2) to the extent that the takeover provides an opportunity to eliminate any and all special privileges and reduce the portfolio holdings in order to spread the risk out amongst various market participants and get the government out of this business as opposed to having quasi-public/private entities lingering around so that we get bit in the ass later, I'm all for it.

So, yes, I will gladly trumpet my support for free markets in the face of the Frannie (and frankly, the credit crisis in general) because Frannie was a government-caused abomination and markets had nothing to do with it. So-called "Progressives", it seems would rather continue to do battle with windmills and focus their ire towards the things that did not cause this problem while ignoring the things that actually did. None of this surprises me.


(1) Perhaps it's a personal bias, but I tend to debate liberals who associate "free market" with "unregulated market" absent, as Yglesias puts it, any sort of institutional or legal framework. With the exception of perhaps the libertarians of the more anarcho-capitalist variety, the libertarians I know do not share this view. We accept certain forms of regulations; therefore, the debate is not between something like "no regulations vs. regulations". Rather, the debate involves to what extent markets should be regulated. Here, libertarians (small l) and liberals hold widely divergent views.

I would love to know what free market of "popular myth" Yglesias speaks of, but he, not surprisingly, given his target audience, fails to define it. Also, I fail to see how my wanting to buy cereal at my local grocery store and the local grocery store wanting to sell it to me involves "public" choices and need to involve any beneficiaries outside of those involved in the transaction.

Anecdotally speaking, if Yglesias wants to think that regulations are the sorts of things we don't notice, I suggest he take a job at a Wall Street firm where he will get to know the people in the legal department and compliance very, very well, even if you never cause one bit of trouble for them. Just saying...