SENTIENT TIMES June/July 2006

How the Wealthy Use the Government to Stay Rich and Get Richer

By Dean Baker

Dr. Dean Baker is a macroeconomist and Co-Director of the Center for Economic and Policy Research in Washington, DC. In his new book, The Conservative Nanny State, Dr. Baker debunks the myth that conservatives favor the market over government intervention and examines the areas in which the hand of the state is most visible in pushing income to those at the top. In fact, he explains how conservatives rely on a range of “nanny state” policies that ensure the rich get richer while leaving most Americans worse off. It’s time for the rules to change. Sound economic policy should harness the market in ways that produce desirable social outcomes—decent wages, good jobs and affordable health care.

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Political debates in the United States are routinely framed as a battle between conservatives who favor market outcomes, whatever they may be, against liberals who prefer government intervention to ensure that families have decent standards-of-living. This description of the two poles is inaccurate; both conservatives and liberals want government intervention. The difference between them is the goal of government intervention, and the fact that conservatives are smart enough to conceal their dependence on the government.

Conservatives want to use the government to distribute income upward to higher paid workers, business owners, and investors. They support the establishment of rules and structures that have this effect. First and foremost, conservatives support “nanny state” policies that have the effect of increasing the supply of less-skilled workers (thereby lowering their wages), while at the same time restricting the supply of more highly educated professional employees (thereby raising their wages).

This issue is very much at the center of determining who wins and who loses in the modern economy. If government policies ensure that specific types of workers (e.g. doctors, lawyers, economists) are in relatively short supply, then they ensure that these workers will do better than the types of workers who are plentiful. It is also essential to understand that there is direct redistribution involved in this story. If restricting the supply of doctors raises the wages of doctors, then all the non-doctors in the country are worse off, just as if the government taxed all non-doctors in order to pay a tax credit to doctors. Higher wages for doctors mean that everyone in the country will be forced to pay more for health care. As conservatives fully understand when they promote policies that push down wages for large segments of the country’s work force, lower wages for others means higher living standards for those who have their wages or other income protected.

Conservatives don’t only rely on the nanny state to keep the wages of professionals high, they want the nanny state to intervene through many different channels to make sure that income is distributed upward. For example, conservatives want the government to outlaw some types of contracts, such as restricting the sort of contingency-fee arrangements that lawyers make with clients when suing major corporations (conservatives call this “tort reform”). This nanny state restriction would make it more difficult for people to get legal compensation from corporations that have damaged their health or property.

Conservatives also think that a wide variety of businesses, from makers of vaccines to operators of nuclear power plants, can’t afford the insurance they would have to buy in the private market to cover the damage they may cause to life and property. Instead, they want the nanny state to protect them from lawsuits resulting from this damage. Conservatives even think that the government should work as a bill collector for creditors who lack good judgment and make loans to people who are bad credit risks (conservatives call this “bankruptcy reform”).

In these areas of public policy conservatives are enthusiastic promoters of big government. They are happy to have the government intervene into the inner workings of the economy to make sure that money flows in the direction they like—upward. It is accurate to say that conservatives don’t like big government social programs, but not because they don’t like big government. The problem with big government social programs is that they tend to distribute money downward, or provide benefits to large numbers of people. That is not the conservative agenda—the agenda is getting the money flowing upward, and for this, big government is just fine. Of course, conservatives don’t own up to the fact that the policies they favor are forms of government intervention. Conservatives do their best to portray the forms of government intervention that they favor, for example, patent and copyright protection, as simply part of the natural order of things. This makes these policies much harder to challenge politically. The public rightfully fears replacing the natural workings of the market with the intervention of government bureaucrats. This stems in part from a predisposition not to have the government meddle in their lives. In addition, the public recognizes that in many cases the market will be more efficient than the government in providing goods and services.

It is not surprising that conservatives would fashion their agenda in a way that makes it more palatable to the bulk of the population, most of whom are not wealthy and therefore do not benefit from policies that distribute income upward. However, it is surprising that so many liberals and progressives, who oppose conservative policies, eagerly accept the conservatives’ framing of the national debate over economic and social policy. This is comparable to playing a football game where one side gets to determine the defense that the other side will play. This would be a huge advantage in a football game, and it is a huge advantage in politics. As long as liberals allow conservatives to write the script from which liberals argue, they will be at a major disadvantage in policy debates and politics.

The conservative framing of issues is so deeply embedded that it has been widely accepted by ostensibly neutral actors, such as policy professionals or the news media that report on national politics. For example, news reports routinely refer to bilateral trade agreements, such as NAFTA or CAFTA, as “free trade” agreements. This is in spite of the fact that one of the main purposes of these agreements is to increase patent protection in developing countries, effectively increasing the length and force of government-imposed monopolies. Whether or not increasing patent protection is desirable policy, it clearly is not “free trade.”

It is clever policy for proponents of these agreements to label them as “free trade” agreements (everyone likes freedom), but that is not an excuse for neutral commentators to accept this definition. Back in the 1980s, President Reagan named the controversial MX missile system the “Peacekeeper” to make it more palatable to the public. Thankfully, the media continued to use the neutral “MX” name to describe the missile system. However, when it comes to trade agreements, the media have been every bit as anxious to use the term “peacekeeper” as the proponents of the agreements, using the expression “free trade” almost exclusively to describe these agreements. (In using this term, reporters disregard their normal concern about saving space, since “trade agreement” takes less space than “free-trade agreement.”) In fact, the media have even gone one step further—they routinely denounce the opponents of these trade agreements as “protectionists.” This would be like having the New York Times refer to the opponents of the MX missile as “warmongers” in a standard news story covering the debate over the new missile. You’re doing pretty well in a public debate when you get the media to completely accept your language and framing of issues. It’s not easy winning the argument over the MX when the media and policy experts describe opponents of the missile as “warmongers.”

Unfortunately, the state of the current debate on economic policy is even worse from the standpoint of progressives. Not only have the conservatives been successful in getting the media and the experts to accept their framing and language, they have been largely successful in getting their liberal opponents to accept this framing and language, as well. In the case of trade policy, opponents of NAFTA-type trade deals usually have to explain how they would ordinarily support “free trade,” but not this particular deal. Virtually no one in the public debate stands up and says that these trade deals have nothing to do with free trade.

Remarkably, the public has enough good sense to recognize that these trade agreements do not in general advance their interests (unless they are in the protected minority), so that NAFTA-type trade deals remain unpopular. If the public voices in the debate would ever stop accepting the conservative framing of the argument, it is very likely that these protectionist pacts could no longer be slipped through Congress. Even with a debate that largely accepts the conservative framing, it is getting increasingly difficult to pass these agreements. While trade policy has been the topic of many heated public debates in recent years, it is just one of the areas in which the nanny-state conservatives have been able to tilt the framing of the debate to favor their goals. In nearly every important area of economic policy, conservatives have set the terms of debate in ways that make the liberal/progressive opinion unpalatable to the bulk of the population. Unless the debate is reframed in a way that more closely corresponds to reality, conservatives will continue to be successful in their agenda of using government intervention to distribute income upward.

The Secret of High CEO Pay and
Other Mysteries of the Corporation

Pay for CEOs and other top corporate executives in the United States has soared in recent years, even as the wages of ordinary workers have stagnated. The conventional argument is that CEOs get multi-million dollar salaries because they are highly productive—firms are willing to pay these executives what their services are worth.

This argument is implausible for several reasons. First, today’s CEOs don’t seem in any obvious way more productive than the CEOs of 30 years ago, who were well compensated, but not nearly as well as today’s crop of top executives. Second, CEOs of foreign corporations don’t get anywhere near as much compensation. Even the most successful executives in Japan and Europe don’t get the ten and hundred million dollar pay packages that are the standard for top executives in the United States. Finally, many of the people who get these seven and eight figure salaries prove incompetent—even when the definition of success is defined narrowly as increasing corporate profits. When top executives walk away in failure they are often given bonuses in the millions of dollars—more than a full lifetime of earnings for a typical worker. In short, there seems little basis for the claim that the pay of top executives reflects their productivity. The more obvious answer is that the pay of CEOs is determined by corporate boards, many of the members of which are appointed by, or serve at the whim of, the CEOs. Ostensibly, corporate boards are accountable to their six shareholders. But with ownership increasingly concentrated among investment funds, whose managers have little time or interest in running individual companies (it is easier to sell the stock than change corporate managers), the CEOs often get free run to do what they want, including giving themselves high pay.

The conservative nanny state plays a big role in allowing high CEO pay, because the corporation is itself a creation of the government. While nanny state conservatives don’t like to call attention to this fact, in a free market corporations do not exist. In a free market, individuals can form partnerships and engage in whatever trade and commercial relations they please, but they cannot establish a new legal entity that exists independently of the individuals who own it. Only a government can create a corporation as a legal entity with its own rights and privileges, the most important of which is limited liability. The privileges of corporate status are clearly valuable to shareholders. We know this because individuals form corporations, even though it means that they have to pay a corporate income tax in addition to the income tax paid by individual shareholders. As a condition of gaining corporate status, the government can and does set rules for corporate governance. (For example, there are extensive rules on the rights of minority shareholders.) Rules of corporate governance could easily include provisions that put a check on runaway CEO pay. For example, it would be relatively simple to require that pay packages be periodically subject to approval by a majority of shareholders, in an election in which only the shares that are actually voted count. (Most corporations count shares that are not voted as supporting the management’s position.)

Whether or not such rules on corporate conduct are desirable is a debatable issue, but in a world where the government by definition sets the rules for corporate governance, any set of rules necessarily involves govern-ment intervention. The nanny state conservatives would like the public to believe that the current rules of corporate governance were part of the Ten Commandments and should never be altered. In a serious national debate over economic policy, these rules must be part of the discussion.

How Bankruptcy Laws are Bailing Out the Rich

True libertarians want to minimize the role of the government in people’s lives. If such people exist, they were staunchly opposed to the recent revisions of the bankruptcy laws that make it much more difficult for people to eliminate their debts by declaring bankruptcy.

Part of being a good businessperson is being able to assess a customer’s creditworthiness. If a business consistently extends credit to people who can’t pay it off, then it is obviously not a good judge of credit risk. In a market economy, such businesses should go out of business, they should not be allowed to run to the government to act as their debt collector. Making the government into a debt collector leads it to become involved far more extensively in people’s lives.

Historically, most loans were attached to physical property, such as houses or farms. This made the issue of debt collection relatively simple. If a debtor fell sufficiently behind in repaying a loan, then the creditor simply asked the court to turn over to them the deed for property that provided collateral (a house or a farm). This was a one-time transaction that ended the government’s involvement in the case.

However, the new bankruptcy statute gives the courts the responsibility of acting as a debt collector on a continuous basis. The courts must continually monitor the earnings of a debtor who has declared bankruptcy to determine how much money should be turned over to creditors. It must assess factors like their requirements for necessary work-related expenditures (a car, for example), medical care, or for supporting children. Needless to say, this process will bring the government directly into the lives of millions of people. It will also provide a serious disincentive to work for people who have declared bankruptcy, since being forced to pay money to a creditor has the same disincentive effect as being required to pay taxes to the government. For these reasons, people who like to minimize the role of government should support bankruptcy rules that make one-time transfers, thus allowing people to get on with their lives.

Beyond the Conservative Nanny State

The idea that conservatives trust the market while progressives want the government is a myth. Conser-vatives simply are not honest about the ways in which they want the government to intervene to distribute income upwards. Once this myth is exposed, it allows for a whole different framing of a wide range of policy issues. We can recognize that both conservatives and liberals favor a wide variety of government interventions in the economy—and also want many decisions left to the market. This view can allow us to look at a wide range of policies from a different angle.

In trade policy, we can decide which areas should be placed in competition, and how. At the moment, the nanny state conservatives are the biggest protectionists around. If we want workers in the United States to compete directly with workers in the developing world, then it probably makes the most sense to start at the top. Trade policy should focus on putting our doctors, lawyers, and economists in competition with professionals in the developing world, not our least-skilled workers. This strategy offers the greatest opportunity for economic gain, in addition to distributing income downward. Regarding Federal Reserve Board policy, we may consider other ways than high unemployment to ensure that inflation remains tame. And, we may be willing to take more risks with inflation than the nanny state conservatives want. Corporations are an effective governmental tool to facilitate economic growth and the accumulation of wealth. The government certainly has the prerogative to set rules that limit the ability of high-level corporate executives to pilfer from the corporation. Remember, no one is forced to form a corporation.

There are many ways to support innovative and creative work. There is no reason to believe that patents and copyrights (or any other relics from the Middle Ages) are the most efficient mechanisms in a 21st century economy. In a free market, the government does not act as an all-purpose debt collector. Creditors must be taught that they are taking risks and they cannot count on the government to bail them out.

In a free market, people must be allowed to collect damages from those who have harmed them. Reforms to the legal system that make this process more efficient are desirable. The public has no reason to support changes in rules that stack the deck in favor of big corporations so that it is more difficult for those who have been harmed to win compensation. Most small business owners are honest, hardworking people, just like most other people who work for a living. The government has no special obligations to small business owners, many of whom will inevitably lose money and go out of business.

Finally, there are many areas in which the government can provide services more efficiently than the private sector. There is no reason to apologize for providing a service in the most efficient way. If private businesses can’t compete with the government, it is their problem.

Exposing the truth of the conservative nanny state opens up a whole new range of policy options. However, it should be clear that if progressives ever want to start winning national debates on economic policy we must stop using scripts that were written by conservatives. The market can be a fantastic force for promoting economic growth and allowing an arena for individual freedom, but it exists in a structure set out by the government. If we cannot question the structure established by the nanny state conservatives, then we are not really debating the policies that determine the well-being of hundreds of millions of people in the United States and around the world. We’re just putting on a show.

Excerpted from The Conservative Nanny State, a free e-book by Dean Baker, published May 2006, www.conservativenannystate.org. Visit Dean Baker’s blog at www.beatthepress.blogspot.com.

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