The Visible Hand
Last night I had the chance to hear Joseph Stiglitz, the Nobel Prize-winning economist and author of several books on recent international economic policy, including The Roaring Nineties and Globalism and Its Discontents. Stiglitz, a former Clinton economic advisor and chief economist of the World Bank, is what I would call a realist about free trade rather than an ideologue. He also seems to be an unrepentant Keynesian, critical of both “supply side” nonsense and the Robert Rubin view that the political act of cutting the deficit in the 90s laid the basis for the economic expansion.
His talk was long and somewhat disjointed (not helped by a poor sound system, uncomfortable seats, bad ventilation, and, in my case, additional distractions), but he touched on a lot of these issues and stressed the need to analyze the economic problems of globalization and market bubbles from the perspective of poorly-aligned incentives and the pitfalls of imperfect information. To the extent that he is an ideologue at all, he seems to have the economists’ axiomatic faith in the propensity of actors to make rational decisions in their own interests given correct incentives and information. If you share that assumption, then his policy arguments about the need for regulatory revision (rather than de-regulation) and investment of government assets in infrastructure make perfect sense. A functioning market economy requires the strategic application of government authority to bolster confidence among investors and consumers, and to ensure the steady supply of quality assets (infrastructure, skilled workers, capital) for economic growth.
In my opinion, the missing incentive structure here is on the government side, not the market side. Markets correct themselves because it is ultimately in their interests to do so. Likewise, governments apply economic policies when under pressure by the power groups within their societies. If the citizens of a democracy demand consumer protection, labor protection and regulation to mitigate the impact of market cycles, the government should in theory respond or face eviction at the hands of an angry electorate. If the people are silent, special interests can be counted on to advocate for measures that benefit themselves at the expense of (or at least indifferent to) the public good.
Today it appears that the economic problems that exist not only in the United States, but also in China, Russia, Europe and most of the world, are caused more by the misappropriation of government authority to benefit narrow interests than by problems with the markets themselves. “Crony Capitalism” is emerging as the dominant political paradigm of the new century, where the institutions of representative government are hijacked by well-organized groups highly focused on the achievement of their own agendas, and where expressions of the public will are systematically manipulated or emasculated.
The failure of populations to get proper information, or, having it, to act rationally in their interests, allows unregulated abuses of the market system to proliferate, and leads to the misallocation of public resources (unnecessary or unbalanced tax cuts, wars, corporate welfare, etc.). The power of governments to affect economic outcomes has created an enormous incentive structure for private interests to deceive or mislead the public – not simply on narrow issues like stock valuation and company finances, but on broad ideological grounds.
The attachment many Americans feel toward a political agenda that is manifestly against their economic interests is emotional, not rational. There should be, for example, next to no popular support for the reduction in estate taxes that affect only the extreme upper reaches of the income spectrum. Instead, by casting the debate in emotional terms like “the death tax,” and attaching the issue to a broader ideological platform that includes emotionally-charged non-economic issues, proponents have manufactured support (or at least stifled opposition) to effect a really lousy policy outcome for the vast majority. This happens in thousands of ways on thousands of issues from industry regulation and workplace safety to market oversight to subsidies. In each case, the focused attention of a minority of extremely interested actors outweighs whatever support proponents of the public interest can muster.
The core issue is one of incentives. There appears to be no mobilized constituency for “good government” – that is, disinterested application of policies, and the implementation of new broad-based programs for social or economic investment. This is because the instruments that could be used to mobilize this constituency – primarily the media, which stirs outrage by publicizing private abuses, and the labor movement, which represents a broad constituency opposed to the interests of the crony capitalists – have been compromised almost beyond retrieval by substantial conflicts of interest of their own. The corruption is so deep and pervasive that it has bred corrosive cynicism, accompanied by counterproductive ideology on the so-called Left that encourages the breakdown of society into tribal “identity groups” that question the very existence of a national social fabric. Before we can hope to correct the misaligned incentives in the economic system, we need to address the more profound problem of misaligned incentives in our political and media systems, and the opportunities to do so are slipping away.
8:56:21 AM 
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