Stiglitz made his point with scholarly care, but for a long time a stronger claim has been made by intellectual leap: that markets are widely imperfect, and their outcomes can be improved by the state. This feeds into the current policymaking zeitgeist, in which governments are assumed to be well-placed to make corrections. Almost all modern policy proposals, from childcare subsidies to fuel efficiency standards, are justified at some point by some theoretical market inefficiency, taking for granted that the government can eliminate or mitigate it.
When the 2018 Nobel in economics was awarded to Paul Romer and William Nordhaus, the committee noted the pair’s “findings put the spotlight on a specific market failure. Both laureates thus point to fundamental externalities that — absent well-designed government intervention — will lead to sub-optimal outcomes.” “Market failure necessitates government solution” is the mantra of interventionists in both major American political parties and, these days, much of the economics profession too.
More markets, less government / In his new book Gaining Ground, veteran Brookings Institution microeconomist Cliff Winston offers a much-needed corrective, reminding us how much this interventionist framework represents a backslide in good economic thinking.
Citing hundreds and hundreds of studies on federal, state, and local governments’ policy records across numerous functions, Winston shows that markets are often more robust at reducing inefficiency than governments’ corrective efforts. His extensive survey of the academic literature on economic and social programs suggests an expansion of markets, not their curtailment, would better deliver on our widely shared political goals of improving material living standards, broadening opportunity, and protecting families from unforeseen hardships.
For example, while there is scant evidence of antitrust laws enhancing consumer welfare, he documents how free trade, consumer clubs, and technological advances have provided market-led means of delivering more choice, better information, and lower prices to customers.
In transportation, he shows that government entry regulations on the U.S. airline sector, including restrictions on foreign airlines obtaining cabotage rights, raise prices and reduce choice for passengers. In contrast, previous airline deregulations were a boon for consumers. There’s good reason to suspect that allowing worldwide low-cost carriers to enter the U.S. aviation market would deliver large consumer gains as networks are restructured to reflect the new competition.
Even in areas as diverse as customer information regulation and the provision of public goods, Winston brings evidence to bear that markets do better and governments worse than commonly acknowledged. In genuinely thorny areas where intervention seems most justified, such as dealing with externalities like pollution and carbon emissions, government policies often bring their own inefficiencies, achieving any benefits at too high a cost relative to realistic alternatives.
Winston explores how programs such as the 2009 “Cash for Clunkers” car-buying subsidy, energy insulation programs, and land-use policies intended to reduce congestion are all extremely costly relative to their environmental benefits. He contrasts those interventions with market responses such as satellite navigation systems like Waze and their congestion-reducing guidance, the double-dividend of cheaper energy and lower carbon emissions from the shale revolution, and the potential for more market-led road pricing and carbon tax systems. By contrasting market responses and command-and-control regulations, he effectively asks, “What is there to fear from more markets and less government in our lives?”
Evidence and reason / Just 25 years or so ago, economists of even the center-left recognized that government failures — or at least unintended consequences — were ubiquitous. There are, as Winston documents, instances where policies don’t improve welfare because there is little inefficiency to begin with (again, see the antitrust laws), instances where policies bring large economic welfare costs (such as price and entry regulations), and instances where policies simply have costs that exceed benefits relative to some reasonable alternative (such as externality “corrections” or anti-poverty programs). Yet, today we appear to be unlearning what we previously knew on all these fronts.
This isn’t just true where economic efficiency goals are concerned. Whether it is reducing poverty, delivering “fair” outcomes in labor markets, or the provision of goods with clear broader benefits to society (so-called merit goods), many government social programs either fail to achieve their objectives or else bring important and large unintended consequences. Though nobody pretends that all market outcomes are just, there usually are incentives to weed out discrimination or unfair dealing. New apps and websites that include consumers’ product ratings and reviews, for example, can help overcome racial biases or barriers to entry that impede social progress.
None of this will be news to free-marketers who lament the growing scope of government. But Winston is not writing for us. There are no paeans to the inherent virtues of economic freedom or to the structural benefits of the price mechanism or profit motive in weeding out bad outcomes. Instead, the tome, which brings together much of the author’s life work, is written as an appeal to evidence and reason. I suspect it is targeted at the increasingly interventionist center-left, perhaps even some of Winston’s colleagues at the Brookings Institution. Here is a collection of findings documented to highlight the instrumental benefits of markets in achieving what the author believes are universal economic and social goals. Winston sees himself as the disinterested expert raining down truth bombs about the likely consequences of the interventions, juxtaposed against the many positive effects of markets.
Why government failure? / This framework, however, has its limitations. Winston simply presumes that we all share the same high-level goals of economic efficiency, financial security, and wealth-creation, but self-evidently we do not. Some people value dynamism over security, others want the government to reduce economic inequality even if it means less material prosperity, and still others elevate other values. Last year, for instance, New York Times columnist David Brooks suggested that we should all support President Biden’s “Build Back Better” agenda, even though Brooks doubted many of the new programs would work, because the package would at least “redistribute dignity back downward.” How do you trade-off efficiency for a hazy concept such as dignity? With great difficulty, it seems.
But that’s the point: politics in part is a clash of philosophies in action. Winston writes with a degree of wonkish innocence in assuming that all, or even most, people share the same goals, allowing us simply to look to the evidence of costs and benefits of proposals to decide what to do.
This instrumental, rather than principled, approach also produces gray areas regarding the scope of government. Milton Friedman was clear, for example, that businesses’ role is to produce goods and services people want and need in pursuit of profits. Any broader social objective chosen by politicians should be undertaken explicitly and honestly by taxpayer-funded programs.
Winston instead muses about the potential for a quid-pro-quo of business tax cuts in return for businesses delivering social objectives such as a “living wage” or more training for workers — in other words, for governments to incentivize certain business behaviors regarded as desirable. It is not clear why incentivizing businesses to set wages that do not reflect the underlying supply and demand dynamics in the labor market would be good for economic health overall. Perhaps he is unwittingly indicating his own ideological preferences.
Winston’s book is overall much stronger on documenting how government fails than why. He holds up convincing research showing that neither professional lobbying nor campaign contributions — bête noires of the populist left — go far in explaining the continuation of bad policies. But the role of interest groups is much broader than that. And while his evidence about the lack of competence in government, the ideological rigidness of politicians and officials, and the status quo bias of a permanent bureaucracy are well-taken, he downplays the more inherent problems of intervention, such as the subjectivity of value or the knowledge problems that policymakers face.
A timely, untimely book / All that said, the book is both a brave endeavor given the current climate and a strong, fact-based antidote to the coming revival of economic and social interventionism. American policymakers on both sides of the aisle have fallen out of love with market approaches to dealing with economic and social problems. COVID-19, despite highlighting the limitations of government fulfilling functions with the clearest justification for intervention, has merely accelerated this process. Winston has optimistically pitched this book as a guide to how an agenda to expand markets could improve economic and social outcomes. But right now, free-marketers must be on the defensive.
While reading the book, I was struck simultaneously by two sad emotions. First, it felt as if I was reading an old text from an age where government failures and policymaking generally were taken much more seriously. But second, it also felt as if I was reading a premonition of all the problems that will materialize in the coming years as the scope of government expands.
Don’t get me wrong. I sincerely hope a “coalition of the sensible” will heed Winston’s warnings and champion his causes. U.S. economic and social policy would be better for it. But his conclusion that it “would be useful to have a large commission … [to] write detailed and granular proposals … [of] where markets potentially could help government” seems completely at odds with the moment we are living through.
