Saturday, October 15, 2011

Book Review (#32 of 2011) The End of Loser Liberalism

One way to get me to read your book is offer it for free, and the other is to have a nice blog. I found Dean Baker's The End of Loser Liberalism: Making Markets Progressive to be a pleasant read. Baker works for the liberal CEPR and is a shill for the unions. His blog, Beat the Press, applies basic economics principles to debunk various articles in major outlets, which is why he's linked on this blog.

If you can get past comparing every cost-saving measure he proposes to how much the "Bush tax cuts for the wealthy" cost, and get past his overlooking of various economic problems with unions, you'll like this book.  Baker's goal is to move the goalposts and argue that Progressives are not and should not be anti-markets.  He highlights ways Conservatives have disguised various policies as "free market," when in reality they are not. In that, he does everyone a valuable service. Baker's ideas are quite Hayekian. He generally sees the market as favoring Progressive outcomes:
"Progressives should want a free market" (141).  "In the same vein, we can structure the market more generally to produce progressive outcomes. The enormous growth of inequality over the last three decades did not come about as the result of the natural workings of the market; it came about through conscious design. The job of progressives is to point this out in every venue and in every way we can. It is not by luck, talent, and hard work that the rich are getting so much richer. It is by rigging the rules of the game" (154). 

Trade deals, for example, are never "free trade" as they are labeled and trumpeted in the media. They always contain a large number of restrictions, usually involving patents and "intellectual property rights," and containing provisions that open the market for our financial services. Most of these clauses favor people who work in higher-skill industries, while the trade deals generally lower barriers for goods produced in low-skill industries. Other high-skilled workers (doctors, accountants, etc.) are in services that are not easily tradable, so trade deals don't increase the competition they face.  This could be offset if we allowed freer flows of labor along with goods and services. Most high-skilled immigrants (doctors, engineers, etc.) to the U.S. are unwilling to take low-skill jobs in farming and construction. But due to visa laws and making it onerous for employers to sponsor visas, the supply of these workers in the U.S. is relatively small. Hence, wages for these sectors are high. In the 1990s, physicians groups argued against increasing visas for foreign physicians because these physicians were willing to work for less, and hence would lower physicians' wages via competition.  Meanwhile, low-skilled workers in manufacturing are increasingly faced with tougher competition and making the same complaints-- but the situation currently favors the doctors over the factory workers.

In this there is no daylight between Baker and a Libertarian. We'd all be better off if all barriers were removed. But as far as immigration goes, a Milton Friedman quote comes to mind: "You can't have open borders and a welfare state."  So, Baker argues that we should take advantage of the fact that every other country in the world pays less for healthcare than we do, and find a way to increase trade in services.  If we signed trade agreements in health care, where Medicare would pay for services in places like Singapore as well as the U.S., we'd see incredible savings.  Someone could have a heart bypass for $40,000 in Singapore as opposed to $100,000 in the U.S., and the taxpayer or the insurance customer could save.  The market would develop ratings for international hospitals and insurance companies could build PPO networks just as they do in the 50 states. Government agreements could work out how lawsuits are handled.

The basic Ricardian analysis of comparative advantage typically leads teachers and students to conclude that the U.S. will continue to shed manufacturing jobs and gain more higher-skilled service jobs. But Baker points out that this broad process cannot be indefinite:

"There is no logic whatsoever in the view that somehow the United States will remain dominant in highly skilled occupations, exporting the services produced in these areas to the rest of the world while importing manufactured goods from the rest of the world. It is perhaps a racist conception to believe that workers in the developing world somehow lack the capacity to compete effectively in skilled professions with people in the United States...To imagine that the United States can maintain an advantage over these countries in international trade involving these occupations would require a view that these engineers and designers can be effective when working in Silicon Valley or Seattle but suddenly become 80 or 90 percent less efficient if they return to their home countries or the countries of their forebears. The United States is destined to import major quantities of highly paid professional services in the decades ahead, just as it now imports major quantities of manufactured goods. The argument for the benefit from these imports is the same as the argument for the benefit of importing manufactured goods: it allows us to buy these items at lower prices than if we relied on domestic production. This frees up income to purchase other goods and services, making us richer and increasing growth" (97)
Any sector of the economy where you see increasing gains over time raises a flag that the market must be kept from functioning properly. Whether it be a tech stock bubble, or a housing bubble, or CEO pay.  The fact that U.S. CEOs has increased relative to the median worker, and they are paid roughly twice as much as European counterparts without a noticeable difference in value added, is evidence somehow they are being shielded from competition:

"This pay gap suggests the possibility of large gains to the U.S. economy and to groups of workers who are not in top corporate management from taking advantage of lower-paid top management at foreign companies wherever possible...(T)he public has no patriotic obligation to favor contracts with U.S.-based companies simply because the companies have a headquarters in the United States. Where foreign-based companies like Fiat can offer lower costs, at least in part because their executives are lining their pockets much less amply at the company's expense, progressives should jump at the opportunity to bring them on board."
Baker is not promoting nationalism, but rather economic efficiency, as Progressive which is refreshing.

Baker's hypothesis for why these ideas aren't widely embraced by the public is that the media and political class consists mostly of high-skilled, highly-educated workers who want to see their salaries, and the salaries of their equally high-skilled friends and neighbors, shielded from competition.  Meanwhile, they aren't as connected to lower-skilled workers and don't care as much.  It's also true that many large Progressive donors work in finance (George Soros) or Hollywood, both of which are highly protected sectors, so some Progressive politicians don't want to hurt their financial position.  Baker also just believes the general population lacks economic literacy, as seen with his macroeconomic chapters.

Baker takes the time to give an overview of how the Fed works and to explain the national income approach to the balance of payments because he believes most Progressives are ignorant about how these things work (I can't disagree!).  Treasury Secretaries' and political candidates' "strong dollar" rhetoric polls well because people have nationalistic sentiments about their currency, but the fact that the U.S. has run a trade deficit for the last 30+ years indicates that the dollar has been consistently overvalued. We'd likely be doing more manufacturing if the dollar was worth less.  He takes time to criticize the China-bashing of recent years by pointing out that:
"At the end of the day, the U.S. Treasury has enormous ability to influence the value of the dollar. It is certainly capable of forcing the dollar down against the Chinese RMB and other important currencies, if this is a major goal of economic policy. So far, a lower-valued dollar has not made the cut. A high valued dollar is in the interest of the financial industry and other powerful actors, and so the Treasury Department has not pursued a lower-valued dollar as major goal in negotiations with China or anyone else." 

Conservative politicians who are hawks over the U.S. budget deficit cannot logically simultaneously demand a "strong dollar" policy, something which I've pointed out a few times on my blog. Increasing national saving leads to an increase in net exports via a real depreciation of the currency.

Baker would like to see a Fed that pursues higher inflation and worries more about unemployment. He's not terribly far from market monetarism on some points.

Baker's final point is about patent monopolies. He is a champion of the government buying research patents from pharmaceuticals and providing other incentives-- like prizes-- for the development of drugs rather than seeing consumers hurt by higher drug prices as pharmaceuticals recoup the costs of their research. This is an approach discussed by libertarian thinkers like Tyler Cowen.  The reason we don't do that, according to Baker, is that it would mean more government spending on scientific research and conservatives paint this idea as central planning. He also applies this concept to music and the arts, which gets a little hard for me to fathom as reality. But I like the ideas and intention-- the way we have set up our patent monopolies have become very onerous and ridiculous as companies like Apple and Amazon, as well as "patent trolls," hire armies of lawyers to sue each other over patenting the most basic of ideas.  This system is slowing innovation and hurting consumers, while benefiting lawyers (regressively).

Baker wisely avoids talking about taxes and income redistribution. He wants Progressives to take up causes that Conservatives can't logically or genuinely argue against on the merits. The caricature of Progressives is that they are anti-market and pro-redistribution. Baker wants to change that.
"Conservatives' complaints about the economic distortions created by high taxes have some basis in reality, even if they are often hugely overstated. Progressives should steer clear of the potential for being seen as having an agenda that means slower growth and less job creation. Shifting attention to before-tax issues of income means talking about the big policy items, most importantly the Fed and the dollar, that have the greatest impact on economic outcomes." 

I give this book 4 stars out of 5.  Since I read his blog, I liked the full elucidation of Baker's ideas that he usually only alludes to in his posts for brevity's sake.  I'd rather have policy designed by a Progressive economist than one created by a Conservative non-economist.

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