The Choices Government Makes, and the Courage to Make Them
I’m fairly sure that the theoretical “free market” Adam Smith describes in his book “Wealth of Nations” never actually existed, but I’m 100 percent, absolutely positive it doesn’t exist today. The worldwide economy — and the essentially country-less multinational corporate conglomerates — have become too big and complicated to have anything resembling the kind of fair competition with informed self-interested consumers that Smith was so excited about in his theories.
In the country and world we live in today, companies have become so big and powerful that they can manipulate and badly distort markets, and they can wield such outsize influence over governments that it wreaks havoc with countries as a whole — and sometimes the worldwide economy, per the economic crisis of the last three years. So while markets still work pretty well for some things in some contexts (the best new technologies will win a lot of new converts quickly, the best restaurants in a given metro area will get a lot of customers, etc.), the free market for the economy and society as a whole doesn't really work very well in this era. Take banking, for example. When six stunningly big banks control assets equal to 64 percent of our entire country's GDP, it distorts the financial markets in all kinds of ways. There's the Too Big to Fail problem, a bitter example of market distortion that will weaken our entire economy for as long as these big banks are so dominant: knowing that our government will not let them fail has given them all kinds of competitive advantages in the marketplace, and made their corporate cultures far more likely to make big risky bets in pursuit of short term profits. Banks with that kind of market share have a huge edge in knowledge of the marketplace, and make other businesses feel compelled to do business with them or risk being left out of the big moves that can come with all that insider knowledge. Banks that size can quite literally manipulate stock prices and commodity prices and real estate prices at will to reap big profits. Banks with that kind of market power can dominate whole sectors of finance — such as credit and debit cards — and force smaller businesses to pay whatever fees they demand. And banks that wealthy have the political, legal, and public relations juice to rewrite laws and regulations to their advantage.
Banks, of course, are not the only industry where a few companies have too much market share for the public or economic good. A small number of huge health insurance and drug companies have driven up health care costs dramatically because of lack of competition. A small number of big oil and coal companies have had the power to manipulate prices and escape environmental regulations. Companies the size of Walmart have driven millions of small businesses out of business. A relatively small number of insider contractors get the vast majority of government contracts. And the list goes on. Whenever too few companies get too big and powerful (economically and politically), the free market gets distorted and way too many small businesses are stomped into the ground.
Here's the other thing: companies this big are pretty much all multinational in scope. They have almost no loyalty to the country they happened to be incorporated or based in. Their employees and executives, their factories and offices and outlets, their markets, their profits, and their shareholders are scattered all over the world. For these kinds of companies, if America's middle class falls apart, there are always consumers elsewhere. If our schools are terrible, there are always employees they can bring in from other places. If our trade surplus is terrible, it doesn't matter much to them. On the other hand, smaller community-based businesses are far more bound to the communities they are based in, because they know that if their communities — their schools, their labor force, their customers, their environment — start to fall apart, it hurts their business as well.
The idealized free market that conservative politicians and ideologues love to worship is a myth in the modern economy. And in this kind of uncompetitive economic environment, governments have to make choices about whose side to be on. Every decision on taxes, every decision on which contractors to choose, every decision on trade, every decision on regulation and anti-trust: there is nothing idealized about it, it is quite simply a choice of who you want to benefit and who you want to penalize. And every one of these choices is a matter of values: does government side with the most powerful of the special interests or those with less power? Does the government help poor and middle class folks or the wealthy? Does government help hard-pressed small businesspeople creating jobs here, or big multinationals shipping jobs overseas? Does government side with workers trying to organize a union, or employers who want to crush unionization? On government contracting, does our government sign contracts with innovative up and coming small businesses who have never had a chance at a contract before, or just reward contracts to the same old insider companies who have always gotten the deals in the past because of their connections (even if they have been guilty of cost overruns, labor and environmental violations, and sloppy work in the past)?
Let's take a couple of specific examples from the world of banking. The first is one I have been working on and have written about a lot before, the swipe fee issue. Sen. Durbin succeeded in passing an amendment to the financial reform bill that for the first time would regulate debit card swipe fees, and the Federal Reserve — which generally has been extremely pro-banker in past regulatory issues — wrote a reasonably balanced regulation that would cost the big banks (who control 80 percent of the market on this) about $12 billion. The big banks and their allies in Congress are now screaming and whining and gnashing their teeth about the great injustice done to them. But this is a simple matter of values that the government has to decide: either the big banks get the $12 billion, or Main Street retailers, restaurant owners, cabbies, and their customers do. My values say that the big banks already have too much money and power, and that the economy — along with basic fairness — would be better served if the retailers and all those other small businesspeople got to keep the money. Government has a clear choice to make, and going with the Main Street economy over the banks seems pretty clear.
Then there's the housing mess. Faced with a little bit of pressure from the state AGs to write down underwater mortgages, the big bankers have gone into high-pitched bouts of chutzpah not seen since the proverbial son killed both of his parents and threw himself on the mercy of the court as an orphan. Bank of America executive Terry Laughlin said that "It's not that we don't want to help troubled borrowers. It's a moral hazard issue." Ah, yes, the moral hazard issue. Someone from a Too Big to Fail bank which got rescued by taxpayers after they helped blow up the economy worrying about the moral hazard of writing down a mortgage for someone who bought a $150,000 house now worth less than 100K is precious.
