Breaking Out of a Cramped Economic Policy Debate

Jared Bernstein is a senior fellow at the Center on Budget and Policy Priorities in Washington and a former chief economist to Vice President Joseph R. Biden Jr.

The Justice Department’s decision to oppose the merger of American and US Airways caught a lot of people by surprise.  From the cruising altitude of 30,000 feet, it doesn’t look much different from previous airline mergers, so it’s not unreasonable for onlookers to wonder why this particular merger threatens consumers that much more than the others.

There are, in fact, some salient differences (e.g., that American and US Airways share many routes and control most of the slots at Ronald Reagan National Airport seemed unduly anti-competitive to the lawyers seeking to enjoin the merger), but at the end of the day, the two airlines’ biggest problem is that they’re late to the party.  First, the more consolidation, the less competition, so those who go later are at a disadvantage against those who go first.  Second, it’s not obvious that previous mergers have been particularly beneficial to either consumers or the airline industry.  (Perhaps if they weren’t always bugging everyone to “power down anything with an on/off switch,” this would all be going differently.)

But what I found most interesting about this episode is what it says about the ways in which we shape economic outcomes.  This merger dust-up is a microcosm worthy of attention in an era wherein the debate over the scope of government intervention in the economy is confined, misleading, and uninformed.  The fact is we can and must shape outcomesâ€"we do it all the time.  But because this fact is discomforting to the mythological ideology of “free markets,” we’re often in denial in ways that skew the debate and severely limit the scope of our policies.

If you dropped in from Mars and turned on cable news (though that in itself might lead you to hightail it back to Mars), you’d probably think that things break down like this.  On one side are those who want the government, the Federal Reserve, the Justice Department, the Environmental Protection Agency, Fannie and Freddie, Obamacare and all the rest of them to just get out of the picture and let the “free market” solve whatever problems those agencies and their interventions are misguidedly trying to fix.

On the other side are the interventionists, the tinkerers, the Bernankes and Obamas with their stimulus, their jobs programs, social insurance, safety nets, fuel standards, and so on, grabbing the “free hand” by the wrist and trying to move it this way and that.

Of course, reality is more complicated, particularly as regards the first group (the second group really does want to do most of that stuff).  Whether it’s Tea Partiers opposing Medicare cuts, politicians protecting tax-advantaged investment income, or the Justice Department intervening in such a way as to preserve market competition, you’d be very hard pressed to draw neat lines between those who seek more or less intervention.  When you drill down, it’s usually more a matter of who wins and who loses.

Our Martian might think, for example, that traders in financial markets would oppose outside interventions that affect prices.  Yet last Thursday, there was a big sell-off in equity markets based on the fear that the Federal Reserve was going to start doing less to support the economy.

The following graph provides another important and concrete example of what I’m talking about, one that’s well known to American economists but underappreciated by the broader public.  It shows real gross domestic product and employment trends in the United States and Germany over the great recession, which, as the G.D.P. lines show, hit just about as hard in both countries.  Yet note the difference in the employment trends.  German policy makers protected against job losses far more than we did.  German unemployment, at 5.5 percent, is now two percentage points below that in the United States (that’s over three million jobs in our labor market).

Sources: Organization for Economic Cooperation and Development; United States Commerce Department;  Bureau of Labor Statistics

These trends reflect policy choices.  Germans used “work sharing” to great effect, spreading the loss of growth and demand around by reducing workers hours, compensating them for some of their lost earnings, and keeping them on the job.  In the United States, we usefully applied Keynesian stimulus, but much of that went to tax cuts, little went to direct job creation or protection, and when the stimulus prematurely faded, we’d already made the pivot to deficit reduction.  Again, policy choices.  (The United States actually enacted a work-sharing plan in 2012 but it is neither well known, well publicized, nor widely used.)

Or take poverty.  According to data from the Organization for Economic Cooperation and Development, the poverty rates pre-policy (before taxes and transfers) among advanced economies roughly cluster around 30 percent, as shown in the table below.  Surprisingly, for all the cultural, institutional, and demographic differences, the market-driven poverty rates aren’t that different.  Yet others choose to go much further than we do to reduce market poverty.

International Poverty Rates, Before and After Tax and Transfer Policies, 2010
	Before	After	% Point Diff.
United States	28.4%	17.4%	-11.0
Canada	26.0%	11.9%	-14.1
Britain	31.9%	10.0%	-21.9
Germany	32.3%	8.8%	-23.5
France	34.7%	7.9%	-26.8
Denmark	24.4%	6.0%	-18.4
Source: O.E.C.D. Poverty measure is 50 percent of median income.

Health care provides another good example of a policy choice.  The right’s intense opposition of Obamacare is said to be motivated by the fear of the government’s “taking over your health care.”  Again, that framing presents a false choice: about 45 percent of health care spending in the United States is already from the public sector, and it’s widely recognized that health care is simply not a typical market good.  You show up hungry at the supermarket, they don’t give you food.  You show up sick at the emergency room, they treat you.  That simple reality has led every other advanced economy to take control of health care delivery in various ways to insure affordable coverage and cost.

And that’s what we’re finally trying to do as well, with some hints of early progress.  Interestingly, some of the health care exchanges set up by the new law seem to be lowering costs through competition, using market forces within a publicly constructed framework through which regulated coverage is delivered, an interesting hybrid.

It’s a waste of time to argue about whether public policy is going to play a role in shaping market outcomes, from health care to airlines to stocks and bonds.  No advanced economies exist wherein policy does not play that role.  Adam Smith himself recognized that sometimes the “invisible hand” is all thumbs, and wrote incisively about the importance of distributional outcomes and regulating commerce (he might well have signed on with the Justice Department in opposition to the airline merger).

The question is whether the interventions will promote fairness, opportunity, and growth.  Too often, our political economy debate tries to preclude these choices in the defense of some pristine vision of unfettered markets.  We’re told we have to choose between growth and equity, innovation or regulation, factory jobs or globalization, budget deficits or private investment.  That’s all a ruse, and it has led to the cramped politics and limited policy debate in which we’re stuck today.  We can and must choose a better path.