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‘Pro-business’ is bad business for the middle class

Editor’s note: This is the first of several guest posts related to our Liftoff & Letdown series about the fate of America’s middle class. To go with those stories, we’ve invited a wide range of researchers to weigh in on what is – and is not – holding back U.S. workers. This one is from George Mason University economist Matthew Mitchell.

Policymakers at the federal, state and local level have never been more interested in promoting business. And yet for the average American, business is bad. A smaller share of people are working or looking for work than at any point since 1978. More alarmingly, the U.S. economy seems to have lost the dynamism that was once its hallmark. The rate of new business start-ups has fallen over the past several decades, and the share of employment by young firms has declined by 30 percent over the last 30 years.

This is not a coincidence. The bipartisan impulse to privilege particular businesses — through subsidies, bailouts, tax privileges, incentive packages, and the like — stands in the way of genuine economic progress. Here are five reasons why “pro-business” policies are bad for business:

1. Pro-business policies undermine competition: Privileged firms are insulated from competition and can therefore ignore customer desires and waste scarce resources. This leads to higher prices and lower quality goods (think of your local cable monopoly). It’s tempting to think that high prices don’t matter so long as the policies buy us more jobs. But the main reason we work is to earn money to buy products and services, and policies that protect firms from competition in the name of job creation depress real (that is, price-adjusted) wages.

2. Pro-business policies retard innovation: Privileged firms are not innovative firms (think of protected taxi companies in most major cities). They need not adjust their products to meet changing desires. And they need not be creative. But change is what drives growth. Indeed, careful empirical tests find that the sort of “creative destruction” that Joseph Schumpeter famously extolled nearly 100 years ago correlates with faster economic growth.

3. Pro-business policies sucker workers into unsustainable careers: The destructive side of creative destruction is painful. Skill sets become obsolete, and workers have to retrain. But the longer industries are sheltered from the realities of the market, the more painful is the adjustment. Consider U.S. automakers. Through tariffs and subsidies, the U.S. auto market was protected for decades. As U.S. automakers grew more detached from customer desires, more 18 year olds were lured into this ultimately unsustainable line of work. Reality hit in 2008, and the dislocation was more painful than it would have been had the transition been gradual. Of course, policymakers doubled down with a massive auto bailout.

4. Pro-business policies encourage wasteful privilege seeking: The late economist Gordon Tullock showed that when governments dispense privileges to particular firms or industries, people will expend resources — time, money, and effort — in an attempt to obtain these privileges. They’ll lobby, they’ll donate to Political Action Committees, and they’ll orient their businesses around political desires rather than customer desires. Tullock’s insight was that much of this activity is socially wasteful. It expends resources without creating any new value.

5. Pro-business policies undermine the legitimacy of government and business: When businesses succeed on the basis of their political connections rather than on the basis of their ability to create value for customers, it undermines the legitimacy of capitalism itself. And when policy makers mind the specific welfare of the well-connected rather than the general welfare of the public, it undermines the legitimacy of government.

Instead of being “pro-business,” policy makers should aspire to be “pro-market,” eschewing both targeted punishment and targeted privilege. That would be pro-worker.

Matthew Mitchell is a senior research fellow and the director of the Project for the Study of American Capitalism with the Mercatus Center at George Mason University, where he is also an adjunct professor of economics.