It was less than 20 years ago that Daniel Yergin and Joseph Stanislaw published “The Commanding Heights,” which chronicled the triumph of free-market economics over socialism, communism and the idea that government had a big role to play in managing the economy. The years since, marked by financial crises, stagnant incomes, rising debt levels and persistently high unemployment, have raised doubts as to whether that great debate has been resolved. So it should be no surprise that the bookshelves are beginning to fill up with revisionist critiques of how the market fundamentalists got it all wrong.
In two of the most recent contributions, Edward Kleinbard, a respected tax expert and lawyer, and Jeff Madrick, a longtime economic journalist, set out to debunk the notion that markets can always be relied on to generate the best economic outcomes. As you might imagine, Milton Friedman comes in for a heaping helping of scorn. They also chide their fellow liberals, and liberal economists, for allowing the political debate to become so cramped by misguided fixations on deficits, moochers and “job-killing” taxes that much-needed regulation, redistribution and public investments are no longer seriously discussed.
Beyond that, however, the similarity between the two books ends. One (Kleinbard’s) is packed with powerful data, fresh insights, unassailable analysis, and a set of recommendations that are both economically and politically viable. The other (Madrick’s) is an infuriating and rambling rant full of straw men, oversimplification and historical blind spots that winds up being the mirror image of the ideology-masquerading-as-science that it means to expose.
The strength of “We Are Better Than This” comes from Kleinbard’s background as an academic (University of Southern California law school), tax lawyer (Cleary Gottlieb Steen & Hamilton) and congressional aide (staff director of the Joint Committee on Taxation). His lawyerly precision, thorough research and restrained conclusions provide the credible underpinnings for the moral passion discernible just below the surface. “The nature of life is that we do not control it,” Kleinbard writes in response to those who argue that markets generate the incomes people deserve. “Both our native talents and our good fortune are distributed through processes that we cannot fathom and do not ‘earn.’ Our loud proclamations that what we take from the market is our just deserts is just noise made against the darkness, trying to still the voice inside that asks, why me and not them?”
Elsewhere, he draws from his experience on Wall Street in rejecting the widely held liberal belief that there’s no limit on how high you can tax the rich since they’ll never miss their last million. “The affluent clients with whom I worked largely share the view that they sincerely loved money, that money was attracted to them because it sensed their love, that they knew how to take care of money and give it a good home, and that other less affluent individuals would horribly mistreat that money. . . . If there is such a thing as the declining marginal utility of income, someone forgot to tell these folks.”
Kleinbard’s targets are what he calls the “the market triumphalists” who stubbornly ignore the market failures all around us; rationalize inequality in the name of economic growth that no longer is widely shared; and undervalue the economic worth of public investments in infrastructure, education and a social safety net that nourishes our economy, our politics and our souls.
“The United States has the highest poverty rate [and] the greatest . . . wealth inequality of any major developed economy in the world. Our parents’ incomes play a larger role in our personal economic fortunes than is true for other peer countries. Our long-term unemployment rate, once the envy of the world, has now sagged badly. Our education system is mediocre, and our healthcare is unaffordable. . . . And what, in turn, have we bought in exchange for all of this? Not growth, at least over the last generation. The first refuge of the economist when this question is asked is to claim that inequality is a necessary consequence of free markets. . . . This is true, but only to a point; inequality is not the nectar of the economic gods. Some is necessary, but more is not necessarily better. No other developed country is as addicted to poverty and inequality as we are, and yet somehow they prosper.”
Every chapter of “We Are Better Than This” opens with a quote from Adam Smith, the Scottish philosopher and father of modern economics, who coined the “invisible hand,” and whom Kleinbard aims to rescue from his current fate as a “cartoon spokesperson” for selfishness, inequality and a market unrestrained by government. The effect is to expose the moral poverty of our current discourse on economic and fiscal policy.
But Kleinbard is no bleeding heart given to easy moralizing. He is at his best when he reviews the unambiguous research on the degree of cognitive impairment that results from malnutrition in pregnant mothers and infants, and juxtaposes it with the paltry savings from recent budget cuts in those programs. Or when he compares what wealthy American school districts spend per pupil ($19,000) with what the poorest spend ($7,400) — an unusual policy choice that we share only with Turkey and Slovenia. Or when he marshals the most recent and reliable data to demolish the most cherished nostrum of free-marketeers: that higher taxes and bigger government strangle job creation and economic growth.
But it’s not just conservatives who are overly fixated on taxes. Over the past two decades, Kleinbard argues, liberals have struck a bad political bargain that accepts a steady erosion of public investment and social insurance (the safety net) in exchange for maintaining the progressivity of the tax code. The more potent element of a progressive fiscal system is how the money is spent, he shows, not how it is raised. For both political and economic reasons, he says, the better trade-off is a slightly less progressive tax system that raises more revenue to support higher levels of public investment and a more generous safety net. “The secret of funding a progressive fiscal system — one that actually has a measurable impact on inequality as it is experienced — is not through quasi-sumptuary taxation in the form of high marginal tax rates,” he writes. “Instead, the secret sauce is a tax system that is only mildly progressive, or even regressive, but that is large enough to fund government investment and social insurance programs that change lives.”
Kleinbard’s fiscal plan would modestly increase federal spending from about 19 percent of GDP, its historical average, to 21 percent. To pay for it, and bring the deficit to reasonable levels, he’d lift the earnings cap on Social Security taxes, raise middle-class taxes back to Clinton levels and convert the tax deductions used by wealthier households into less-generous 15 percent tax credits. His idea for integrating the tax on corporations and their shareholders is ingenious but, alas, too hard for the public, or even a member of the Ways and Means Committee, to understand.
“We Are Better Than This” might have become the fiscal companion to “It’s Even Worse Than It Looks,” Thomas Mann and Norman Ornstein’s widely read political cri de coeur of 2012. That it won’t is for want of a strong editor. The book is way too long and annoyingly repetitious, with long primers and discourses on budget and tax policy that are as interesting as reports from the Congressional Budget Office.
Jeff Madrick’s “Seven Bad Ideas” certainly started out with a lot going for it. The numbered-myths structure is one that is popular with readers, including those of this section of The Washington Post. And in many respects — its belief in an affirmative role for government in the economy, its emphasis on the importance of institutions in creating prosperity, its recognition of the role of psychology in market behavior, its acknowledgment of the danger in pushing globalization too far too fast, its skepticism about economics as a hard science — Madrick’s book closely tracks the themes of the introductory economics course I teach. Unfortunately, it fails to deliver on its promise.
For starters, the book is politically simplistic and naive, ascribing absurd amounts of power and influence to economists while willfully ignoring the robust public debate that has gone on within the economics profession over the past 30 years. It’s not even clear that Madrick understands what most economists do. His suggestion that academic economists should have known about the excesses in Wall Street’s asset-backed securities market in the 2005-07 period, and then factored that knowledge into their macroeconomic forecasts, is simply preposterous.
Equally preposterous is his assertion that the global trend away from socialism and toward free markets had nothing to do with lifting a billion people out of poverty in China and India over the past two decades. Or that Brits would be better off today if the government still owned and operated the airlines, the energy companies and the telephone network. Or that, to give workers more leverage in wage negotiations, the Federal Reserve should keep interest rates low enough so that inflation routinely runs at something just shy of 10 percent.
Madrick seems determined to out-Krugman Paul Krugman, the New York Times columnist, who recently reviewed the book in the Times, excoriating anyone who might have ever worried about government budget deficits, no matter how structural they may be. While we can appreciate Madrick’s efforts to restore John Maynard Keynes to his rightful place in the pantheon of economists, even Keynes would not have recommended running a $250 billion federal budget deficit in 2006 when the economy and markets were booming.
Madrick’s choice of economist villains — former treasury secretary Lawrence Summers, IMF Chief Economist Olivier Blanchard, former Federal Reserve chair Ben Bernanke, and economic historians Daron Acemoglu and James Robinson — is also curious. Their apostasy is that by praising Milton Friedman and supporting financial deregulation (Summers), worrying too much about budget deficits (Blanchard) and inflation (Bernanke), and paying insufficient attention to things like the minimum wage and labor unions (Acemoglu and Robinson), they have given aid and comfort to the market fundamentalists. Madrick apparently finds it little consolation that Summers helped orchestrate the bailout of General Motors and the biggest slug of fiscal stimulus in American history, or that Blanchard has led the IMF to repudiate fiscal austerity during recessions, or that Bernanke’s Fed took extraordinary steps to pump $3 trillion into the monetary system, or that Acemoglu and Robinson have put inclusive political and economic systems at the top of the list of reasons some countries are rich and others poor.
What characterizes these and many others among the best economists is that they do not let ideology keep them from constantly adjusting their economic models to incorporate new data, new experience, new theories or even their own boneheaded miscalculations. These flexible, pragmatic qualities are precisely those Madrick says have been so lacking among economists. And yet it is Madrick who seems to be without them, having apparently learned nothing from the failure of Keynesian fine-tuning and European socialism of the 1960s, or the stagflation and excessive regulation of the 1970s, or the political and economic success of the welfare reform and deficit reduction of the 1990s.
As much as it pains me to say it, it is the tax lawyer, not the economic journalist, who this season has given us the more compelling critique of market triumphalism and the economists who helped to shape it.
WE ARE BETTER THAN THIS
How Government Should Spend
By Edward D. Kleinbard
Oxford Univ. 509 pp. $29.95
SEVEN BAD IDEAS
How Mainstream Economists Have Damaged America and the World
By Jeff Madrick
Knopf. 254 pp. $26.95