Buzzwords Won't Save the American Economy

The first question to ask when considering a “broad-based economy” is why people are focusing on it. We have declining life expectancy in the US, a rise in “deaths of despair” such as opioid overdoses, rising income inequality, a declining middle class, and the civic collapse of many former industrial cities. These are problems that need to be addressed. And the traditional market-based solutions we classify under the label “free trade” haven’t succeeded. Undoubtedly, we need more “entrepreneurship” and “competition,” as Samuel Gregg says in his lead essay, but more buzzwords are unlikely to get the job done.

It’s important to first note that many of these simplistic economic ideas have not performed as advertised in the real world. For example, when trade globalization was promoted in the 1990s through NAFTA, the Uruguay Round of trade talks, and ultimately the granting of permanent normal trade relations to China, international trade was touted by economists as a win-win for everyone. It was not until the 2016 China Shock paper that economists began publicly admitting that trade with China had caused many American job losses. We tried free trade, and many if not most Americans are right in concluding that it did not work out well for them.

Similarly, the simplistic view of the firm as a profit-maximizing entity requires significant adjustment. As Julius Krein noted, the real goal of corporations is maximizing returns to shareholders and that “increasing profits is at best a means to that end.” He says, “Rather than take the risks involved in expanding operations or developing a new product, it is often far easier for firms to simply reposition or financially reengineer themselves to realize a higher valuation.” Thus we have seen stock prices skyrocket during a period of anemic economic growth.

And as I recently demonstrated, the state of Indiana implemented the full suite of free-market and conservative policy solutions at the state level, yet remained a mediocre performer, with slow growth in population and jobs, and declining personal incomes relative to the nation.

None of this is to say that trade is bad, corporations are indifferent to profits, or that states shouldn’t balance their budget, but just that reality is much more complex than simple models suggest. “Entrepreneurship” and “competition” aren’t magic elixirs any more than free trade. A look at the real world shows a more complex economic development story, one with a more robust role for government action.

Gregg cites the large number of people who have risen from extreme poverty. But we might look more carefully at a country like China that has seen a steep drop in poverty. Yes, entrepreneurship and competition played a role in that. But the state played a key role as well. It has protected Chinese industry from foreign competition—such as by limiting foreign owners to a minority stake in many Chinese ventures—demanded technology transfers from Western partners, invested heavily in internal improvements such as its high-speed rail system, directed financial support to favored industries, etc. China has clearly engaged in a form of industrial policy to great success—and in part at the expense of the American worker. Given its status as the premier case study of economic growth and transformation today, it’s curious that Gregg does not explain why we could not learn from China.

Similarly, he dismisses the role of industrial policy in the development of the Internet. But the US government created the Internet. Similarly, US government investment into electronic warfare during World War II is now understood as the origin point of Silicon Valley as we know it. Also, the development of the consumer Internet took place under a regulatory regime that greatly privileged technology companies. They were exempted from sales tax on internet transactions for many years. They received a special exemption from liability for any content posted on their system, no matter how libelous. These were special giveaways that no other industries, including ones competing with them, had access to. Undoubtedly Silicon Valley has been highly entrepreneurial, but even they are the result of conscious industrial policy actions by the US government.

Having said that, undoubtedly levels of entrepreneurship and competition need to be increased in the US. The question is how to do that.

Government action across a range of dimensions is needed to address the legitimate underlying concerns that cause people to demand solutions like “broad-based” economic growth in the first place.

Gregg suggests reducing regulations. However, it’s clear that a reduction in regulations is the cause of at least some of the industrial consolidation that has reduced competition in the country. For example, banking was once a much more fragmented industry than it is today. There were significant restrictions on bank expansion and mergers. Over the course of several years, many of these were eliminated. For example, interstate bank acquisitions were essentially banned in 1980, but nearly universally allowed by 1990. The Glass-Steagall Act that had previously separated commercial and investment banking was repealed. Similarly, the government repealed the Public Utility Holding Company Act that had previously prevented many utility mergers. Similarly, it has reduced legal barriers to media consolidation.

The general decline of anti-trust enforcement and toleration of industry consolidation has reduced competition. These have also resulted in the creation of large companies that, as Gregg so aptly notes, are now able to use their lobbying power and regulatory influence to entrench their position and reduce their risk. Recurring federal bailouts of financial institutions is the best example of this.

Entrepreneurship alone is unlikely to increase competition in these sectors. No startup bank is going to displace JP Morgan Chase. Some form of renewed anti-trust enforcement that de-consolidates these markets will be required. This would involve a more skeptical view of future mergers, and potentially breaking up some of these companies.

Additionally, not all barriers to entrepreneurship come from the government today. The increasing digitalization of the world, combined with monopoly or oligopoly conditions for key service providers, means that any would-be entrepreneur needs the permission of multiple private firms to even be in business.

For example, the vast majority of web traffic today is through mobile phones. Two companies, Apple and Google, control 99% of smartphone operating systems. It is difficult (and in Apple’s case essentially impossible) to install applications on those phones without going through those companies’ app stores. This means a would-be entrepreneur needs their permission to even be in business. These companies enforce an array of requirements on app developers, such as requiring them to censor user content in a similar manner to how Apple and Google themselves would. This means, for example, that a would-be competitor to Twitter that wanted to employ a materially different content moderation policy as a basis of competition is barred from the marketplace. 

There is an array of these private gatekeepers—Mastercard and Visa are two others—that can de facto keep entrepreneurs out of the marketplace. Imagine if the electric company or water company could refuse to do business with would-be entrepreneurs they don’t like. This is essentially the case for the critical digital and financial infrastructure necessary to be in business today. So not only are many of these critical infrastructure providers monopolies or duopolies, which makes it difficult for any competitor to them to arise, they are also able to use their market power to discriminate against or even de facto banish entrepreneurs from the marketplace at their whim.

I would concur with Gregg on the need for raising America’s flagging entrepreneurship and competition levels. Undoubtedly a reduction in some government regulations would be helpful in this regard. But increased government regulation and activities related to anti-trust and ensuring that there are not private sector blockades on entrepreneurship are needed as well.

We should also not be naïve about believing our problems are as simple as entrepreneurship or competition. The world is much more complex than free marketeers would like to admit. Government action across a range of dimensions is needed to address the legitimate underlying concerns that cause people to demand solutions like “broad-based” economic growth in the first place.