Paul Pillar

The Free-Market Deficit

Debates in the United States over the economy, government and business tend to be viewed as one between free marketeers on the Right and government interventionists on the Left. As Arthur Brooks, president of the American Enterprise Institute, puts it at the outset of this week's edition of the Washington Post's “Five Myths” feature:

The 2012 presidential campaign is shaping up to be a battle of two economic philosophies. One favors a greater redistributive and regulatory role for the government; the other prioritizes the values of free enterprise, including private property, individual liberty and limited government.

It is appropriate to view some issues of public policy this way. Some people, who are found more on the Left than the Right, believe that even a smoothly operating free market does not meet all important public needs. There may be, for example, tragedy-of-the-commons phenomena that lead to unacceptable environmental degradation, to which an appropriate response is government-introduced incentives that lead the market to operate in a less destructive way. There may be other social needs, such as safety nets for the disadvantaged, to which the favored response might be not a tilting of market incentives but instead a circumvention of the market with governmental programs. Of course other people, found mainly on the Right, have different views about such issues.

In looking around at what is wrong with our crisis-generating, inequality-accentuating economy, however, one finds far more instances in which there is not enough of a free market than of ills flowing from a free market's unfettered operation. Brooks gets to this point when he identifies as his fourth myth to dispel, “The free market caused the financial meltdown.” Actually, says Brooks, “It wasn't free enterprise that was at fault; it was the lack of free enterprise.” He's right about that, although in his zeal to indict government he quickly narrows his description of the problem. “Statism and its co-dependent spouse—corporate cronyism—melted down our economy,” he says, pointing to the housing bubble and the role of government-chartered Fannie Mae and Freddie Mac.

That sort of codependence is indeed part of the problem, and one could find glaring examples of it in, say, the military-industrial complex. Another example that recently came to light through investigative journalism of the New York Times is a privatized system of halfway houses in New Jersey, run by a firm with close ties to the state's governor, Chris Christie. The halfway houses are houses of misery with awful supervision and resulting rampant drug use, gang violence and frequent escapes. As Paul Krugman, someone who approaches most political and economic issues from a much different perspective than Arthur Brooks, has observed, one thing companies like the one running the halfway houses

are definitely not doing is competing in a free market. They are, instead, living off government contracts. There isn't any market here, and there is, therefore, no reason to expect any magical gains in efficiency.

But government-contractor cronyism is still only a piece of the problem. The deficit in free markets is found in much else of the private sector, where there is no governmental angle at all. The myth involved here is that a private sector untrammeled by government interference equals a free market. It doesn't.

Take, for example, the compensation of corporate chief executives. CEO pay in the United States is vastly inflated, by any of several measures: by how much it has increased over the years, by comparison with pay throughout the same enterprises, by comparison with pay for CEOs in European corporations, by comparison with pay for senior executives in government and just by contemplating the value added by any one person, even the one in the top job. If we had a free market in CEOs, the pay of most of them would be much lower. Those are, after all, highly desirable jobs. For every CEO who is pulling down $10 million annually, there are probably several comparably talented executives who would love to have the position, would run the company just as well and be willing to do the job for a mere, say, $3 million. But there is nothing close to a free market in CEOs. Instead, what passes for corporate governance in much of the American private sector involves self-perpetuating structures led most often by an executive chairman.

A few months ago I attended a forum, oozing with a free-market ethos, in which the dominant theme of the speakers was the unwisdom of government interference in the private sector. Another member of the audience had the temerity to raise an issue about CEO pay along the lines of what I just mentioned. The response from the stage was, “Well, if a company gets the right person, those several million dollars aren't going to be very important.” When the questioner shot back that this assumes there is only one “right person,” the moderator changed the subject.