November 06, 2016
Ross Douthat devoted his NYT column this morning to how people in the United States and other wealthy countries deal with a world in which they have fewer children. It’s mostly devoted to social psychological speculation, which I will leave to others to assess, but I do want to pick up on an economic item that is a central theme.
Douthat tells readers:
“The Obama White House’s ‘Life of Julia’ ad campaign in 2012 — featuring a woman whose every choice was subsidized by the government from cradle to grave, with a lone child but no larger family or community in sight — seemed to many conservatives like a perfect confirmation of our fears: Here was liberalism explicitly pitching the state as a substitute for kith and kin.”
While I don’t recall the campaign ad, presumably the subsidies are for items like child care, education, health care, and Social Security. Douthat is making a clear contrast between incomes that people earn in the market, implicitly without the hand of government, and the items that the government gives to people. In his view, and the view of the conservatives he refers to, the former is good and latter in some way bad. This distinction becomes more problematic when we acknowledge that the government shapes the market in ways that enormously impact the ability of people to earn income in the market.
Starting with an example that was in the news last week, the Fed may soon decide to raise interest rates. The purpose of this move is to slow the economy and the rate of job creation. In addition to keeping some people from getting jobs (disproportionately African Americans and Hispanics), a higher rate of unemployment will weaken the bargaining power of workers who do have jobs. In particular, it puts downward pressure on the wages of the workers at the middle and bottom of the wage distribution.
Going in the opposite direction, the government protects the income of doctors from prohibiting foreign doctors from working in the United States unless they have completed a residency program in the United States. As a result of this restriction, doctors in the United States earn twice as much as their counterparts in other wealthy countries like Germany and Canada. This costs the country roughly $100 billion a year in higher medical expenses.(This effectively reduces the wages of all non-doctors, since our money buys less.)
In the same vein, the government grants patent monopolies in prescription drugs. These monopolies allow drug companies to charge prices that are often several thousand percent above the free market price. This protectionism both makes some of those involved in the process of developing and distributing drugs very rich and ends up costing the rest of us a huge amount in higher drug prices. The gap between the patent protected price of drugs and the free market price can easily exceed $350 billion a year.
There are a variety of other mechanisms through which the market has been shaped in recent decades to redistribute income upward. This is the topic of my new book Rigged: How Globalization and the Rules of the Market Economy Were Structured to Redistribute Income Upward (it’s free). It is important to recognize how the market was structured to enrich the rich since it undermines the moral distinction that Douthat and his fellow conservatives want to make.
They want to claim that the income people get through the market has a superior moral status to the transfer payments that people get from the government. If we consider how policy has rigged the market, this claim is a bit hard to justify.
Because we ban foreign doctors our doctors earn on average more than $250,000 a year, compared to $125,000 or thereabout in other wealthy countries. We are supposed to believe that this extra $125,000 a year due to protectionist measures has a higher moral status than average the annual food stamp benefit of $1,500 a year?
Many Wall Street bankers and hedge fund types make millions, tens of millions, or even hundreds of millions a year in large part due to the fact that the financial industry does not pay the same sales taxes as shoe stores or restaurants. We are supposed to see these enormous paychecks as being justified, as opposed to the Social Security benefits that workers receive after they retire (and for which they paid taxes)?
It is understandable that those who are happy with a situation in which a small number of people get rich at the expense of the rest of the country would like to convince the public that their high incomes were just the result of the natural workings of the market. But this is very far from reality. It is important that the public understand the ways in which the market was deliberately structured to enrich the rich. The amount of money involved in this rigging dwarfs the amount that government pays out to the poor and elderly as transfers.
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