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Capitalism, Steven Pearlstein, and Morality

The Washington Post had a major column by Steve Pearlstein on the front page of its Outlook section headlined, "Is Capitalism Moral?" The piece notes the sharp upward redistribution of income over the last three decades and asks whether we should just being willing to accept market outcomes.

Demonstrators in Dundas Square in Toronto, Canada protest greed and inequality in 2011. (Photo: Vince Talotta/ Toronto Star) Of course this question is absurd on its face. The upward redistribution of the last three decades was the result of deliberate government policies designed to redistribute income upward; it was not the natural workings of the market.

For example, trade policy was quite explicitly intended to place segments of the U.S. workforce in direct competition with low paid workers in Mexico, China and other developing countries. The predicted and actual result of this policy has been to push down the wages the bottom 50-70 percent of the workforce to the benefit of those at the top.

This was hardly the free market. We could have adopted trade policies that were designed to put doctors, lawyers and other highly paid professionals in direct competition with their much lower paid counterparts in the developing world. If we had done this, doctors in the U.S. might be earning closer to $100,000 a year rather than the current average of more than $250,000 annually. This would transfer more than $100 billion annually to the rest of the country in the form of lower health care costs.

The government also strengthened and lengthened the periods of monopoly protection provided by both patents and copyrights. This has hugely increased the amount of rents being paid to high-end earners, the pharmaceutical industry and the entertainment industry at the expense of everyone else.

The government has also helped management against labor by having laws that asymmetrically punish workers and management. If workers have a strike that is ruled illegal, the case can immediately go into court and the leaders of the strike can be thrown in jail. By contrast, when management breaks the law to prevent workers from organizing, the case goes to the National Labor Relations Board, where it can be dragged out for months or even years. Management will almost never face imprisonment as a result of its lawbreaking.

In the last three decades the government has allowed banks to merge and grow large enough so that they enjoy an implicit guarantee from the government. This guarantee provides a subsidy to the big banks that has been estimated to be as large as $80 billion a year. The financial sector also enjoys a special low tax status in that it is exempted from many of the taxes (most importantly state sales taxes) that affect other industries. This is also an implicit subsidy.

Even the state of the macro economy is a policy decision, not a market decision. The fact that almost 8.0 percent of our workforce is unemployed is the result of a policy decision that put a greater emphasis on limiting deficits and debt than maintaining full employment. (There is no natural market level of government surpluses/deficits. Whatever the government does is a policy decision -- sorry natural market lovers.) The decision to put a higher priority on deficit reduction than maintaining employment levels also redistributes income upward. The people who are unemployed are disproportionately at the lower end of the income ladder. Also, high rates of unemployment put downward pressure on the wages of the bottom half of the workforce even if they are employed. 

The massive upward redistribution of the last three decades has been the result of these and other deliberate policies that had the goal of redistributing income upward. It was not the result of free market capitalism. (This is the topic of my book, The End of Loser Liberalism: Making Markets Progressive.) The real question is whether a system that is designed around policies that redistribute from the middle and the bottom to the top is moral.

Pearlstein's piece is incredibly dishonest to imply that the upward distribution of the last three decades was just a natural occurance. Perhaps he really doesn't know better, but someone in an editorial position at a major newspaper should.