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Market Failure

Two professors explain why small government, loose regulations and an over-reliance on markets eventually cost taxpayers.

The era of big government is far from over. Quick, somebody tell the politicians, before we go broke.

Don't run straight to the tax-and-spend liberals, though, Lawrence Brown and Lawrence Jacobs caution in The Private Abuse of the Public Interest: Market Myths and Policy Muddles. Conservatives bear just as much of the blame for our fiscal predicament. America now faces blowback from 40 years of political dominance by right-wing market utopians, who championed extreme industry deregulation only to increase government's size and power.

Beginning in the Nixon administration, conservative policymakers adopted the philosophy of academic free-marketeers like the late Milton Friedman: Government was not only less efficient than business; it was the problem. The solution to challenges like underperforming schools or skyrocketing health care costs, they said, was slicing government down and letting an expanding market come to the rescue. As former Texas Congressman Richard Armey once put it, "Markets are smart; government is dumb." This Manichaean view has worked its way into much of American political discourse, with Democrats such as Bill Clinton aping anti-statist language to win elective office.

What's ironic, Brown and Jacobs write, is that small-government rhetoric often directly contradicts real-world policy. During the supposed free-market era, real federal spending on consumer, environmental and other protections jumped from $1 billion in 1960 to $20 billion early this decade, with money for economic regulation climbing 400 percent. As of 1999, 2 in 5 American households contained at least one person who either worked for the government or held a job falling within a government contract or grant.

Republicans and Democrats alike imposed rules in sectors from international finance to aerospace, tripling the number of pages in the federal register during the Nixon-Ford era, growing them by another 25 percent in the years through 2000 and increasing them by an additional 16 percent in the early George W. Bush administration. Conservatives like Alan Greenspan and Newt Gingrich have lamented the fact that federal spending rose twice as fast during Bush's first term as during the Clinton years and that the government work force grew by more than 1 million people between late 1999 and 2003. Even deregulation champion Ronald Reagan imposed more than $15 billion in new regulatory costs during his final two years in office.

Click here to read more Miller-McCune book reviews.

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What explains the hypocrisy of shrink-government speeches and expand-government policymaking? For Brown and Jacobs, it's rooted in a misreading of Adam Smith and other classical political economists. Smith wasn't the profit-obsessed, laissez-faire advocate that many of his current proponents make him out to be (in fact, Smith never even used the term "laissez faire"). Though he strongly supported markets, Smith feared that without some regulation, self-interest could "generate wasteful, expensive luxury, managerial inefficiencies and devious business practices that undermined competition." For much of American history, U.S. government regulation followed Smith's advice, waxing and waning as regulators strove for a delicate balance between capital and labor.

After the regulatory and spending peaks of the New Deal, World War II and the Great Society, a backlash arrived in the form of Friedman and his cohorts. They charged that government was an incompetent failure that had no business intervening in the economy. Even in its traditional spheres of influence, such as public education, government needed to get out of the way and let the market work its magic. Soon, these economists were whispering in the ears of mainstream Washington, which chose the simplistic "government bad, markets good" mantra over the more nuanced approach of old.

Private Abuse traces the way these market-utopian ideas played out in three areas: transportation, schools and health care. Though events and players are different, the cycle is the same. The free-marketeers define the problem as insufficient reliance on markets, then convince the legislature or government agency to widen the market and diminish government involvement. Eventually, the privatized institutions perform terribly, citizens complain and politicians send in bumbling government entities.

Public schools, for example, have long struggled to adequately teach all students, especially low-income children. The market utopians proposed that school districts should think of families not as recipients of a public service but as consumers of a marketed product. If the market let parent-consumers choose where to send their kids every day, competition would force schools to shape up.

Their theories became reality as cities like Milwaukee and Cleveland started offering vouchers to families, and a charter-school movement expanded from a handful of schools to thousands nationwide. Despite mixed (at best) evidence that these programs could effect positive change, it soon became conventional wisdom that they would work wonders. One 1990 book published by the Brookings Institution called vouchers a transformative "panacea" for schools.

The real-world results weren't promising. Cleveland created a program designed to allow city children to attend schools in an adjacent, suburban district — except none of those schools accepted any of the mainly poor and black students. And often, instead of pushing schools toward better teaching, competition moved them toward corporate-style public relations tactics to attract already high-achieving students. In more than a few cases, disaster struck: One of the country's largest operators of charter schools collapsed without warning, leaving 6,000 California schoolchildren scrambling to find an alternative and their parents "swearing and shouting."

A Darwinian marketplace creates both winners and losers, and the market failures and management abuses that result from unadulterated capitalism may not be so terrible when the worst that can happen is people pay a little extra for a television set. When one of those losses means a child gets no education — or, as in other cases, poor health care or no electricity — the market cannot correct itself quickly enough to sustain a society.

After privatization or public-private partnerships make things worse, Brown and Jacobs show, citizens clamor for big government to clean up the mess — at considerable taxpayer expense. Americans favor economic growth and fear a strong government — that is, unless we want Washington to bail out our bank, save our mortgage, protect us from toxic chemicals or step in to enact yet another special-interest regulation on cancer-causing tanning beds or diet pill producers.

The overall result is a "disconnect between a national narrative trumpeting small government and steadily increasing expectations of government."

At times, the authors use telling anecdotes, usually drawn from the popular press, to support their thesis. Yet too often, Brown, a public health professor at Columbia University, and Jacobs, director of the University of Minnesota's Center for the Study of Politics and Governance, fall back on the muddled phrases and circuitous sentences of academic writing. They do offer a much-needed reality check for anyone who believes the last four decades have succeeded in shrinking and simplifying government. Still, crucial questions remain unanswered: Are the politicians true believers, unknowingly making short-term mistakes that will catch up with us a decade from now? Or are they knowingly lying, claiming to shrink government on the stump while increasing it through pork-barrel spending and regulation to please constituents?

Understanding such motivations would make a considerable difference for any architect of a solution. The authors describe, in general terms, a reasonable middle ground between anti-statism and anti-capitalism, where government both performs more efficiently and better regulates the private sector. How exactly to strike that balance, though, they'll leave up to the men and women in charge.

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