Myth of the Liberal Nanny State

Our economic arrangements, and the political discourse that supports them, balance precariously on some deeply held myths.

Among the most fanciful is the notion that conservatives are self-reliant actors who embrace a private sector free from government meddling. Supposedly, the right is content to take on the free-market with strength and skill, and let the chips fall where they may, while liberals look to the state to be their protective nanny, there to iron out the wrinkles of a dynamic, entrepreneurial society.

It's a "zombie lie" -- no matter how many times you shoot it in the face, it keeps coming back to haunt you.

But economist Dean Baker, co-director of the Center for Economic and Policy Research, is trying his best to knock it down. Baker knows what the phrase "free market" really means, and in his new book, The Conservative Nanny State (which you can purchase in paperback or download as an e-book free of charge), he lays waste to the notion that American conservatives embrace anything resembling a truly free market. In fact, they're perverse Marxists, using heavy-handed government intervention to redistribute wealth upward.

I recently caught up with Baker at his Washington, D.C., offices to get the scoop on The Conservative Nanny State.

Joshua Holland: Your book cuts right to the heart of one of the most cherished myths of conservative philosophy. You say that conservatives are not, in fact, self-reliant fans of free-markets. Lay out your thesis in a nutshell.

Dean Baker: Well that's the stereotype -- that conservatives are willing to take the hard knocks when they come -- but in my book I argue that what the conservatives have done is they've rigged the deck. They've made sure that certain people come out ahead, that income flows upward, and that other people are put at a disadvantage -- and these things are built into the rules of the system. And then what they want to do -- in talking about "free markets" -- is they want to kick back and say, "No, no, no; those are the rules, and we can't talk about them." They don't want to talk about how the deck is rigged; they want us to fight over the small scraps.

Holland: That's a good segue. You made a point about how our economic arrangements are considered part of a natural system. And you say that when it comes to markets, nanny-state conservatives are all "creationists" and adherents of "intelligent design." What do you mean by that?

Baker: Well, you go through a list of policies, and they want to act like the way the market works today -- the way the economy's structured -- that it's simply the natural course of things. They didn't do it; it just evolved that way. And what I'm trying to argue is that they did do it.

And let's just get into some concrete examples. Take trade -- they've managed to frame the debate beautifully. They're for free trade. They want to compete in the world economy, and if you're a loser, you should get better skills or get more education. Maybe we'll throw you a bone here or there, but it's basically your problem if you can't compete.

But the truth is, we carefully structured these trade agreements -- we put great effort into it -- to put our manufacturing workers into competition with manufacturing workers in developing nations. That meant going to these places and asking: What kind of problems does General Motors face if they want to set up a manufacturing plant in Mexico or Malaysia or China? What can we do to make it as easy as possible? That means that they know they can set up their factory and not have it nationalized, not have restrictions on repatriating profits, etc. Then they need to be able to import the goods back into the United States, and that means not only making sure there are no tariffs or quotas, but also that there's no safety or environmental restrictions that might keep the goods out.

Now what they could have done -- and this would have been a true free trade policy -- they could have said, "Look, there are a lot of very smart people in Mexico and China and India. And they can be doctors, lawyers, accountants and economists, and they would drive down costs in those areas enormously." We'd get our health care for much, much less -- we'd save hundreds of billions of dollars per year -- our college tuition would fall, because we'd pay college professors much less. We could make the whole thing transparent -- set up standards to make sure that we get the same quality of doctors.

Enormous savings for the United States -- a great free trade story -- but instead of putting downward pressure on the wages of our auto workers, we'd be putting downward pressure on the wages of our highest earners. If we brought our wage structure for doctors just down to European levels, you'd be talking about saving $80 billion per year. That's a big chunk of our health care bill right there. But no one talks about that, and that's a classic example of framing the debate about what "free" trade is.

Holland: How does that compare with the projected gains from NAFTA, for example?

Baker: If you look at honest projections, you're talking about gains of maybe $10 billion per year.

Holland: So eight times the benefits?

Baker: Yeah.

Holland: You think that liberals shouldn't shy away from markets, just that we have to point out how the "conservative nanny state" has rigged the game. Explain.

Baker: The way a lot of liberals approach policy is that they take the current market situation as a given. But if you look at the last quarter century, we've had pretty good growth -- not outstanding, but pretty healthy growth -- and the vast majority of those gains have gone to those at the high end. If you look at incomes in the middle, there have been very modest gains; most of the income has flown upwards. So what a lot of liberals do is they say, "OK, let's see what we can do to redistribute those gains. So let's institute an earned-income tax credit. Let's increase the minimum wage."

I support those things too, so I don't mean to trash those policies, but my point is that it's much, much harder to tax money away from people and redistribute it than it is to structure rules so the income doesn't all go upwards. So we made a mistake of focusing on redistribution after the fact instead of getting into the battle and asking if we can have different rules and better rules. We aren't against the market -- I make the analogy about the wheel. We don't want to get rid of the wheel -- but instead of letting the conservatives shape the market so that income flows up, let's restructure it so that we share in the gains, or even so that more benefits flow to the bottom.

Holland: Progressives going after the conservative free-market mythology often point to obvious ways the right intervenes in the private sector-- things like corporate welfare. But you talk about less obvious examples of big-government intervention, so let's get into some examples. Why is so-called "tort-reform" a big-government policy?

Baker: First, let me just be clear about what the issue of torts is about. When a corporation or an individual does us harm, torts are there to give us an opportunity to collect damages. That's not a liberal principle, that's actually a conservative principle. It's saying: "We're holding people accountable for their actions. People are responsible for the damage that they cause." And what's happened in the past two, three decades is there have been a lot of cases where you've had individual or class-action suits against corporations, saying, "You've caused us harm." Tort suits -- you can look at the tobacco suits …

Holland: Or asbestos …

Baker: Another good example … Tort suits -- like when an industry knows the damage they're doing, and they conceal evidence that showed they were causing damage. So a conservative who believes in limited government should say, "OK, you're responsible, you pay for the harm you cause." What we've had is these corporations running to Congress and saying, "This is abusive. These people are making us pay too much, and you have to make it more difficult for people to sue."

And that's what tort reform is all about. It's to throw up obstacles and make it harder for people to sue, and one way they do that is by making it harder for people to get lawyers. One item in their tort reform proposals that's a good example of market intervention are all these restrictions on the kind of contracts that I can sign with a lawyer to represent me. They say that a lawyer can get a maximum contingency fee of 30 percent. Now a true free-market conservative would say that's up to me. If I want to give the lawyer 80 percent of my settlement, that's my business.

And, as a practical matter, what the conservatives are trying to do is make it impossible to get a lawyer because most people can't afford to pay for a lawyer upfront, and there are high costs going up against these well-funded corporate lawyers.

Holland: And in terms of tightening up bankruptcy: Isn't it a function of the state to help enforce contracts -- I mean even real libertarians would agree. But you say it was a form of nanny-statism -- if you will -- the way the Congress approached it last year.

Baker: The story here is that you and I sign a contract, and you owe me so much money. OK, so that's between you and me. Then we set up rules about what happens if you don't pay. Historically, most loans were attached to specific pieces of property -- most commonly land or a house -- so it was fairly straightforward what would happen if you didn't pay -- if you fall behind, I go to court and the judge says, "OK, give him the deed to the house," and it's settled.

Now what's happened is that we've seen an explosion in debt that isn't attached to a home or a car or whatever -- mostly credit card debt -- and that's harder to collect. The market story is that, as a lender, I'm supposed to be able to evaluate risk. I'm the credit card company. It's a market economy, and some people are good at evaluating risk and others are bad at it. If I'm bad at it and I give loans to a lot of people who aren't able to pay, well, bad luck for me. I'm out of business or I take the loss, and those who are good at it are rewarded.

What happened instead was you had the credit card companies running to Congress and saying, "Hey, a lot of people aren't paying their bills." As a practical matter, it turns out, the main reason people aren't paying their bills is they lost their jobs or had big medical bills -- things like that. But aside from that, what the creditors were saying is that they wanted Congress to chase after these people. They don't ever want them off the hook; they want the government to monitor their earnings for 10 or 20 years and deduct money from their paychecks all because they made bad loans. That's big government.

Holland: Now, I think I found an error in your book.

Baker: Uh-oh.

Holland: You say that corporations are some kind of government-created entity, but I think in Genesis it goes Adam, then Eve, then something about an apple tree and then … GM, right?

Baker: Exactly, right there in the Bible. It's, again, another one of those areas where progressives have just been out to lunch in the sense that the whole corporate structure is a creation of the government. You and I can negotiate contracts. We can have a partnership and do business, but only the government can make that into a separate legal entity, and there are important privileges that go with that entity -- most importantly limited liability.

An obvious example in the news is Enron. When Enron went out of business, they owed a lot of people money, and to the extent that they had assets, some people collected. But you couldn't go to the individual shareholders and say, "You owned Enron stock, I want your house, I want your bank account, you owe me." That's limited liability, It's what a corporation does, and it doesn't exist in a state of nature.

The point here is that this is, in effect, a special privilege, and the government has the right to make rules about those receiving that privilege. You don't have to form a corporation if you don't like the rules; many people do prefer partnerships to corporations.

One of the points I make is that there's been a serious problem with corporate accountability that's been seen, most obviously, in CEO pay, which goes into the tens and sometimes the hundreds of millions. Now, you don't see that in Europe or Japan. Their CEOs are very well paid, but they don't go away with, you know, salaries of 20 million or a hundred million like we've seen here in the U.S.

Holland: About 250 times that of the worker at the bottom.

Baker: Yeah, and you could go the route, as some people have suggested, of having the government put a cap on it, but what I say is: Well, why don't we just change the rules to make it more difficult for these CEOs to get this money? What I suggest in the book is simply sending out proposed CEO pay packages to a shareholder vote -- it could be every year; it could be every few years, whatever.

Now the way shareholder votes work now is the deck is hugely stacked in the CEO's favor, so suppose you changed the rules and required CEOs' pay packages had to go out to the shareholders for a regular fair vote? My guess is that you'd see a lot lower CEO pay.

Holland: Let me go away from the book for one question. You analyze economic reporting on your blog, Beat the Press, which I read every day. And, among the expected slips, you find some really egregious reporting errors, all of which seem to go in one direction ideologically. But you always say that it's laziness. You wonder why don't they have better fact-checking. Does it ever occur to you that they might just be big, fat dirty liars who know exactly what they're saying is false?

Baker: Yeah, well, I try my best to refrain, both for my own mental health and because it doesn't help to call anyone a liar. So I'll credit them for being sloppy, for making mistakes, but I'd prefer to just point out the mistakes and ask for corrections. What I'm inclined to think, when I see really silly reporting is that you have reporters make mistakes, and the editors don't scrutinize the figures when the mistakes track with their preconceived notions about how the economy works.

So, one recent example was the Washington Post reporting that since NAFTA passed, Mexico had seen annual growth of 17 percent -- which would make it the fastest growing country in the history of the world. And because editors were inclined to believe that Mexico had experienced rapid growth -- the Washington Post supports NAFTA and probably most of the editors do too -- they didn't scrutinize it and see that it was absolute nonsense. What I will say is that we've tried hard -- and continue to try -- to get them to correct it, but they haven't.

And I think in terms of correcting the record, there's a very serious problem of bias because if, for example, they had done the opposite and someone from the Bush administration called and said, "Hey, you understated Mexico's growth under NAFTA," my guess is the correction would have appeared the next day. And remember, this is archived -- the article appears on Lexis-Nexis and comes up on searches.

Holland: Last question. You wrote: "Many progressives even use the phrase 'market fundamentalist' as a term of derision directed against conservatives. Such attacks must delight the intellectual defenders of the conservative nanny state." You want us to refrain from validating their arguments. But you don't really get into how we should be discussing these issues.

Baker: I think the main thing is that we have to get in there and fight over the definitions of the market, because when we say they're "market fundamentalists," we're acting like they're willing to accept market outcomes. And when we do that, we've already given away the store; we've let them set the rules of the market and determine how income's going to flow, and that leaves us fighting over the crumbs.

What I want to do is point out all the places where they've intervened in the market, and then open those areas up for discussion -- I think we need to get in and fight over the rules. I talk in the book about how the Fed impacts employment, how we structure rules on corporations, how we come up with tax rules, and trade policy, I talk about intellectual property -- tremendously important in the economy -- the point is to call attention to all the places the government is intervening today, not all of which are bad by any means, but let's talk about it. Let's sit down and acknowledge that they want the government to intervene in the markets and debate how best to structure that intervention so that it works for everyone.

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