Recently, a libertarian acquaintance on Facebook linked to this Forbes article to support his positions. Now getting an article on the Forbes website is not as hard as getting published in the print magazine. There are lots of ‘contributors’ with tenuous qualifications, but this author is an economics professor. So herewith is a casual fisking of his ideas.
1 – The government cannot create wealth, jobs, or income. Wrong.
The government can create money. You’d think an economics professor would know that. “Priming the pump” was the old phrase. Further, the government can be the most efficient employer for some services. We certainly don’t want multiple private armies, and military forces are one of the largest expenditures of the government. And in the end, fighting a war does create jobs – for soldiers. The private sector can never create those jobs.
Is this eventually paid for with debt? Yes, but that debt is paid with inflated money. The actual interest rate on the debt is the stated rate minus the inflation rate. This can be negative at times, and other times less than the economic multipliers of putting the money in circulation.
2 – Income inequality does not affect the economy. Wrong.
That poor people spend all of their income is a sign they have too little income. Rich people can put money into investments, but they also put money into assets with inflated values that are not productive. A billion dollars invested in bonds goes eventually to work. A billion dollars spent on houses and superyachts has a much smaller economic impact.
More importantly, the income spent by a poor person is working today. Even a bond investment only really starts working economically once the bond’s intended use is finished. Therefore the net present value of the income spent by the poor person has a larger effect than the bond investment.
Other forms of investment have even more remote connections to the economy. Only stock bought at the IPO will provide cash to the corporation to expand. All other stock market activity just moves money between investors.
3 – Low wages are not corporate exploitation. Wrong.
The author here (and in other places) assumes that there is always another employer, always someone else ready to make a deal. This is fantasy free market thinking. It derives from the ideal world invented by economists making “simplifying assumptions” in order to use calculus. These assumptions include the ideas that everyone has perfect information, that markets are frictionless (no transaction costs), that there are an infinite number of buyers and sellers, and that everyone has the same desire to maximize net present value.
“Greedy businesses cannot exploit workers because another greedy business would be happy to exploit them a little less until greed removed all the exploitation.”
In the real world, McDonalds and Walmart can hold coercive monopoly power in communities, demanding low wages. There is no “other greedy business” in a small town where Walmart has put the Main Street businesses out of business.
4 – Environmental regulation is a regressive tax. Wrong.
The poor suffer more from pollution than other classes. That means they benefit more from cleaning it up. Calling any spending that is not scaled to income a “regressive tax” is BS argumentation.
5 – Education is not a public good. Wrong.
The lasting benefits of invention and innovation go far beyond what the inventor is paid. Perhaps the author is not aware that patent rights lapse after 17 years. The invention and all of its benefits do not evaporate when that happens. Educating people creates benefits far greater than their earnings.
6 – High CEO pay is no worse than high entertainer pay. Wrong.
CEOs are not entertainers. People voluntarily pay ticket prices to see an entertainer. Shareholders expect profits, and high CEO salary directly cuts profits, often dramatically. Through ESOPs, 401(k)s, pension funds, and other vehicles many workers are shareholders in the company they work for and in much of the American economy. They have a right to those profits. The author seems to live in a world where the investor class and the working class do not intersect. Maybe in 1875, not today.
Shareholders, whether workers at the company or not, might see that paying all workers a higher salary rather than one person would attract better workers and make better products. But CEOs and the corporate compensation committee are sold on the Napoleon theory of corporate leadership – the ‘great man’ theory of history applied to business.
7 – Consumer spending is not what drives the economy. Wrong.
Even the author has to admit that consumer spending is 70% of the economy. That might be higher than optimal, but then consumer saving is needed. It is still consumer behavior – individual choice.
Further, consumer behavior is the driver of innovation. This has been true since at least the invention of the automobile. Supercomputers that predict the weather use graphics processors and so do Bitcoin miners. Why? Because of video games. Drones, for better or worse, are enabled by the technology of smartphones. Delivering high-quality web maps and driving directions led Google to map every street in the world, a key enabler of self-driving cars.
8 – Government programs are low quality. Wrong
The first question to ask would be ‘compared to what?’ Private infrastructure frequently collapsed and the firms went bankrupt, that is how the government wound up owning many roads, bridges, railroads, ports, etc. The main job of government is public health. We have gone from epidemics of cholera and polio to epidemics of obesity and opioid abuse. That is high-quality government work!
9 – The government cannot correct cosmic injustice.
No, but it can minimize the cost. The same as any insurance pool works by spreading risk and profit, social spending works for all of us. If a very sick child keeps their parent out of work, out of college – that affects the entire economy through lost productivity. Insurance companies don’t correct cosmic injustice. That hurricane, tornado, or earthquake really did happen. They just help our entire economy recover more quickly from the loss.
10 – There is no such thing as a free lunch. Wrong.
A free lunch is a positive net present value. Many investments have a positive NPV, otherwise, we wouldn’t make them. Public health, education, and infrastructure are exactly those kinds of things. We saw earlier that the fantasy free market drives many of the author’s conclusions. In the fantasy free market, there can be not positive NPV because the cost of any investment already includes any possible profits the investor could make from it. This is implied by the perfect information assumption.
It is sadly typical of libertarians I interact with that they believe the market can do no wrong. Buildings don’t collapse in India because the market is perfect. Buildings collapse because the market is imperfect, humans can be greedy, and we need help.
Competition is great. But there aren’t only players out on the field, there are umpires and referees, also. In major league baseball, there is a maximum of 13 players on the field and four umpires. American football has 22 players and seven officials on the field. In basketball, there are ten players and three referees. Complicated games, many rules – if we want fair play there have to be regulators, even in a sport. Or we could just let the Yankees win.