Obama’s Pro-Market Economics
Obama’s Pro-Market Economics
Conservatives in Congress spin an alternate reality of government takeovers when in fact these reforms will ensure better quality, more choices, and competitive prices for consumers, writes Christian E. Weller.
Conservatives in Congress may not be good at coming up with solutions for real problems—they still support less supervision of Wall Street even after the consequences of conservative financial deregulation led to the U.S. housing crisis and the Great Recession—but they are at least creative. Americans find themselves constantly confronted with a conservative version of an alternate reality that has little to do with the actual facts. The latest example is their willful ignorance of actual policies that will improve the functioning of private markets in health care, financial services, and energy—something conservatives supposedly support.
Here’s what House Minority Leader John Boehner (R-OH) says on his website about progressive reforms under President Obama and the 112th Congress: “…[w]hat we cannot forgive…is 18 months of a ruling party in Washington that has sought to pulverize the private sector one government takeover at a time…” These comments completely misrepresent actual policies and their economic effects that have passed or are in the works.
Health care reform, financial regulation reform, and energy reform are the main pieces of legislation that are actually passed or in the works. All three will increase transparency and competition exactly in the private market segments that need them. Those who spin the tale of an antibusiness administration seem to have forgotten what they learned in basic economics classes. The textbook examples of market failures that require corrective action by (drum roll, please) the government are (hold your breath) health care, financial services, and energy. These markets do not work properly—they fail, in standard econ language—because businesses can gain an advantage over consumers and other businesses.
The technical term for this is monopolistic competition, but the all-too-real implication is that consumers pay too much and get too little of what they need. Health insurance premiums and denied claims, high financial service fees, too much speculation and too few small business loans, gouging at the pump and oil dependence (and now, a Gulf Coast disaster), are the real world reflections of dry, standard textbook economic problems.
The cure advocated by many economists—conservative and progressive alike—is to increase competition and thus reduce the specter of ugly and inefficient monopolies. Government regulation can increase competition through more transparency—specifically more information and better dissemination—and easier market entry for start-up businesses seeking to crack a protected market through subsidies of start-up costs for a new business venture. More information will make it easier for consumers to compare offers and thus will make it clearer how much they are paying for what they are getting and what they are not getting. Equally important is the government’s role in standard setting to ensure quality while maximizing price competition.
Some progressive economists do propose an alternative approach. They would prefer that the government, either the local, state, or federal government, provide these goods and services. Even conservative economists used to consider this a viable possibility in the extreme cases, where no amount of government action will ever create enough competition to deliver vital services in sufficient quantities and affordable prices. That’s why, for example, many utilities are still owned and operated by localities.
The Obama administration falls squarely into the increased competition camp with respect to all three markets. Health care reform increases the number of players in the health insurance market through state-level exchanges and invests heavily in more and better information for consumers through these exchanges and investments in health care information technology. More players and more information are the ingredients for a more competitive health insurance market that will serve consumers better with more health insurance options and thus more affordable health insurance. Health care reform also sets standards for the health insurance market on both the quality of services and the pricing power of health insurers, thereby leveling the playing field between consumers and health insurance companies.
Did I mention that this is textbook economics stuff?
Financial regulation reform is not any different. The biggest piece is more and better information for consumers and investors. Better informed consumers and investors can more easily compare financial products. The result is that banks will have to offer more of what consumers need, such as loans for small businesses, and less of what they don’t need, such as costly and risky investments. The Consumer Financial Protection Bureau will make sure that financial products are properly labeled and advertised to consumers, creating better-informed consumers. And the Financial Stability Oversight Board will collect more information on financial market activities to identify spots in the market where too much risk is building up, thereby providing better information to investors.
This financial legislation also sets minimum standards in the form of minimum capital requirements for most financial institutions to make sure they are indeed healthy and can live up to the financial promises they make to consumers and businesses, investors, and each other. Better information for investors and stronger capital requirements will create well-functioning financial markets and help to better allocate financial capital to all kinds of productive businesses, small and large. The Obama administration’s new financial regulation thus creates a more level playing field between Wall Street gamblers and all productive businesses.
Energy reform is on the table. It is also a centerpiece of the administration’s economic agenda. Energy markets are the standard textbook example of two market failures. The first is called externalities in economic parlance, whereby a firm unloads part of its production costs onto society and does not include them in the price of the product—such as the cost of not preparing for a deep-water drilling blowout (can you say “BP gulf gusher”?).
The second market failure is known as a tendency toward monopoly power, whereby one firm or a few large firms will inevitably corner the market because the start-up costs for any newcomer are too high. The Obama administration’s responses include better oversight and regulation of energy production so that companies cannot unload their production costs onto consumers and taxpayers alongside more investments in new energy technologies and energy efficiencies. More investments will reduce the market power of large energy producers such as BP by helping start-up companies enter new energy markets—wind, solar, and biofuels, among others—and thus increase competition in the energy market. The result will be a more diversified energy base for the U.S. economy, which in turn will make energy costs more predictable for businesses and thus enhance investment and growth.
The Obama administration did not embrace alternative progressive proposals, such as the public provision of health insurance, banking services, and energy. President Obama instead favors a level playing field between consumers and businesses through more and better information, greater competition among businesses, and consumer protections through minimum standards.
Conservatives in Congress could have found all of this in their intro micro textbook, if they had bothered to look. But they’d rather spend their time on fabricating an alternate reality that seeks to score political points but does not engage on the policy discussions that could actually strengthen our economy. The private market logic embedded in these legislative efforts does not stop conservative pundits from proclaiming that President Obama is antibusiness. Why let the facts that President Obama is actually pro-private market stand in the way of an otherwise appealing fiction? Most Americans won’t be fooled by their rhetoric, but still it’s a shame many of their most passionate supporters may well fall for it.
Christian E. Weller is a Senior Fellow at the Center for American Progress and associate professor, Department of Public Policy and Public Affairs, at the University of Massachusetts Boston
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Christian E. Weller