Making Markets Work

The dominant form of economic philosophy since the 1980’s has been the market system. The problem with this approach is that its advocates assume that the market always produces the most efficient solution to problems. If all of the costs and benefits of an action were included in the market process they might have a point. However, markets do not take many costs and benefits into account. These excluded items are called benefit and cost externalities.

An externality is any cost or benefit generated by a market action that is not embodied in the market’s decision making process. For example, in the past Texas considered Polio immunization to be a private benefit to the person vaccinated. As a result, many children were not vaccinated. This led to the external cost of having children in Texas exposed to Polio. As we all know, no vaccine is 100% effective. This means that some vaccinated children would contract Polio even though they were vaccinated. However, if all children had been vaccinated the probability of anyone contracting the disease and passing it on would have been very low. There is a societal benefit from universal vaccination that is not taken into account by the private market. Private markets would not have eliminated the scourge of Smallpox.

In addition, business does not include external costs in the cost of production. For example: An electrical utility using high sulfur coal to produce electricity in Ohio doesn’t include the cost of dead fish in the Adirondacks or the reduced life of a Pennsylvanian’s car finish in its production costs. These external costs are bourn by New York sportspeople and Pennsylvania car owners.

The problem is not that markets do not work. The problem is that as currently constructed there are too many externalities. Attacking markets will, to the average American, appear to be an attack on our very way of life. This approach will not get anyone anywhere in the modern world. There is a need to aim policies and attacks at improving markets by finding ways to internalize the externalities. Markets need to be modified to place external costs into the costs of production and external benefits need to be incorporated in a manner that makes sure that the benefits are realized

Workers Are Falling Behind

Economic Recovery has become the latest claim to fame of our NEOCON government. They point to official figures showing a growth in the country's output (GDP). They talk about growth in the number of jobs measured by the numbers of employees that employers are reporting. If you listen to the minions of the right you would believe that we live in what Dr. Panglos call "..the best of all possible worlds.."

However, the rose colored picture takes on a different light when we dig a little deeper into the recovery. on January 5th of this year the Morning Call of Allentown, PA reported that wages were not keeping up with inflation. This means that people's real ability to spend on goods and services is falling. How are they then able to maintain their living standards? The answer is simple: They are dipping into savings and they are going deeper into debt. In many instances people are using Home Equity credit lines to maintain their current consumption spending. They are in fact mortgaging their homes to buy movie tickets, eat out, buy Christmas gifts, and go on vacation. Our NEOCON leaders keep saying that being stake holders will allow people to have a better future. However, if that stake holding is mortgaged for current consumption the retirement years will be even bleaker than the proposed cuts in Social Security would warrant. Re-mortgaging means that people who should have had their homes paid for at retirement time, will still have to pay debt while they experiencing lower incomes due to retirement.
NEOCONS tell us about job growth. However, the employment figures do not say how many of the jobs are full time and how many are part time. Several months ago the Philadelphia NPR radio station had a morning program where the guests talked about the growth in jobs. A listener called the program to find out how the number of employed people were counted. He stated that he had four part-time jobs with 4 different employers in order to make a full time income. He asked: "...How many times am I counted in the employment figures..?" After hemming and hawing and trying to distract the listeners with comments about whether the listener was paid on a W-2 or a 1099, the right wing guest admitted that the statistics would count the listener as four employed people. Given this situation, is anybody rally able to say that the country is better off?

The NEOCON Nirvana has turned out to be the 19th century. Workers' requiring multiple jobs to make ends meet, multiple income households, and falling real wages are leading the U.S.A to third world status. The third world is a place where the rich get richer and "...to hell with everybody else..."

Wall Street Welfare

The NEOCON approach to Social Security is to tell us that the current surplus in the Social Security Trust Fund is irrelevant. To some extent they have a point. Whenever pensions are invested in the very organization that is issuing the pension you have what is called an unfunded plan. Since Social Security funds are invested in US Government Notes and Bonds we can say that Social Security is unfunded. That is why regular pension plans have a limit on the percentage that can be invested in the company sponsoring the plan. Bankruptcy would leave you without a pension if all you had was the company's guarantee or investment in the company's stocks and bonds. Look what happened to the ERON employees who kept their 401k money in ENRON stock.

Governments have an easier time of it when getting out from under their obligations. They merely need to change the law. If you want to get away from paying the debt to Social Security you merely need to declare that there is a crisis and tell people that they can do a better job investing their own money than government can. Then change the law. Unfortunately, many younger people who do not know history seem to fall for this argument.

Privatization can be called the "Wall Street and Corporate Welfare Act". It will help brokers, investment advisors, and current shareholders. In addition, placing government (Social Security) funds into the stock market will tend to raise stock prices. This would help firms with under funded pension plans meet their obligations through higher stock prices. It will also help top executives meet the goal of rising stock prices and increase their incentive compensation. People, on the other hand, could find that their investments are withering due to high transaction costs and fees. This is what happened when Chile converted its Social Security to private accounts.

Immigration and the Anti-Market Right

Time and again the NEOCON right asserts that they are the defenders of "Free Market" ideas and the left are anti- market socialists. However, the right's support of the "Guest Worker" program and other measures to bring in cheap foreign labor is about as anti-market as any policy can be.

The claim is "Americans won't do the jobs that foreign workers are willing to do." This is a fallicy. The truth is that Americans are not willing to do those jobs at the prices (wages rates) that the employers want to pay. In a free market, this imbalance of the quantity of labor supplied and the quantity of labor needed would be accomodated through rising wages. This higher wage rate would bring out more workers. However, because the businesses involved can make higher profits through low wage rates, they ignore the immigration and hiring laws. In fact, they lobby to make their illegal practices legal.

The right seems to believe in free markets only when it suits them. They constantly emphasize the efficiency of free markets. They claim that there are no external costs that the market can't handle. However, when the free market says that they need to raise wage rates, they claim that there is a need to ignore the marketplace and change our immigration laws.