Compassionate Conservatives Meet the Free Market

Free-market economists are relearning a hard lesson—that conservatives, even or perhaps most particularly compassionate ones—are no devotees of market solutions to many of the problems governments face. Only the very young or the very innocent will be surprised to learn that, conservatives once in office, often find their philosophic and rhetorical devotion to free markets to be a practical inconvenience.

Richard Nixon thought that the way to cope with a misperforming macroeconomy was to fix prices and wages. George Bush the elder chose mandates over markets as a way to solve many problems ranging from cleaning up our air to providing decent access for the disabled to the workplace and public transport. He also thought it a good idea to plead with Arab sheiks to raise the price of oil when it threatened to fall so low as to threaten the livelihoods of marginal domestic producers. His son prefers a worldwide cartel as a price-raising instrument, in this case in the steel industry.

The current Bush administration is in that great tradition of conservatives who campaign to shrink government, and then find themselves interfering in markets to a considerably greater extent than they had ever imagined, or admitted, they would.

Start with areas in which market solutions suggest themselves to economists, but aren’t even on the radar screens of compassionate conservatives. One such is immigration. Government has a choice: quota systems of varying degrees of efficiency, or allocation of immigration permits by some sort of bidding system, with available visas going to those who most value and can afford them. This, says one of the leading students of immigration policy (George Borjas, Heaven’s Door: Immigration Policy and the American Economy, Princeton University Press, 1999) “would maximize the total gains accruing to those who immigrate to the United States and to the U.S. Treasury.” But, he notes, “despite the logical appeal and apparent benefits of the market approach, this type of proposal does not seem to go far in the political debate.” Certainly not with politicians of all persuasions whose vote-counting tells them that any such market-based system that might disfavor Hispanics requires a bit more courage than they can muster.

Nor does another market-based solution have much appeal. School vouchers, a system that includes market competition by schools for the custom of empowered parents and their kids, loses support as soon as its political proponents meet the reality of the financial clout of the teachers’ unions. George W. Bush expressed interest in and support for some sort of voucher system, and then backed down at the first whiff of opposition from Ted Kennedy and other apologists for those unions. Markets will do when it comes to talking the talk on the campaign trail, but not when it comes to walking the walk when in office.

“Affordable” Energy

But, you might say, it is unreasonable to expect even a conservative government to introduce such revolutionary, market-oriented policies in the fields of immigration and education, market approaches never having been tried in any significant way in the former, and perhaps being held in abeyance in the latter, while more centrally directed methods of improving educational standards are tried.

So let’s look at a field that touches fewer raw nerves, and in which markets have operated with considerable success for some time: energy. The administration recently unburdened itself of the latest in a long series of American energy policies, this version the product of the combined expertise of some of the best and the brightest energy mavens, led by Vice President Dick Cheney.

The policy team decided that it favors an adequate supply of “affordable” energy. Mark that word affordable. It is certainly no synonym for “determined in the market by the forces of supply and demand.” If prices are left free to respond to those forces; if those prices are competitively determined and incorporate all of the external costs of production and consumption; and if no subsidies are doled out to producers or consumers, any supply of energy will be adequate in the sense that it will provide all the energy that everyone is willing to buy at the prices set in the market.

Ah, but will it be “affordable”? That is a question for politicians. Prices can never be low enough to satisfy most politicians from consuming states, or high enough to satisfy inefficient producers, be they high-cost producers of oil and gas, subsidy-suckled producers of energy from renewable sources, or executives eager once again to build nuclear plants.

But only a retired (involuntarily, no doubt) Gosplan economist, or a failed Eastern European politician—both mercifully consigned to the dustbin of history—would confidently pursue the goal of “affordability” by setting energy prices below the market-dictated equilibrium level. If market prices are judged to be too high to be affordable by some chosen group, better to give them money—money to spend or not, as they wish—than directly to subsidize their energy consumption.

But, after opposing price controls for electricity in the West, where Californians were suffering from a shortage of capacity created in part by their unwillingness to allow new plants to be built, the administration once again retreated, this time in the face of opposition from California’s senators, supported by that post-Jeffords political powerhouse, the “moderate Republicans.” When the federal regulators capped electricity prices in the West, the administration professed itself satisfied since these were not price controls, it said, but “price mitigation” measures. Besides, the “mitigation” would be temporary—rather like the rent controls introduced in New York City during World War II and, more recently, in some California cities. They have yet to be repealed in either case.

There is worse. The market price of energy is too low to satisfy the administration’s desire to revive the nuclear power industry. Therefore, such plants are to be subsidized by having the government limit the liability of the operators of these facilities in the event of an accident. Such a step is necessary because the cost of adequate liability insurance in a free market would be higher than the nuclear-plant owners want to pay, and would drive up the cost of what is already an uneconomically costly technology.

Nuclear power, of course, is not the sole beneficiary of an energy policy that is in essence a program to repeal market forces. Would it be a good thing to have cars that run on fuels other than gasoline but are unlikely to be produced because they are unattractive to consumers? Subsidize research to bring their cost down. Would it be a good thing if consumers were to use less energy than they would by responding merely to what it costs to consume? Subsidize a host of energy conservation measures. Do we think that housewives are profligate in their use of energy? Force them to rely on front-loading (i.e., back-breaking) washing machines by eliminating top loaders from the market.

Dictating Outcomes

The retreat from market forces can be seen in policies even more fundamental than energy. Ours is supposed to be a meritocratic society in which everyone competes for fame and wealth in a free market—the proverbial “level playing field.” Indeed, if we find that some people are required, through no fault of their own, to carry extra weight in the race, we adopt policies to lighten their burdens, often through programs (affirmative action is one such) that conservatives find offensively preferential, or through means such as student loans, which allow the accumulation of intellectual capital that will earn dividends from which the loans can be repaid.

The notion of such free and open competition in the market for skills and talent is not one that wins favor with this or any other conservative administration. Instead of using government powers as they should be used—to set fair rules applicable with equal force to all, and let the chips fall where they may—the government eschews that role for one that allows it to dictate that the outcome further favor the already-favored. How? By attempting to repeal, or at least reduce, inheritance taxes.

Inheritors of the results of their parents’ hard work and good fortune already enter life with advantages, some of nature, some of nurture. The fact that they now can add to those advantages a greater share of the financial advantage conferred upon them—not by market-based rewards for drive, work, and initiative but by their luck in the sperm game—comes courtesy of conservatives who in other contexts swear fidelity to free markets.

None of this is to say that conservative governments should never take actions that impinge upon market mechanisms. Indeed, there are many policies that can improve how markets work. If producers and consumers of energy impose costs on society, it is the duty of government to see to it that those so-called externalities are reflected in market prices, by appropriate taxation or such other means as are most efficient. Or if a lack of information is preventing consumers from making optimally efficient choices, government can certainly fill the gap, perhaps by requiring the publication of health, unit price, and other information in instances where the costs of those programs are justified by their benefits.

Having taken such steps to improve the efficiency of markets, government then has two choices. It can let the interaction of consumers and producers create results satisfactory to both, with price as the mediating force. Or it can decide that it does not like the results produced by such market forces, and adopt measures designed to produce a different set of results.

These policies—and I paint here with the broadest of brushes—can attempt to reshape market results in either of two ways. One approach would be to supplement the purchasing power of those deemed by government to be too poor to acquire some standard of living that society sets as its minimum. This interferes with market forces to the extent that it takes from those who have been successful in selling their wares and time, and gives to those less successful folks who are deemed worthy of such assistance. The reduced incentive available to the winners can be justified on humanitarian grounds, or as an offset to the distortions created by repealing the inheritance tax, or as a cost that is offset by possible gains from a long-run increase in the productivity of the recipients of the income transfers.

Conservative governments often acquiesce in such transfers, in part because they know that efforts to roll back such income-transfer programs are more often than not doomed to failure if initiated by them. Better to leave such chores to the likes of Bill Clinton and his “new Democrats,” on the Nixon-to-China theory.

But conservative administrations also attempt to override market outcomes they do not like through efficiency-reducing subsidies, price controls, and regulations, as in the aforementioned case of energy. Worse still, they have little use for policies that attempt to preserve competitive markets. When a lower court decided that there is nothing wrong with American Airlines driving smaller competitors from the market by drastically cutting prices and swamping the threatened route with additional capacity and, having succeeded in that effort, then raising prices and withdrawing capacity, the administration preferred to let the matter rest. It was only because its new team at the Antitrust Division had to recuse itself and leave the decision to professional career staff that the decision was taken to appeal.

And when the appeals court upheld a lower court finding that Microsoft has violated the antitrust laws, the president’s spokesman rushed to the microphones to say that the president feels there is too much litigation in our society, a clear signal to the guilty company that a soft settlement might be in its future, and that it might be unleashed to continue the anticompetitive practices so thoroughly documented in the recent case.

But all is not gloom. Market economists live in a world in which our voices are not dispositive. That may be a good thing: there are, after all, noneconomic values worthy of consideration by politicians whose job is much more than making certain that price equals marginal cost in all markets. Economists can tell them what their scuppering of markets costs, but cannot definitively tell them whether the cost is worth bearing if it serves some goal that society deems loftier than economic efficiency.

Besides, we know, or should by now have learned, that the choice is not between politicians who support free markets at all times, and those who don’t. It is between politicians who incline toward market solutions, and those whose first instinct is to substitute their judgment for those of freely interacting buyers and sellers. That conservatives are in the former camp should be reason enough for devotees of free markets to march under their banner, on the theory that their voices are more likely to be heard more often in that company than in any other.