A Friendly Appeal to the Unconvinced

An excerpt from the conclusion of *Unbeatable*

Greeting from Narita, Japan! Here’s the final Unbeatable excerpt I’ll be releasing for a while.

Hope to see you in Northridge, California on June 19 for the meet-up.

[from: Conclusion: A Plea to the Free-Marketeers of the Future]

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If you’ve read this far, you don’t find my arguments are worthless. You must appreciate my candor and the economic way of thinking. But if you opposed free-market economics before you started the book, you probably still do. What more can I possibly say to win you over?[i] My best bet at this point is to walk through my central theses as I ask myself “Why would a thoughtful, economically literate individual continue to disagree?”

To start, I emphatically do not reject the theory of market failure. What I claim, rather, is that the standard theory of market failure is a reproach to all actually-existing governments. Why? Because no government on Earth competently uses standard textbook economics to diagnose social problems or prescribe evidence-based remedies. No government carefully measures externalities, then imposes taxes or subsidies equal in magnitude to the externalities, then leaves markets alone. In fact, the world’s leading governments rarely bother to get the sign of the externality right. The net externalities of immigration, housing, and nuclear power are all positive, yet governments’ standard response to all three is draconian repression. The net externalities of education are negative, yet every government on Earth heavily subsidizes it, fomenting severe credential inflation. These are all multi-trillion dollar failings.

So Dr. Pangloss is deeply wrong: The status quo is nowhere close to being the best of all possible worlds. The incurious response to this admission is to shrug, “So government intervention is counter-productive in some important ways. Instead of condemning government and praising free markets, let’s fix these specific shortcomings.” The curious response, in contrast, is to wonder: “Why does so much multi-trillion-dollar counter-productive government intervention persistently prevail?” Out of all the possible diagnoses, Social Desirability Bias is the most cogent. What other slogan approaches the insight of: “Markets do the good things that sound bad. Governments do the bad things that sound good”? The best cost-benefit analysis in the world wouldn’t convince Americans to open their border with Mexico, or San Franciscans to give skyscraper construction a green light. And while keyhole solutions could win over a few thoughtful opponents, solid majorities would roll their eyes. Why? Because the main determinant of policy is what sounds good, not cost-benefit analysis – and keyhole solutions sound bad.

Once you blame Social Desirability Bias for government failure, the idea of pragmatically fixing government’s specific shortcomings sounds like wishful thinking. The problem is not specific, but systemic. And so is the solution: If markets do the good things that sound bad and governments do the bad things that sound good, the only credible way to dramatically improve outcomes is to deprive government of power and let markets pick up the slack.

Truth be told, that’s optimistic. The pessimist who takes SDB seriously could fairly object: “There is no credible way to dramatically improve outcomes, because ‘depriving government of power and letting markets pick up the slack’ also sounds bad.” Yet this hardly excuses the tera-dollar failures of actually-existing government. Once you’re debating, “Laissez-faire is the only viable remedy for government failure” versus “There is no viable remedy for government failure,” you have embraced a momentous heresy: Laissez-faire would be better than the status quo. Even if you affirm, “An optimal government would be better than laissez-faire,” you have still apostatized from mainstream to free-market economics.

Apostacy hurts.[ii] Ideas give us a sense of meaning – and allies who share that sense of meaning. To abandon your ideas is to risk losing both meaning and allies. Which is why, after learning inconvenient truths, people often redefine the core tenets of their faith. Facing the harsh realities of actually-existing government, many mainstream economists, especially the left-leaning, replace “Government intervention improves market efficiency” with something like “Government intervention improves distribution” combined with “Distribution matters more than efficiency.”

But this strategic retreat fails, because actually-existing redistribution also grossly violates textbook prescriptions. No government on Earth surgically redistributes wealth from the very rich to the very poor. Four of the Biggest Losers are regressive. Restricting immigration is awful for the global poor. Restricting necessities like housing and energy, and stoking credential inflation, are bad for the domestic poor. Universal redistribution and health subsidies, too, may turn out to be regressive, because both categories heavily favor the elderly, and the gap in life expectancy between rich and poor has spiked in recent decades.[iii] Even if their net effect is progressive, such programs are terribly targeted, because most of the beneficiaries aren’t even relatively poor.[iv]

And to be candid, “Distribution matters more than efficiency” sounds suspiciously like Social Desirability Bias. Since equality varies widely across nations and within nations, anyone who earnestly values equality need not wait for their favorite politicians to decisively win the next national election. You can relocate without delay to a place where distribution is already unusually equal. In the United States, for example, the states with the lowest Gini coefficients are Utah, Idaho, Wyoming, South Dakota, and Alaska.[v] Yet almost no one – including vocal egalitarians – feels tempted to migrate to their exceptional equality. Migration to higher income, in stark contrast, is commonplace. “Distribution matters more than efficiency” is words; migration is action; and as usual, actions speak louder than words.

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[i] Cite Jason Furman thing from 2007?

[ii] Cite The God that Failed.

[iii] Auerbach et al. 2015 [book]

[iv] Cites

[v] https://en.wikipedia.org/wiki/List_of_U.S._states_and_territories_by_income_inequality