The “New Rules” Economy, Part 2

Well, I’m about halfway through their policy paper. The progressives decided, before laying out their own policies, to critique those of the “neopopulists” (anti-immigration, pro-organized labor Democrats, it seems) and “conservatives” (mainstream Republicans). They lay out a nice, 10-page response to the neopopulists, complete with data, graphs, and logic. Then they went after the conservatives*, and gave conservatives little respect— “This section takes only a very brief look at these myths, since even among conservatives, there is a growing consensus that it is time for a new economic philosophy.” Where they got that, I don’t know. They’re saying that because Republicans are acting like Democrats, economic freedom doesn’t work?

But so be it. Let’s look at their two myths. The first, is “The Myth of Incompetent Government”:

President George W. Bush and a Republican Congress created the Medicare Part D program, arguably the largest expansion of the safety net in forty years. No Child Left Behind not only increased spending for public school education, but created the most extensive federal involvement in local education curricula ever. These measures passed less than ten years after then-Speaker Newt Gingrich pledged to allow Medicare to “wither on the vine” and to abolish the Department of Education.

Some forward-thinking conservatives have already outright rejected this myth and have frankly embraced big-government solutions. The health care proposals of Gov. Arnold Schwarzenegger of California and Gov. Mitt Romney of Massachusetts are two of the most prominent recent examples.

The conservative pillar of government-as-incompetent is a myth, because even conservatives no longer believe it themselves.

So they don’t ever claim that government is competent. They skirt the issue by claiming that Republican administrations aren’t cutting government as promised. Granted, they’re entirely right, and the past six years have proven it. Politicians who said government was incompetent were egotistical enough to believe that if they themselves controlled the policy levers, it would be competent. They were wrong. But this does nothing to address the “myth” of incompetent government.

Perhaps if they spent more time around The Liberty Papers, and the other libertarian sides of the blogosphere, they’d see the countless examples of government incompetence. They’d also see a lot of quotes like “Power corrupts; absolute power corrupts absolutely.” I, for example, don’t think the average person headed to Congress is evil or incompetent. I think the system itself provides incentives which cause bad results. It is why I don’t put much faith in the democratic process to fix the system. I don’t believe that if we just elect “our team”, we’ll fix it. Structural changes need to occur, and I don’t see any way that this will happen in the near term.

But moving on, we’ve got another myth to tackle, “The Myth of Infallible Markets”:

Trust, for example, is a significant benefit that accrues from standardizing transactions through regulation. It enables anonymous counterparties in disparate areas of the country or the world to sell millions or even billions of dollars in stock or assets to each other in the ordinary course of business. This extraordinary degree of confidence in the reliability of transactions is not a market creation. Rather, it results from the rule of law and the imposition of government regulations. In countries where the rule of law is weak, trust in the marketplace is often limited to business partners who are family or known associates. In a system such as ours where trust is more universally ingrained, the commercial network (and its attendant opportunities) is potentially infinite. This trust would not exist, however, without a mature statutory and regulatory framework and a strong legal system that ensures the enforcement of

I’d point out that a mature regulatory framework and the rule of law are not a package deal. One can certainly claim that without the SEC, our stock market would be “lawless chaos”. But I’m not so sure. The claim of most statists that without government providing programs, programs wouldn’t exist, is hardly proven. After all, we have a Better Business Bureau and Consumer Reports, as well as ISO certification, to help people and companies determine whether each other are trustworthy.

But the criticism of this paragraph goes deeper. A government regulatory scheme can exist without being an onerous, crippling force on the economy. In the absence of government, free-market regulatory schemes would undoubtedly spring up, and as with ISO certification, companies would choose to spend time and money complying with those [completely voluntary] schemes. What most conservatives demand is that we set an “efficient” level of regulation. I would posit that things such as Sarbanes-Oxley go far beyond “efficient”.


During the first decades of our country, farsighted leaders realized that markets alone would inhibit our growth. Treasury Secretary Alexander Hamilton championed the first national bank to provide needed liquidity to growing businesses. In this century, the creation of government-sponsored entities, like Fannie Mae and Freddie Mac, created liquidity in the mortgage market and broadened the availability of mortgage credit. As a result, homeownership is now attainable by the majority of Americans and has created trillions of dollars in wealth.

Ahh, yes, Fannie Mae. A government agency that may soon require a bailout, and which has Enron-style “accounting deficiencies”. All they do is allow banks to take on bad risk and sell that bad risk to the government, because investors expect that if Fannie Mae melts down, that the government will bail them out. And the national bank? Why don’t you use an example which currently exists?! After all, the financial markets and venture capital firms are doing a heck of a job to provide liquidity to growing businesses. If you really want to talk about providing liquidity to growing businesses, maybe the Small Business Administration might make more sense?


In the 19th century, New York State raised the then-enormous sum of $7 million to construct the Erie Canal to facilitate commerce from the Great Lakes to the Atlantic Ocean. The Erie Canal and other government infrastructure projects were the reason the North was economically superior to the South. In the 20th century, the interstate highway system and rural electrification expanded economic growth and spread prosperity to the general population.

Again, the assumption that without government, none of these projects would have occurred. Even allowing that, since when have conservatives objected to legitimate government infrastructure projects? There’s a reason the interstate system is known as the Eisenhower interstate system, and it’s because a Republican was its champion. There is debate within libertarian circles as to whether “public goods” such as a dam, a canal, or a highway should be government or privately owned, but no debate really exists within the mainstream conservative movement on the matter.

And, of course, to claim that “government infrastructure projects were the reason the North was economically superior to the South” is ludicrous. Rather, I would think that it’s more likely that climate and bad soil forced the North into manufacturing and shipping, where there are larger profit margins than agriculture.


The anti-trust laws of the last century broke up oil, steel, and transportation trusts that were stifling innovation. Most recently, the invention of the internet was as much due to government as private innovators. Public education and efforts such as the GI bill are largely responsible for creating the talented and innovative workforce we have today.

Again, the suggestion that without government, we would have rampant monopolies. But in the section on the “myths of neopopulism”, they bring up the myth of the “omnipotent corporation”. If the “omnipotent corporation” is a myth, perhaps we can agree that monopolies, when not enforced by the state, don’t require the state to solve? I would state that in a global economy, maybe these anti-trust laws should go the way of the National Bank?

I’ll give credit where it’s due for the internet, that was largely a government creation. The defense department and universities have long been hotbeds of research that trickles down to the rest of us. But I wouldn’t necessarily state that these things wouldn’t have occurred without government, as we can see with nanotechnology, which may be the next world-changing technology.

Last, public education may have created a class of docile workers, but I would definitely state that it hasn’t done a lot to truly educate individuals. Nor do I think, for a second, that it couldn’t be done better by the free market. The GI Bill is a benefit of employment, which allows the government to attract people to military service by offering a program only a fraction of the soldiers will make use of after their service. I view it no differently than my employer offering me health insurance, because they want to attract me to their job.

Last, we get to their conclusion of their critique of conservatism. Here they ascribe everything that occurs in the economy to the President, conveniently forgetting who was in Congress during these times.

During the years of President Reagan and the first and second Bush Administrations, average household incomes for the top five percent of households grew at an annual rate that was more than three times the rate for families in the middle three quintiles. Under 17 years of conservative economic rule, average yearly real income growth for the middle three income quintiles was a sluggish 0.4 percent compared to 1.3 percent for those in the top five percent.

During the eight Clinton years, the wealthy continued their upward march, growing by 2.2 percent per year, but the middle class also benefited greatly—a real growth rate of 1.6 percent per year and four times the rate of growth under conservative rule. From 1993 to 2001, the average household income for the middle three quintiles grew from $43,692 to $49,602—or nearly $6,000.36 The Clinton era was, in fact, the most prosperous period our nation has seen in modern times. It was brought about not by shrinking government’s role but by prudent policies—fiscal discipline, investments in human capital and openness to trade—that worked with the markets, not against them.

Reagan and George H.W. Bush had Democrat congresses to deal with. The reason they didn’t have any sort of fiscal discipline was that their Congress would not let them. Shortly after Clinton came into office, the “Republican Revolution” occurred, and Congress tightened the purse strings. Would Clinton’s universal health care, had the Democrat Congress been able to enact it, have retained fiscal discipline? I don’t think so. The Republican Congress knew that any program that they voted for would be a feather in Clinton’s cap, and thus refused to let him have anything. Unfortunately, when George W. Bush came into office, they then realized that any new program they voted for would be a feather in their own party’s cap, and started a rise of government at rates unprecedented since the days of LBJ. If anything, it’s an argument for divided government (particularly a fiscal-disciplinarian Republican Congress and a Democrat in the White House), not an argument against conservatism or for progressivism.

I would also point out, of course, that time since the mid-1990’s has been a time of incredible productivity growth as the personal computer and the internet reached maturity. What occurred was beyond the blame or credit of anything that government can offer. It was a fundamental change in the way that business gets done, and is ushering in changes in our society from top to bottom beyond that of even the rise of television. The rise of the personal computer and the internet is revolutionizing our society in a way similar to that of the automobile. This is evident partly by the fact that I can work from an office in my basement with almost no discernible reduction in my productivity as opposed to when I worked in the office with coworkers (in fact, I think I’m more productive). This wasn’t so easy 20 years ago.

So, as I pointed out, I’m now only halfway through the Thirdway policy paper about the “New Rules” economy. But in a matter of moments, I’ve seen their misrepresentations of the conservative economic philosophy in the only two places I’ve seen them address it. Once I get through their policy recommendations, I’m sure I’ll have a lot more to say.

* By “conservative” economic philosophy, its a philosophy which is rather liberal, in that it allows a maximum of economic freedom, and a minimum of government philosophy. I only use the word “conservative” because that is what the article– and general society– mistakenly use as a label.