If we want the market to serve the needs of the American people, we must remove the blinders of market reductivism and recover the tools of economic policy.


In unwitting homage to Congressman Barney Frank’s line that “government is simply the name we give to the things we choose to do together,”1Ross Douthat, “Government and Its Rivals,” The New York Times (January 28, 2012). Senator Pat Toomey recently defined “the market” as “just the name that we assign to the sum total of all the voluntary exchanges that occur every day by free men and women participating in a marketplace.”2Senator Pat Toomey, “In Defense of Capitalism,” speech delivered at The Heritage Foundation (March 11, 2020).

These equal and opposite platitudes share more than a formulation and a woeful inadequacy. Each represents, for the ideologues who adopt it, a comfortably absolute view of the world. If government is nothing more than voluntary collaboration, who could object? What challenge couldn’t benefit from choosing to do more together? Meanwhile, if the market is nothing more than the sum of voluntary exchanges, what cause might there be for concern? How could public policy improve upon choices freely made? Frank’s statist utopianism has its adherents, and may even be resurgent, but it has long been contested within the American left-of-center—at least since President Bill Clinton’s declaration that “the era of big government is over.”3Bill Clinton, State of the Union Address (January 23, 1996). The same cannot be said, unfortunately, for Toomey’s market reductivism.

The blinders that narrow his perception of the market are worn proudly across the American right-of-center, obscuring a proper view in one direction of what the market is, and in the other of what the market is for. Analysis of the market’s voluntary exchanges begins and ends with the personal, immediate, and question-begging formulation that they occur always because each participant believes it will be beneficial. Assessment of the market’s effect on society considers only the material living standards that it delivers.

This tunnel vision produces a truncated conception of economic policy’s scope and goals—in the same way that seeing baseball as just people throwing and catching a ball, while often technically accurate, would preclude appreciation of the game and render pointless concepts like a team, league, or commissioner. With “the market” reduced to voluntary exchanges between individuals on a quest to maximize consumption, the role for policymakers shrivels to the task of avoiding interference.

“It is impossible not to see the social, legal, historical, and institutional scaffolding that buttresses a growing economy, and the role that public policy must play in its construction and maintenance.”

In reality, the market is supported, shaped, and constrained by a variety of essential rules for intellectual property, employment relationships, monopolization, and so on. Its participants are guided in their behavior by vital institutions like schools, labor unions, and the military. Its exchanges, particularly when they operate as investment, proceed to support, shape, and constrain future exchanges. With blinders on, one might eagerly profess what Friedrich Hayek called “faith in the spontaneous forces of adjustment.”4F.A. Hayek, The Constitution of Liberty (1960). Take them off, and it is impossible not to see the social, legal, historical, and institutional scaffolding that buttresses a growing economy, and the role that public policy must play in its construction and maintenance. A protective instinct, and gratitude, for such structures should come naturally to conservatives.

Instead, guided by free-market dogma, policymakers have spent recent decades forsaking their obligations and celebrating a theoretical and oversimplified ideal. In parallel with an erosion of global leadership, declining productivity growth and dynamism, stagnating wages, and rising social dysfunction, the vital practice of economic policymaking has been lost. If we want the market to serve well the needs of the American people, we must first recover the tools necessary to shape it.

What the Market Is

Begin with a simple economic transaction: a farmer offers a laborer a wage to perform a day’s work and the laborer accepts; both believe the transaction will benefit them. This appears nearly the Platonic ideal of a “voluntary exchange” and so the sum total of all such exchanges should define the market. But which market? Is it the market in which the laborer is paid $40 per hour to operate laser-guided machinery, or the one where he earns $40 for an entire day spent picking by hand? The laborer may or may not have union representation. He may or may not even have legal permission to work in the country. He may be the only qualified laborer available, or he may be one of twenty loitering in a parking lot, hoping to find work that day. The farmer may be a sole proprietor, or the employee of a global conglomerate. He may hope to retain the laborer for permanent employment, or to find a better or cheaper option tomorrow. What year is this and what country are we in?

The content of the market’s transactions are contingent on the conditions in which they occur. Each exchange occurs against the substantive backdrop of law, institutions, accumulated capital, culture, technology, and is subject also to transitory conditions like the weather. Each exchange may be freely chosen, but none is inevitable, because under different conditions the parties might choose differently—or be different parties entirely. The farmer may not hire any laborers if a storm is passing through. But the rain does not deprive him of liberty, nor does it make his choice not to hire anyone less efficient than his choice on a sunny day to employ a team. The substantive backdrop shifts more gradually, but far more consequentially, leading for instance to new configurations of the entire agricultural sector—what farms exist where in America, how do they harvest, who does that work and why. No true result exists against which all others can be measured for distortion, because no one set of “free market” conditions exists to provide a baseline.

This is not an indictment of the market. To the contrary, its capacity to mediate between so many forces while deferring to countless individual preferences in a way that generates prosperity is precisely what makes it invaluable—both in principle and in practice. By allowing individuals to exercise choice, it protects liberty and limits the scope of government. By creating and transmitting information about people’s preferences in the face of extant conditions, and providing rewards for meeting people’s needs, it spurs productive activity and allocates resources efficiently.

For public policy, however, the implications of this broader perspective are immense. With blinders on, so that only the market’s exchanges are visible, economic policy might logically entail only tax policy that adds to or subtracts from those exchanges and regulation that constrains them. “As we are dealing with changes in our economy,” says Ambassador Nikki Haley, “tax cuts are always a good idea.”5Nikki Haley, @NikkiHaley on Twitter (March 10, 2020). Conservatives looking beyond those bounds confuse her—they “seem embarrassed by the free market,” and she sees their “hyphenated capitalism” as entailing “more tax credits here, more subsidies there, more mandates for this, more regulations for that.”6Nikki Haley, “This Is No Time to Go Wobbly on Capitalism,” The Wall Street Journal (February 26, 2020). Only those sites of policymaking seem relevant and, if an exchange is either free or unfree, policymakers can only impinge.

If markets encompass both voluntary exchanges and the conditions that influence those exchanges, and if a market’s outcomes are dictated by interaction between the two, then the scope of economic policy expands and an unwavering preference for non-intervention becomes arbitrary. Consider the law, institutions, accumulated capital, culture, and technology that might influence market transactions. Are markets more or less free when communities operate public schools? Are markets more or less efficient when NASA works on sending a man to the moon? These questions are almost nonsensical.

The narrow perspective fosters a conviction that minimal economic policy yields maximum output. Holding the market’s underlying conditions constant, it may generally be the case that interventions by policymakers in the market’s exchanges will reduce efficiency and growth. The claim that government action could be constructive might rightly seem suspect.

“Committing such acts of economic policy is not a crime against capitalism. It was a prerequisite to the emergence of capitalist systems; it is unavoidable to the task of governing them; and it will be vital to their continued success.”

With blinders off, the picture changes. Because market outcomes are contingent on impermanent conditions, the most efficient outcome under one set may not be the best result available. Raising taxes to fund basic research, for instance, might simultaneously reduce the market’s efficiency and improve its conditions such that the end result is higher growth. Requiring firms to manufacture domestically would obviously interfere with international transactions, but the policy would also influence domestic institutions, capital investments, the culture, and the trajectory of innovation. Whether the more constrained market operating under these new conditions would generate more growth than a less constrained one in the status quo has no easy answer.

As longtime Intel CEO Andy Grove warned about Silicon Valley’s hunt for profit without regard for conditions: “Our pursuit of our individual businesses, which often involves transferring manufacturing and a great deal of engineering out of the country, has hindered our ability to bring innovations to scale at home. Without scaling, we don’t just lose jobs — we lose our hold on new technologies. Losing the ability to scale will ultimately damage our capacity to innovate.”7Andy Grove, “How America Can Create Jobs,” Bloomberg Businessweek (July 1, 2010).

Policymakers most directly write the law, but their decisions also shape institutions, alter the flow of investments in both physical and human capital, and influence the directions in which culture and technology evolve. In all these ways, they affect the market’s exchanges and thus its outcomes and its benefits to the nation. Committing such acts of economic policy is not a crime against capitalism. It was a prerequisite to the emergence of capitalist systems; it is unavoidable to the task of governing them; and it will be vital to their continued success.

What the Market Is For

At what should a capitalist system succeed? The standard logic holds that the one true goal for economic policy is to maximize material living standards, which is accomplished by maximizing economic growth, which is accomplished by minimizing the interference of policymakers in the market. Living standards are important, and economic policy should strive to improve them. But only with blinders snapped firmly in place do they appear the only, or primary, concern for policymakers. In a recent survey by the American Enterprise Institute, four-in-five Americans deemed having “freedom of choice in how to live one’s life” and “a good family life” as essential to “the American Dream.”8Samuel J. Abrams et al., “AEI Survey on Community and Society: Social Capital, Civic Health, and Quality of Life in the United States,” American Enterprise Institute (2019). Fewer than half said the same of “a successful career” or “a better quality of life than your parents”; fewer than one-in-five saw “become wealthy” as essential. Pew Research reports that Americans asked to choose between “financial stability” and “moving up the income ladder” prefer the former by more than ten to one.9“Americans’ Financial Security: Perception and Reality,” The Pew Charitable Trusts (March 5, 2015).

There is no end to the range of concerns for which one might assert a national interest and require the market’s support. But just as the concept of a high and rising standard of living encapsulates countless specifics, other broad categories can help to summarize features of an economy that is serving the nation well, and thus establish the goals for economic policy. Defining and prioritizing among such categories is a critical task of the political process, though one that American politics regrettably has abdicated.

“Why shouldn’t we want our markets to produce a social order perceived as legitimate, to give people confidence in an expectation of equitable treatment, and thus to reinforce the social fabric?”

The list of top priorities should be among the axes that most starkly divide liberals and conservatives, explaining many of the differences in their respective agendas. For the conservative who sees established institutions and their practices as critical foundations for prosperity, prefers the private ordering of self-sufficient families and communities to the dependence of individuals on the state and its dictates, and perceives great risk in efforts to defy or reprogram human nature, these four outcomes would likely be important:

1. Security. A well-functioning economy supports the nation with the resources and capacity necessary to assert and defend its interests. This requires the tools for both the outward projection of force and the inward insulation from foreign coercion. To take a recent example, the country with perhaps the world’s highest living standard can still find itself with insufficient medical supplies and no ability to produce needed pharmaceuticals in a public health emergency. More generally, national security requires domestic capacity for a wide variety of materials and components if foreign supplies may be corrupted or subject to disruption in the event of a conflict.“Why can’t the greatest economy in the history of the world produce swabs, face masks and ventilators in adequate supply?” asked Larry Summers, former director of President Obama’s National Economic Council.10Lawrence H. Summers, @LHSummers on Twitter (March 21, 2020). The answer comes in part from his former colleague, Christina Romer, who chaired Obama’s Council of Economic Advisers and dismissed the idea of a “manufacturing policy” as a relic of “sentiment and history.” Romer argued that “American consumers value health care and haircuts as much as washing machines and hair dryers. And our earnings from exporting architectural plans for a building in Shanghai are as real as those from exporting cars to Canada.”11Christina D. Romer, “Do Manufacturers Need Special Treatment?” The New York Times (February 4, 2012). Whether piles of money can be stitched into effective personal protective equipment is another matter.

2. Resilience. A well-functioning economy maintains buffers like spare capacity, reserves, and stabilizers so that unpredictable events and temporary trends do not transform into unmanageable crises or trigger the collapse of entire industries or regions. It enables families to do the same, so that their savings allow them to make long-term plans, smooth rough patches for the household budget, launch a new venture, and prepare their children for success. Capitalism anticipates total failure for individual firms and makes owners accountable for their fates—indeed the process of “creative destruction” requires such failure. But for that process to be one that accrues to the nation’s benefit, it must operate alongside others that preserve stability and opportunity in the market so that disruption for customers, suppliers, and especially workers is temporary. Innovation always disrupts economically, but in a well-functioning economy it also yields tools and systems that insulate communities and protect people’s livelihoods.

3. Pluralism. A well-functioning economy generates broad-based and widespread prosperity that allows people of varied abilities in varied locations to both preserve their ways of life and pursue new opportunities, and raise children able to do the same. Many people are deeply rooted and value living in the communities where they grew up, often close to extended family. But the market’s preference for agglomeration tends to concentrate economic activity in narrow geographies, while its preference for scale and specialization favors the distant conglomerate over the local provider. Fewer than one-in-five mothers with children under four say that full-time work is their preference.12Robert VerBruggen and Wendy Wang, “The Real Housewives of America: Dad’s Income and Mom’s Work,” The Institute for Family Studies (January 2019). But the market’s commodification of relationships places enormous economic pressure on households to outsource care of children and the elderly. If the market is to serve the nation’s citizens and not the other way around, its quest for efficiency must be balanced by the assertion of more humane values.

4. Justice. The market’s performance at its core task of resource allocation must also be evaluated for its accordance with justice. While acknowledging that “the term has been hijacked by the left,” Senator Josh Hawley once observed in National Affairs:

The West’s greatest thinkers, no less than its major religious traditions, have insisted again and again on the centrality of justice. “Justice is the end of government,” James Madison wrote in Federalist No. 51. “It is the end of civil society.” Madison was echoing Aristotle, who argued that justice is the purpose of political community. Though today we often think of justice only in reference to crime and punishment, Aristotle understood that there is far more to justice than that: He contended that justice means arranging society in the right way, in accord with how humans are made and meant to live.13Joshua D. Hawley, “Rediscovering Justice,” National Affairs (Winter 2012).

This requires a labor market in which workers can find good jobs. People enjoy consumption, but they also place great importance on their roles as providers for their families and productive contributions to their communities. A key mechanism for ensuring rising material living standards has been the aggressive expansion of government transfer programs that send more than $1 trillion annually in cash and benefits to lower-income households. But a government check is not a replacement for a paycheck.

Likewise, while people do care about the size of their own houses, they care also about their status relative to others and whether all have received their just desserts. This is not only true as a description of human nature, but also eminently rational and reasonable as a set of concerns. Why shouldn’t we want our markets to produce a social order perceived as legitimate, to give people confidence in an expectation of equitable treatment, and thus to reinforce the social fabric?

These categories are not mutually exclusive. Resilience contributes to security and justice, pluralism to resilience, and so on. Often they are compatible with, or even reinforced by, rising material living standards. But in other cases they are not, and it is in managing the tensions and tradeoffs that politics and policymakers are indispensable. No evidence or theory suggests that the market will attempt to do this on its own, let alone arrive at a result we should want.

Making Markets Work

When the market fails to deliver on the nation’s goals, and especially when it undermines them, policymakers ought to examine how their choices influence the conditions in which the market is operating and to ask what different choices might be better. To do otherwise, and to deem any market outcome happening at any moment as sacrosanct and inevitable, is a dereliction of duty.

Historically, as Wells King observes in “Rediscovering a Genuine American System,” American policymakers understood this. With blinders on, the “economic policy” of the past can look backward and bizarre: aggressive tariffs and immigration restrictions, an income tax with punishingly high marginal rates, regulation ensuring that industries would serve unprofitable regions and prohibiting banks from operating multiple branches—surely a recipe for stagnation. But the nation’s major economic policies included the Louisiana Purchase and westward expansion, the American System with its protection of domestic industries and its investments in internal improvements, the land-grant colleges and the Homestead Act, trust-busting and electrification, the New Deal’s social insurance and the Wagner Act’s organizing rights, the G.I. Bill, the Interstate Highway System, and the Space Race. Leaders asked and answered the question of what could be, and used economic policy to pursue their vision, creating the conditions for a market that produced unprecedented prosperity, material and otherwise.

Today, we “Nudge.” Instead of pouring new foundations, we add new trim. The exception that proves the rule is the “Green New Deal,” a vague Democratic proposal so obscenely impractical and misaligned with American priorities that Nancy Pelosi, the Democratic Speaker of the House, dismissed it as “the green dream, or whatever they call it, nobody knows what it is.”14Chris Cillizza, “Nancy Pelosi just threw some serious shade at Alexandria Ocasio-Cortez’s ‘Green New Deal,’” CNN (February 8, 2019). The Senate voted it down 57-0 with 43 Democrats voting “Present.”15Dino Grandoni and Felicia Sonmez, “Senate defeats Green New Deal, as Democrats call vote a ‘sham,’” The Washington Post (March 26, 2019). More commonly, the left-of-center seeks expansions of the safety net to cover more of what the market already offers, while the right-of-center pounds the table for “occupational licensing reform.” But most of the time, we tweak the tax code.

Tax policy has gradually colonized the entire right-of-center domestic portfolio, offering broad-based cuts alongside targeted ones (dubbed “credits”) aimed at inducing whatever behavior might be desired. President George W. Bush called his 2001 tax cut “the first major achievement of a new era.”16David E. Sanger, “President’s Signature Turns Broad Tax Cut, and a Campaign Promise, Into Law,” The New York Times (June 8, 2001). The only major bill passed in President Donald Trump’s first term, with Republicans holding both houses of Congress, was a tax cut. The leading healthcare proposal is a tax credit. The leading education proposal is a tax credit; proposals to spur innovation, or manufacturing, or energy production are tax credits; family policy and anti-poverty policy both emphasize tax credits.

Technocratic progressives are not far behind. It was President Clinton who divided the White House Office of Policy Development into separate Economic and Domestic Policy Councils, the former invariably headed by an economist and focused on tax and budget issues, as if that were what “economic policy” meant. When President Barack Obama released his own “Plan for Jobs and Middle-Class Security” in 2012, the first proposal was a tax cut and the second combined elimination of a deduction with creation of a credit. Six of the next twelve were tax cuts or credits as well, all coming before the section on tax policy.17“A Plan for Jobs & Middle-Class Security,” Obama for America.

Reflecting on America’s inability to respond effectively to the 2020 coronavirus pandemic, entrepreneur and investor Marc Andreessen declared, “It’s Time to Build.”

We could have these things but we chose not to — specifically we chose not to have the mechanisms, the factories, the systems to make these things. We chose not to build. You don’t just see this smug complacency, this satisfaction with the status quo and the unwillingness to build, in the pandemic, or in healthcare generally. You see it throughout Western life, and specifically throughout American life. … We need to demand more of our political leaders, of our CEOs, our entrepreneurs, our investors. We need to demand more of our culture, of our society. And we need to demand more from one another.18Marc Andreessen, “It’s Time to Build,” Andreessen Horowitz.

Perhaps Andreessen’s vision is not the right one. But as he concludes, “Here’s a modest proposal to my critics. Instead of attacking my ideas of what to build, conceive your own!” At least the American people should have visions like his to choose from.

Whatever the vision, the tools for the job will not be yet more rounds of tax reform. The future of American economic policy lies in the creation of a modern American System, establishing the market conditions for an economy that supports our shared national goals. That system will require economic policy operating through four channels:

1. Institutions. Economic policy can shape the structure and foster the growth of institutions critical to the market’s operation. These include systems of public education and organized labor, the military, the safety net, and the family. Policy plays more central a role in some than in others, but all represent locations where public action has the potential to move the nation toward conditions in which the market will generate better outcomes. For example, an education system with the primary mission of connecting young people at the outset of adulthood to productive employment would make college just one of several pathways—and neither the most popular nor best funded among them.

2. Investments. Economic policy can direct public resources toward socially valuable ends and induce private actors to dedicate their resources to the same. Important targets for public spending include infrastructure, public health, and basic research. Direct subsidies, prizes, and commitments to purchase can all make private investment more attractive. Public-private partnerships represent a hybrid approach that presents private actors with the opportunity to collaborate on public projects. As Julius Krein observes in “Planning for When the Market Cannot,” when private actors lack the information or incentive to invest wisely on behalf of the nation’s interests, policymakers complement rather than impede the market’s operation by stepping forward.

3. Rules. Government regulations can strengthen the market by altering its conditions and directly mitigating socially harmful effects. Beyond basic legal structures like property and contract rights, patent law creates new rights that induce investment in innovation. Standard regulatory fields like environmental and employment law address externalities where the market outcome is not the efficient one and also intervene where economically efficient activities may have consequences that frustrate equally valid but non-economic goals. Network and utility regulation enable natural monopolies to operate well, while antitrust enforcement disables counterproductive market concentration. Trade restrictions prevent foreign markets from transmitting their distortions and abuses into our own.

4. Public Finances. Fiscal and monetary policy affect the context in which consumers and investors make their decisions and policymakers must approach them with blinders off and proper objectives in focus. The design of any tax system entails choices that affect the relative attractiveness of different economic activities. Likewise, setting monetary policy, and managing its tradeoffs, is unavoidable. And government spending, wherever it occurs, by definition diverts resources from where the market might otherwise allocate them. What policymakers must not do is obsess over these questions to the exclusion of all others, or perceive every economic challenge as a nail awaiting the hammer of taxing and spending.

A question remains whether policymakers are capable of drawing on these robust fields to pursue ambitious goals. They may not be capable of setting useful goals, identifying appropriate policies, or implementing them. The political process might frustrate the translation of even the best ideas into tangible action. Unintended consequences abound.

“To deem any market outcome happening at any moment as sacrosanct and inevitable, is a dereliction of duty.”

Unfortunately, these concerns are often raised as an obstruction tactic. Without question, the concerns themselves are real, and a policymaker should always proceed with caution and humility. But many of the voices loudest in raising the alarm fall silent when focus turns to their preferred topic of tax reform. It would be hard to conceive of a policy initiative more perfectly vulnerable to political manipulation, industry capture, simple error, unintended consequences, and all the rest than rewriting the tax code. Yet those most certain that any government action is doomed to failure tend also to be the most eager to tolerate the risk if a tax cut may be in the offing.

In weighing concerns of policy misfire, the critical question is: compared to what? If the status quo were an idyllic, well-functioning system, the risks of tampering would indeed be high. But the baseline against which any new policy must be judged is an environment that emerged under these same constraints, except that it did so with the wrong understanding of the market, using the wrong tools, and aiming for the wrong target. Even in areas where government is purportedly not acting already, the non-action was itself chosen by policymakers and is often beset with exceptions; it too triggers unintended consequences. When an opportunity exists to apply better assumptions to better goals, we should take it.

Read My Lips: No New Tax Plans

Grover Norquist’s infamous “Taxpayer Protection Pledge” asks candidates to promise they will oppose all efforts to raise taxes. Perhaps the first step toward effective economic policy should be a new, simpler pledge: “I will not talk about taxes until 2030.” No increases, no cuts, no credits, no deductions. No simplifications, no fair shares paid, no filing on a postcard. An exception could be permitted for any broad-based increases necessary to fund new spending.

As the old joke goes, ask a roomful of economists how to expand access to books and they will develop all manner of means-tested book-buying subsidies. Those on the right-of-center might suggest accelerated expensing of commercial book-shelving, or a licensing waiver to help bookbinders move across state lines. None would consider the idea of a public library.

What would we talk about, if forced to think about the levers of public power available to shape economic outcomes? Once upon a time, American statesmen had those debates, as well as the confidence to set national goals, make demands of the nation’s economy, and establish public policies that led to their fulfillment. The American System and its progeny, and unparalleled prosperity, were the happy result. If we allow ourselves to set goals, and to orient our institutions, investments, and rules toward meeting them, we can carry that tradition forward.

Oren Cass
Oren Cass is chief economist at American Compass.
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