President Barack Obama recently extolled the virtues of what he called “middle-class economics” or “the idea that this country does best when everyone gets their fair shot, everyone does their fair share, and everyone plays by the same set of rules.” The president is on to something.
Ours is not a country where everyone plays by the same set of economic rules. Many longstanding federal and state policies privilege some businesses and not others. This tilted playing field isn’t just unfair; it’s grossly inefficient. It undermines competition, discourages innovation, and prompts businesses to expend billions of dollars in socially wasteful efforts to win the favor of politicians. But it need not be this way.
A serious agenda to level the economic playing field appeals to both the progressive impulse to stick up for the powerless and the conservative urge to check government’s scope and power. The president and Congress will soon deliver more detailed agendas. Here are three ways they could level the economic playing field:
End corporate bailouts. The first time the federal government rescued a single private company (Lockheed Aircraft) was in 1971. It bailed out a railroad and Chrysler by the end of the ‘70s; Continental Illinois National Bank in the ‘80s; and the savings-and-loans in the late 1980s/early-'90s. But the big bailouts came in 2008-09 when the government rescued hundreds of insurance companies, financial institutions and auto manufacturers. These bailouts give corporations the (correct) impression that politicians in Washington will rescue them if they get into trouble. That encourages risky behavior, making bailouts a self-fulfilling prophecy.
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The Dodd-Frank regulatory overhaul may have strengthened this perception by directing the Federal Reserve to designate certain firms “systemically important financial institutions,” broadcasting the federal government’s belief that these firms are important enough to save. A good first step would be to repeal this designation.
A next step could be a constitutional amendment prohibiting bailouts. With the knowledge that they alone bear the costs of their mistakes, firms would be more prudent, and the entire financial system would be more secure.
End trade protectionism. Scientific consensus can be elusive. But the closest we get in economics is the consensus view that barriers to trade are bad for an economy. Tariffs, quotas, and domestic subsidies stand in the way of competition, of lower prices, and of higher standards of living. These barriers pad the pockets of a few favored firms at the expense of millions of consumers and businesses who must pay more for the protected products.
The typical congressperson is generally in favor of freer trade but wants to make exceptions for hometown industries. For the better part of a century, the way to get around congressional parochialism has been to give the president “fast track” trade negotiating authority: Congress lets the president negotiate trade agreements and agrees to simply vote up or down without amendments. Democrats first came up with this idea. They should embrace it once again.
Congress can end protectionism in other ways. They could start by letting the Export-Import Bank’s authorization expire this summer. Taxpayers shouldn’t guarantee a loan that J.P. Morgan makes to Air India to buy a Boeing. Then-Senator Obama was right to call this corporate welfare, and he is wrong to have abandoned that view.
Eliminate the grab bag of subsidies to agribusiness. Everyone loves farmers. Many of us have some in the family. But that’s no reason to favor them with special privileges, especially since the average farm household makes 53 percent more than the average U.S. household. But agribusinesses enjoys a host of special privileges: price supports, tariffs, quotas, insurance subsidies, overseas marketing subsidies, and favorable tax treatment.
All of this should go.
There’s much more. Congress could end both traditional and “green” energy subsidies; it could reform corporate taxes by closing loopholes; and it could shut down programs that promote specific industries like tourism, shipping, and air travel.
It’s easy to oppose “special interest” politics. It’s much harder to get down to specifics and recommend that particular programs go. With a detailed and specific agenda to level the playing field, we could turn the president’s words into deeds.
Matthew Mitchell is a senior research fellow and director of the Project for the Study of American Capitalism with the Mercatus Center at George Mason University, where he is also an adjunct professor of economics. He can be reached at email@example.com.