Wednesday, February 11, 2009

Escape from the Predator State

Frank Pasquale

Jack's post on the varieties of the big government experience reminds me of James Galbraith's book The Predator State: Why Conservatives Abandoned the Free Market and Why Liberals Should, Too. The book casts a harsh light on the last eight years of government malfeasance. It also provides some positive recommendations that should guide progressives.

Virtually everyone now recognizes that the state has a big role to play in any potential economic recovery. Texas Republican Randy Neugebauer wryly called the eight banks on the hot-seat today "TSEs," or taxpayer-supported entities, and said "I think we can call this a shareholders meeting." Gresham Barrett, a South Carolina Republican, asserted "You owe my constituents an explanation of how you got yourselves into this position and what you're doing with their money." But today's Congressional Canossa shouldn't lead anyone to believe that banking's superclass has learned the value of other people's money.

What would? When thinking about the future of finance, we should look at another sector utterly dependent on government subvention--health care. In exchange for paying at least 45% of the bills, the government imposes myriad conditions on providers in order to assure certain outcomes. I teach about these in my course on Health Care Finance and Regulation, and if the American people get their money's worth from the bailout, "Finance Industry Finance and Regulation" may be a topic for a future generation of law students.

In health care finance and regulation, the government's goals are relatively clear: raise quality, cut costs, and increase access. These goals are often in tension, but they provide guidance for policymakers. Those terrified of the n-word (nationalization) probably think that no similar goalposts exist for whatever government entity would guide the banks. However, Galbraith's book gives us some method for prioritization. The heterogeneity of the business community is key:

While the causes of occupational safety, consumer product safety, fair competition, living wages, and the environment have all enjoyed the backing of spirited and often effective public interest groups, these groups cannot by themselves account or take credit for the pervasiveness of the late-twentieth-century regulatory system.

Regulation emerged, reached its high point in the Nixon administration, and survived thereafter because a large part of the business community was prepared to support it. . . . In particular, regulation helps the competitive position of relatively advanced businesses by reducing or even eliminating the competition from backward enterprises that offset higher production costs with less safe factories[, services,] and products . . .

Galbraith argues that regulation has declined recently because of the rise of the "predator state," a "coalition of relentless opponents of the regulatory framework on which public purpose depends, with enterprises whose major lines of business compete with or encroach on the principal public functions of the enduring New Deal" (131). Rather than merely dismantle existing agencies, the predator state turns them to its own ends--for example, using the OCC (and a pliant Supreme Court) to eviscerate state regulation of subprime lending.

Many are suggesting that a Swedish-style clean-up may be the only way out of the current mess. The big impediment to "grasping the nettle" now appears to be a lack of a coherent sense of how government should use its new power. For Galbraith, the answer is clear: favor and fund the businesses that actually meet human needs sustainably, and deprioritize the ones that reliably generate negative externalities and treat their workers poorly.

Democrats face a stark choice. The realist/cynical alternative is to recognize the power of those who plundered and blundered into the current crisis, and to try to co-opt them into supporting progressive causes outside the financial sector. A movement that truly offered hope for a new politics would need to articulate alternatives to finance-driven capitalism. For now, perhaps the best hope for progressives is that such alternatives develop in the inevitably value-laden policy choices that TARP II entails.

[Comments Open at the Cross-Post at Concurring Opinions.]

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