The Future of Markets
May 29, 2009
In the midst of the worst recession since the 1930s, countries around the world are reexamining whether governments should play a bigger role in the economy. The debate is centered on two visions of capitalism: the Anglo-Saxon model that mainly relies on competition, and the government-directed French model that protects individual companies and labor, said Gary Becker, University Professor of Economics and of Sociology.
Becker was part of a special panel of economists who shared their views on “The Future of Markets,” at the Chicago Booth’s 57th annual Management Conference at the Sheraton Chicago on May 29. Ray Suarez, senior correspondent of The News Hour on PBS, moderated the panel.
That the U.S. government has taken a substantial stake in private companies as well as introduced proposals to spread the importance of unions and change the thrust of antitrust policy is something that Becker finds worrying. “The belief that the French model is better than the Anglo-Saxon model is just inconsistent with the data,” said Becker. He cites enormous differences in GDP growth and in the overall and youth unemployment rates of the United States, Great Britain, and France between 1990 and 2007, which favor the more free market economies of the U.S. and Great Britain.
Economic growth is vital for improving living standards over time. “Your bread is really buttered by growth,” said Kevin Murphy, George J. Stigler Distinguished Service Professor of Economics. That’s why Murphy is concerned that the U.S. government is moving toward policies that reduce incentives to invest in physical and human capital and that impede innovation and the movement of resources-all key ingredients to growth.
“The kinds of changes that have been talked about--reregulation, tighter antitrust policy, limits on compensation--they run the risk of slowing down that long-run engine of growth,” said Murphy. “While markets can cause short-run fluctuations, they are far and away the best tool we have for providing long-term growth for the United States and the rest of the world.”
People have lost faith in markets as a result of business’s excesses, which makes it easier to accept a more active government. However, Raghuram Rajan, Eric J. Gleacher Distinguished Service Professor of Finance, says that it was, in fact, government policies that contributed tremendously to rising asset prices and the relaxation of credit conditions leading up to the crisis. “Clearly, a lot of the blame belongs to the private sector, but we don’t turn around and blame the regulators,” said Rajan. “When we regulate, we’re going to find that the same old forces that were responsible for the move up will actually get more power in this process.”
Accommodative policies in the United States were put in place to compensate for the relatively stagnant wages of low-skilled workers who would have otherwise been unhappy to see so much growth going on and yet were unable to participate. The overall objective of helping those who are left behind is laudable, but when the government starts remaking the economy, the details of the proposed solutions matter, said Rajan. For instance, redistribution is one way to improve the fortunes of this group, but with adverse consequences to productivity. Another way is to increase productivity by improving the capabilities of low-skilled workers through better education, which will likely involve tackling the unions that are a big part of the problem in education.
Steven Kaplan, Neubauer Family Professor of Entrepreneurship and Finance, thinks that the government should stick to market-oriented solutions when intervening. But that’s not what he see is happening in the present administration and Congress. “They're interpreting the anger that is out there as a mandate to redistribute,” said Kaplan. For instance, CEOs get a lot of criticism for the enormous amounts that they are paid. But whether CEOs deserve their pay or not, the panelists agree that limiting pay or letting the governments decide what pay should be is a bad idea.
But Marianne Bertrand, Fred G. Steingraber/A. T. Kearney Professor of Economics, thinks that competitive markets are unable to undo some of the mistakes that people seem to keep on making, for instance, when choosing a mortgage or buying insurance. Consequently, there may be room for putting measures in place that can help people make such complex choices. Bertrand also is concerned that there are very few safety nets built into the system. Although she acknowledges that having safety nets can undermine long-term growth, there are other important indicators of well-being such as minimizing feelings of insecurity. “In my mind, there is always this tradeoff between growth and minimizing variances,” said Bertrand. “And I feel like a lot of continental European economies have decided they wanted to minimize variances.”
When it comes to emergency situations, it may be necessary for government to step in to stabilize the system as it did when the financial system froze last year. “Some of the interventions in the financial system prevented things from getting much, much worse,” said Anil Kashyap, Edward Eagle Brown Professor of Economics and Finance. However, Kashyap thinks that the exit strategies need to be thought through. “The thing that I'm most worried about for our interventions, say, in the financial system, is that the political pressure to stay in is going to be astronomical,” Kashyap said.
However the government decides to intervene, Becker says that the regulations to be implemented should operate quite automatically. In other words, he favors rules-based regulation rather than discretion. “The regulators have failed in this case,” said Becker. “If you give a lot of discretion to the regulators, they’ll get caught up exactly in the same sort of mentality that the private sector gets caught up in.”
He also thinks that although the Anglo-Saxon model has had its defects, it has performed pretty well over long periods of time. “I think it would be a shame if the United States and other countries, in their recognition of the serious difficulties that we’re in now, greatly injured that model,” said Becker.
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