Defining Ideas

An Economics Lesson For Bernie Sanders

Monday, June 1, 2015

Senator Bernie Sanders’ quixotic presidential campaign received some unexpected attention for an off-the-cuff comment he made in Iowa this past week. The sentence that has raised some eyebrows is short and to the point: “You don't necessarily need a choice of 23 underarm spray deodorants or of 18 different pairs of sneakers when children are hungry in this country.” For Sanders, the market economy that provides consumers with such choices is fundamentally at odds with society’s duty to take care of the vulnerable.

Fortunately, it is impossible to take Sanders’s pronouncement out of context. It was delivered in casual conversation as a stand-alone one-sentence indictment of what is wrong with America. Unpacking it helps expose Sanders’ profound misunderstanding of how a well-functioning market system operates. To be sure, his position derives some support from a strand of behavioral economics that warns of the risks of “choking on choice.” Consumers struggle, for example, in deciding which of the iconic 31 Baskin Robbins flavors they want to eat.

But something is clearly amiss with that critique of choice. Baskin Robbins, founded in 1945, has thrived for 70 years. If it were in its interest to reduce its menu options to spare its customers from difficult choices, it would have figured that out long ago. But instead it has expanded its menu to offer consumers even more options. So the question is why?

The simplest explanation is that it does not expect every customer to examine every choice when they come into the store. Some people like chocolate, others vanilla, and so they can quickly reduce their own choice sets to manageable proportions. A decision to reduce the number of flavors means either a reduction in the number of flavor groups or the number of flavors in each group. But each of those choices could have adverse consequences. When people go for ice cream in groups, they do not all have the same preferences. Make the flavor list too small, and they will head for another shop that offers more choices. “Brand extension” is everywhere, as companies try to leverage new products off old ones, which is why “original” Fritos now has six companions in flavor.

So does this capsule explanation mean that every business should feature an unlimited menu? Certainly not. Expanding choices for customers necessarily entails increasing costs for the provider. At this point the usual economic truth holds; firms try to equate marginal revenues (from each additional unit) with marginal costs (from those same units). It is something of an art form for a firm to decide exactly how many options to give its customers. McDonald’s supersized menu of 121 items, for instance, turned out to be counterproductive. But the source of the problem was not customers being overwhelmed by too many choices. It was the much more prosaic point that the wide range of menu choices made its kitchen operations maddeningly complex, which slowed down service and drove away impatient customers.

Just like everyone else, large and powerful companies face complex trade-offs. What matters from the social point of view is that management has every incentive to fix this problem. The conundrum of too many customer choices may present a nice problem for psychological studies. But it is one problem among many, none of which are amenable to any sensible form of government intervention.

It is, however, fair to ask whether Bernie Sanders was thinking about how a given firm faces the market, or how multiple firms operate within a competitive market. With his deep socialist antipathy to private markets, Sanders probably does not care all that much. But it is instructive to ask, what should be done if in fact we conclude that 23 varieties of underarm deodorants and 18 types of sneakers aren’t necessary in a world with starving children? What next? It will surely not do to operate with no types of deodorants or sneakers. But if open markets generate too many alternatives for these and thousands of other market goods, just who is responsible for deciding what firms can offer what products at what prices, and why?

That problem solves itself in a market economy through the mechanism of decentralized consumer choice. Any increase in the number of choices is a mixed blessing. New choices could lure new customers into stagnant market niches; they could pirate unhappy customers from established brands; or they could flop. No matter. The strong brands will survive and the weak ones will go into bankruptcy. The outside analyst does not have to predict which brands will succeed or fail. He just has to defend the process as a way of getting sensible matches in markets that are always in some state of predictable disequilibrium. But no one has to ask whether the number of market-generated choices in any given niche is too large, too small, or just right. And those market analysts that do know particular markets can help their clients decide, in life as in poker, whether to hold, fold, or raise.

The socialist Sanders cannot take any comfort in these decentralized processes, but wishes to put in place cumbersome administrative processes to make those choices. It is there that the agony begins. The overall population is filled with many different groups of people. Some people have allergies; others have demanding jobs; still others have distinctive personal and professional objectives. Just how thin does a regulator slice the pie in deciding which niche brands of deodorants should disappear and which should survive? The same is true for shoes. A quick trip to Runner’s World reveals that shoes can differ by sex, by age, by skill level, by size, by arch height, by motion mechanics, by injury, by terrain, and so on. And that is just for one category of shoes—running shoes. Similar breakdowns appear for dress shoes, casual footwear, and so on. It turns out that any effort to regulate who can make what kind of products leads to a planned economy that will quickly go belly up.

The history on this point is clear. I doubt very much that Bernie Sanders has any familiarity with the socialist calculation debate of the 1930s, which proved that no central planner has the information to make intelligent judgments on the question of which products should be sold and at what price. There are of course many things that government has to do to maintain competitive markets, but none of them rely on the heavy-handed forms of intervention that rolled effortlessly off Bernie Sanders’ lips.

Sanders’ initial blunder is compounded by a second. Why assume our society faces a stark choice between feeding the hungry on the one hand and indulging in unnecessary consumer choices on the other hand? His basic mistake is commonly made by other egalitarians, who believe there is a zero-sum trade-off between taking care of the needy and giving useless favors to the rich. As I argued in a recent column attacking the warriors against Income Inequality, it is always wrong to act as though there is a “choice” between two social programs that are randomly connected with each other. Just as it is possible to reject both tax subsidies to the rich and the minimum wage, so it is possible to insist on a decoupling of the question of consumer choice from that of public assistance to the poor.

The key task in all cases is to make sure that both of these programs are run with maximum efficiency. One benefit, for example, of having robust consumer markets with lots of choices is that it will expand the social pie, which then increases the resources that society can devote to taking care of the poor, either through government programs or, preferably, private charitable assistance. Efficient markets will also allow the dollars of poor people, like the dollars of rich people, to go further when the array of products and their prices are not subject to government override.

The ideal here is to increase both firm income and consumer satisfaction. Once that problem is solved on its own terms, it is possible to look separately at the serious problem of hungry children. And indeed there are major flaws in agricultural markets that cry out for reform. Yet virtually all of these stem from the strong New Deal tendency to use government power to raise the price of agricultural produce above competitive levels. The hard question for people like Sanders is whether they are willing to look hard at government programs to ask whether, and if so how, they disadvantage the poor, and indeed all other classes of consumers. To reach the right conclusion on this question requires that we start from the right benchmark, which is the array of goods and services that only decentralized competitive markets are able to produce. Socialists like Sanders fail to see the harm that their interventionist programs do to the very people whom they want to help.

For a long time now, I have insisted that progressive policies are unsustainable because they hope to pile on an ever larger set of transfer programs on an economy that is already hobbled by high levels of taxation and extensive government regulation. For these purposes, it is instructive to note that yet again the oft-touted economic recovery has stumbled, as gross domestic product contracted by 0.7 percent in the first quarter of 2015.

No one can blame the idle musings of Bernie Sanders for this disappointing outcome. His sloppy thinking is a symptom rather than a cause of our current malaise. But I have little doubt that the constant political oversight in labor, real estate, and financial markets is a major reason why the economy is not growing. It is time for our progressive political leaders to take ownership of the current stagnation, which is best countered by a major dose of deregulation and tax reduction and simplification. But that day will be long in the coming so long as political leaders can’t resist making one-line zingers in their campaigns.