Defining Ideas


Monday, December 12, 2011

One clear sign of America’s social unease is found in the constant refrain that our current economic condition has poisoned the well for the middle class in the United States. That theme has long been a favorite of American labor leaders, who have wrongly claimed that the great improvement in the quality of life of the middle class during the twentieth century was due to the ability of union leaders to secure high wages and stable jobs for their employees. In his recent speech in Osawatomie, Kansas, President Barack Obama made the same argument. There he announced in no uncertain terms that the “defining issue” of our time is how to rescue the fragile economic position of the American middle class, which he defined in the broadest possible terms.

At one level, the speech is smart politics. Little is gained politically by engaging in long and inconclusive debates over the makeup of the middle class. For reelection purposes, the president is right to cast the net broadly. So forget whether professionals, managers, and high government officials earn too much money to count as bona fide members of the middle class. The key point is that many individuals who once were classified as “working class” by sociologists now think of themselves as middle-class Americans threatened by the current economic malaise. If the president can rally this broad group to his cause, he stands a good chance of winning the next election against a Republican nominee who will likely be painted as a pawn of the privileged few, who are increasingly viewed as the enemies of the middle class.

Illustration by Barbara Kelley

President Obama played into these fears in masterful fashion in Osawatomie. But politics is not my beat. The substantive question is whether Obama has proposed a reform agenda that has any chance of achieving his stated goal of restoring to the middle class the prospect of decent wages that will allow them to educate their children and provide for their own retirement. That kind of analysis is always difficult to do on Obama’s speeches because he flits from topic to topic with such rapidity that it is next to impossible to get a fix on his substantive positions.

It is, therefore, all too easy for one distinguished commentator to think of him, à la Peter Wehner, as a “hack,” while another distinguished commentator, Steve Chapman, takes Obama’s critics to task for branding him a “class warrior” for what are, at most, banal remarks with no more than the usual political errors and oversimplifications. After all, the president did say, “This isn’t about class warfare. This is about the nation’s welfare.”

Others can read or watch the speech and decide for themselves whether the president presents himself as a healer or an incendiary. His speech is larded with quotations that support both positions. More important than that, however, are the policy disagreements between progressives and classical liberals, which the president addresses in his speech. It is useful to look at how the president’s speech matches up with the classical liberal agenda that he has attacked in the past, and the progressive agenda, whose lineage he traced back to Teddy Roosevelt. Doing so reminds me of the great line from Job, “The Lord giveth, the Lord taketh away, blessed be the name of the Lord.” For Obama, each endorsement of free markets is hooked to a condemnation of market forces.

Obama is taking his cues from Teddy Roosevelt.

Taking his cues from Teddy Roosevelt, Obama says first: “The free market is the greatest force for economic progress in human history.” Would any small government champion disagree with that? Good government is necessary to check aggression, a constraint that allows people to live their separate lives. Good government is also necessary to create institutions and norms that facilitate cooperation between individuals, whether through voluntary organizations or one-time exchanges. But while the government lends stability to markets, it cannot supply the vision and information necessary to make those markets hum. For that task, the nation needs men and women with imagination and entrepreneurial abilities in the private sector. But of course, we hear in this speech no systematic account of how to foster growth in the United States. Instead, there is only a lament that growth is sorely missing in the new economy.

Nonetheless, Roosevelt has an answer to that as well. Quoting Obama: “Roosevelt also knew that the free market has never been a free license to take whatever you can from whomever you can. He understood the free market only works when there are rules of the road that ensure competition is fair and open and honest.” But again, no classical liberal would disagree with that statement, when taken in isolation. The distinction between “liberty” under a system of laws and “license,” which allows people to do whatever they want, has been critical to classical liberal political thought from before the founding of this nation to the present day. To take from someone else is the archetypical wrong that is to be avoided. Voluntary exchange in accordance with the rules of the road is the essence of the game.

Friedrich Hayek in The Road to Serfdom constantly stressed that the function of the state was to set the rules of the road, which would allow all to inhabit a common space. It was only the strong New Deal Supreme Court justices, like Felix Frankfurter, who thought that the function of the government was not just “policing” the airwaves for interference, but also determining the “composition” of the traffic, by using, for example, a set of administrative procedures to decide which supplicant should receive what license to broadcast on what portion of the spectrum.

The same can be said about the imperative to keep competition fair, open, and honest. I am not aware of any group that travels under the banner of “libertarians for fraud.” So far, what we have from the president is a transparent effort to claim the high ground by acting as if he is the sole custodian of a set of beliefs that he, in fact, generally shares with his political rivals.

Progressives are breathtakingly ignorant of the sources of national prosperity.

This is also true of Roosevelt’s desire to “bust monopolies, forcing those companies to compete for consumers with better services and better prices.” Now the president’s rhetoric becomes a bit more heated. There is no question that at the onset of the twentieth century, the regulation of large business trusts was at the top of the social agenda. Indeed, the historical origin of the term “anti-trust” lay in the simple observation that the purpose of the law was to combat explicit trusts, like the sugar trust (at its peak, it controlled 98 percent of the sugar market). In cases of this sort, no one could dispute the ability of trusts to exert monopoly power over key segments of the economy. I know of no classical liberal who thinks that the state protection of monopolies counts as good social policy. But the difficulty in this area lies in deciding exactly what form of state intervention should take place to curb monopolies.

Unfortunately, on this issue, Obama shows no awareness that today’s legal and economic landscape is a far cry from what it was over 100 years ago. The big trusts are gone. There is no Standard Oil waiting for dissolution, which is why the government’s 1998 anti-trust suit against Microsoft turned into such a disaster. Easier entry in a global economy makes it harder for firms to obtain monopoly positions privately. The key danger in many cases is the government’s misguided economic policies that can thwart competition, not promote it.

The common desire to protect the middle class, with its mom-and-pop stores, against the competition of larger firms that offer better goods and lower prices is not something that can easily be defended in the name of “fighting monopolies.” One of the great dangers in modern anti-trust policy is the temptation to think that small businesses should be protected from larger firms that do play by the rules of the game.  At no point in his speech does the president show the slightest recognition that even the anti-trust laws can go seriously awry if they are put to the wrong purposes.

Instead of trying to articulate a coherent policy, Obama goes for the jugular. His opponents, like me, have “collective amnesia.” These nameless folks “want to go back to the same policies that stacked the deck against middle-class Americans for way too many years. And their philosophy is simple: We are better off when everybody is left to fend for themselves and play by their own rules.” The problem is, classical liberals who oppose Obama’s policies do not believe that it is appropriate to “stack the deck.” Nor do they believe that everyone should be free to “play by their own rules.” The battle is over what those rules should be. Alas, when the discussion gets down to the grubby particulars, Obama endorses misguided progressive and protectionist policies that rob free markets of their power to innovate on such key issues as jobs and income inequality.

The late nineteenth and early twentieth centuries witnessed some of the greatest material improvements in world history. Child labor, for instance, was on the decline during those years, not because of the laws passed to prevent it, but because the increase in material wealth made it possible for families to survive without having to send more children to work in the factories. At the same time, the rapid introduction of labor-saving devices liberated more women from the drudgery of washing, cooking, and cleaning, so they could enter the workplace alongside their husbands, fathers, and sons.

The president's policy platform is intellectually incoherent.

There is no need to dwell on abstractions. Life expectancy tells the tale: In the United States in 1850, life expectancy was just under 40 years at birth. When it increased to 47 years in 1900, some doomsayers thought that it was a statistical blip. But as it reached close to 54 years in 1920, it became clear that the United States was doing something right. The question was, what? Much of this improvement took place before the major regulatory initiatives of Woodrow Wilson and Franklin Delano Roosevelt, both progressives who introduced long-term reforms of the labor and agricultural markets that involved the creation of cartels in both sectors. Though Obama cites FDR in his speech, Roosevelt’s policies were usually flatly inconsistent with the free market principles to which our current president gives lip service.

No amount of data can slow down this president. His deep protectionist instincts are revealed when he stokes the jingoist fires by saying: “If you’re somebody whose job can be done cheaper by a computer or someone in another country, you don’t have a lot of leverage with your employer when it comes to asking for better wages or better benefits, especially since fewer Americans today are part of a union.” At no point does he bother to note the tension between protectionism and his general proposition that Americans are entitled to have better quality goods at better, i.e. lower, prices. Instead, he thinks he can square the circle by forcing wages up while keeping prices down. He takes a regressive stand against automation, outsourcing, and the rationalization of business facilities when he writes:

Factories where people thought they would retire suddenly picked up and went overseas, where workers were cheaper. Steel mills that needed 100—or 1,000 employees are now able to do the same work with 100 employees, so layoffs too often became permanent, not just a temporary part of the business cycle. And these changes didn’t just affect blue-collar workers. If you were a bank teller or a phone operator or a travel agent, you saw many in your profession replaced by ATMs and the Internet.

To anyone schooled in economics, these statements reveal a breathtaking ignorance about the sources of national prosperity.  It is a good thing when plants can achieve the same output with less labor. Do we really want an America in which thousands of people work in dangerous occupations to turn molten lava into steel bars? Far better it is that fewer workers are doing those jobs. The jobs lost in that industry will be in part replaced by newer jobs created in the firms that build the equipment that make it possible to run steel mills at a lower cost and far lower risk of personal injury. The former workers can seek jobs in newer industries that will only expand by competing for labor.

And what about those ATM machines? Does the president really want people to have to queue up in banks to make deposits or withdraw cash in order to make a boom market for human tellers? Perhaps we should return to the days before automation, when phone calls were all connected by human operators. And why blast the Internet, which has created far more useful jobs than it has ever destroyed?

The painful ignorance that is revealed in these remarks augurs ill for the long-term recovery of America. With the president firmly determined to set himself against the tides of progress, innovation will be harder to come by. The levels of unemployment will continue to be high as the president works overtime to impose additional restrictions on the labor markets and more taxes at the top of the income distribution—both backhanded ways to reward innovation and growth.

The problem, therefore, with the president’s speech is not that it is demagogic in tone. The problem is that it is intellectually incoherent. As a matter of high principle, the president announces his fealty to markets. As a matter of practical politics, he denigrates and undermines them at every step. It is a frightening prospect to have a president who lives in a time warp that lets him believe that the failed policies of 1935 can lead this nation back from the brink. His chosen constituency, the middle class, should tremble at the prospect that his agenda might well set the course for the United States for the next four years.