Book Notes

“The idea that conservatives trust the market while progressives want the government is a myth,” writes Dean Baker. “Conservatives simply are not honest about the ways in which they want the government to intervene to distribute income upwards.”

Another way to frame the argument that is at the core of Baker’s book is: Corporate conservative claims to support “deregulation” are a lie. Corporations very much like some forms of regulation — they just call them by other names. More fundamentally, many forms of regulation are inevitable — a functioning economy requires the government to set a framework of rules, even for transactions handled among businesses or other parties outside of government. These rules — such as those involving enforcement of contracts — may be more or less favorable to corporations, but there is no escaping them.

In Baker’s formulation, many of the key forms of corporate welfare involve not just the handout of public funds, but intervention in the economy — through the establishment of one-sided rules — to benefit corporations and the rich.

He points to recently revised bankruptcy rules in the United States as a prominent example. These rules impose much harsher burdens on lower-income people who declare bankruptcy, than those previously in place. Under the new rules, a debtor in bankruptcy maintains onerous obligations to old creditors.

Many commentators noted how unfair the new bankruptcy rules are. They noted the unsavory role of credit card companies in aggressively luring consumers into acquiring massive debt, and pointed out how the new law would benefit the credit card firms. Others noted the fact that a very high proportion of bankruptcies are triggered by health problems that deprive people of their wages and impose huge costs on the uninsured.

Baker’s key point is different. It is that the new bankruptcy law massively increases the government’s involvement in the private economy. “Under the new bankruptcy laws, the government will monitor debtors for many years after they have declared bankruptcy, seizing assets or garnishing wages for debts that may have been incurred 20 or 30 years in the past. This might sound like a tall order, but when big banks are troubled, the nanny state is there to help.”

Moreover, this is an intervention that disrupts a “pure” free market. Lenders make loans aware of the risk of nonpayment — that’s why riskier loans come with higher interest rates. Default then may be unforeseen in any particular case, but institutional lenders are well aware that a predictable percentage of loans will go bad. A change in bankruptcy rules — at least changes applying to loans already made — permits the lenders to recoup losses that they had already accounted for.

The same dynamic plays out internationally, Baker contends, through the operations of the International Monetary Fund (IMF). International investors are able to earn high returns for their loans to developing countries, precisely because of the greater risk of default. Yet when developing countries suffer economic downturns and consider defaulting on foreign loans, the IMF wields its power to threaten them with severe consequences. Faced with IMF power — and the prospect of losing access to future loans from public and private creditors — few countries have defaulted. Instead, many have agreed to IMF-imposed restructuring plans. These plans have themselves seriously harmed the poor and benefited international and domestic corporate and elite interests.

Bankruptcy is only one of many subject areas of Baker’s short book. He argues the government regulates the economy in all kinds of ways to benefit the rich. Among them:

• Patents and copyright constitute government interventions in the economy to confer monopoly rights. They serve a purpose — to create incentives for inventive and artistic work — but in a fashion that concentrates wealth and power.
• Rules restricting immigration and licensing of doctors and professionals in the United States and rich countries keep supply tight and raise wages. Similar restrictions are not applied for less-skilled workers.
• The Federal Reserve, which regulates the money supply, unavoidably plays a key role in the economy. It has historically favored corporate over worker interests, by preventing unemployment from falling to levels that would drive up wages.
• Government rules in the United States prohibit the government from competing in the marketplace, in key areas where the government would likely be a more efficient operator than corporations. Most notably, Medicare is far more efficient than the private health insurance system, but it covers only seniors and certain other limited classes of people. Other individuals and employers are not able to choose Medicare instead of private insurance plans.

— Robert Weissman