Textbook Right-Wing Economics Can Ruin The Economy

Daron Acemoglu, an economist at MIT, and James Robinson, a political scientist and economist at Harvard, provide an interesting academic analysis of how mainstream (i.e., mainly conservative) economic policies centered on privatization, deregulation, and free trade lead to unwanted social outcomes.

Echoing warnings from progressives about the consequences of right-wing policies, Acemoglu and Robinson (authors of Why Nations Fail) use the financial crisis to show “how economic policy designed with a disregard for political implications can be injurious to social welfare.”  For example, the orgy of financial sector deregulation that started in the U.S. during the 1980s drastically tilted the political environment towards the interests of finance and encouraged the “moral hazard” of big banks taking excessive risks with the full knowledge that the government would have no choice but to bail them out when their bets went bad.  The financial crisis of 2007-2008 was the end result of this mainstream economic advice.

Similarly, conservative economists for decades have argued against the collective bargaining power of unions on efficiency grounds.  But steps to reduce union negotiating strength that began with the Taft-Hartley Act in 1947 – as well as numerous free trade agreements — not only reduced wages and leverage for workers, they also led to higher levels of inequality, outlandish CEO pay, and future deregulation by shifting the political equilibrium too far away from the needs of workers. The long term demise of the middle class was the end result of this economic thinking.

Outside of the U.S., the authors cite the “loan-for-shares” scheme of privatization in Russia to further the argument.  Although the textbook case for privatization initially led to economic gains for Russia, it later undermined democratic reforms and led to the rise of a new authoritarian government under Putin:

Not only did this type of privatization massively enrich and empower the oligarchs, but it also failed to create a large number of small shareholders. In 1994, workers owned 50 percent of the average Russian enterprise; by 1999, this figure had dropped to 36 percent. By 2005, 71 percent of medium and large industry and communications enterprises had a single shareholder who owned half the stock.

The unequal distribution of privatized assets in turn produced a backlash “against the process of economic and political reform in Russia, ultimately re-creating authoritarianism and firmly entrenching a form of state-led crony capitalism.”

Acemoglu and Robinson conclude their article by saying, “Our argument is that economic policy should not just focus on removing market failures and correcting distortions but, particularly when it will impact the distribution of income and rents in society in a direction that further strengthens already dominant groups, its implications for future political equilibrium should be factored in.”

Although their argument is not entirely novel, it does have important implications for how progressives should think about the current right-wing obsession with deficits, taxes, and spending. Conservatives often talk about the “unintended consequences” of liberal policies. What’s that old saying about glass houses?