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Collectivism Corrrupts a Good Economist

Collectivism Corrrupts a Good Economist

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August 13, 2010

March 2004 -- BOOK REVIEW: Joseph E. Stiglitz, The Roaring Nineties: A New History of the World's Most Prosperous Decade. (W.W. Norton & Company, 2003). 361 pp., $24.95.

Columbia University's Joseph E. Stiglitz, who shared the Nobel Prize in economics in 2001 and who was President Clinton's chief economist, is often pro-government intervention. I, on the other hand, am pro-freedom. Yet despite our differing ideologies, I found the chapters on taxation in his 1988 textbook on public finance to be excellent. I was hoping, therefore, to find excellent sections in his latest book, The Roaring Nineties. But I was disappointed. Overall, the book is an uncritical case for more government intervention that, along the way, makes some basic economic errors.

The book's title is a form of bait and switch. Whereas the reader expects Stiglitz to discuss what made the 1990s boom, he puts little emphasis on that. Instead, he criticizes the free market and argues for more regulation and more government spending on almost every issue he discusses. The evident explanation is that his moral perspective has become more explicitly collectivist than it was in most of his earlier work.

One of Stiglitz's most surprising critiques is of airline deregulation. Economists who study airline deregulation conclude that it was a tremendous success because the new competition that followed brought down airfares by 20 to 30 percent. Northeastern University economist Steven A. Morrison and Brookings Institution economist Clifford Winston estimate that deregulation's net gains to travelers, even accounting for travelers' losses from declines in service quality, are a cool $20 billion a year. But, claims Stiglitz, "deregulation was not the unmitigated blessing that its advocates claimed." Why? Stiglitz complains, "Airline deregulation had led to a burst of new carriers, but most of them did not survive." Imagine that: a competitive industry in which most entrants do not survive. Has Stiglitz ever studied the restaurant industry? It's competitive, too, and most entrants do not survive. Does this mean that the lack of regulation of restaurants is a mixed blessing? The reason no new carriers left the market between 1938, when airline regulation began, and 1978, when it started to end, is that the Civil Aeronautics Board allowed not a single new entrant into the market. Governments do that: When they regulate an industry, they typically protect existing companies from competition with new companies. Southwest Airlines got its start by sticking solely to Texas and thereby avoiding interstate regulation.

Assuming Collectivism

In his preface, Stiglitz signals his collectivist premise with a statement in favor of "social justice." Think about that term. In a world with only one person, no one could treat that person unjustly and that one person could treat no one else unjustly. Justice refers only to treatment of some humans by others and, therefore, is inherently social. So putting "social" in front of the word "justice" is redundant. Why, then, do people use the term "social justice"? Almost invariably, it is used to refer to forced transfers of wealth from those who earned it to those who did not. And that is how Stiglitz uses it.

He appears to regard wealth in the United States as a big pool owned by the government that the government gets to allocate. In discussing President Bush's proposal to eliminate the tax on dividends, Stiglitz comments, "Never have so few received so much from so many." But in cutting taxes on dividends, Bush did not "give" benefits to people who get dividends. Rather, he got the government to take less from them. The only way it makes sense to say that the government gave people benefits by taxing them more lightly is if the government owns the income in the first place.

In defending his proposal for having the government give everyone a large endowment at birth, Stiglitz argues that many who leave college or graduate school today are burdened by a huge debt that "constrains them, for instance, from choosing a life of public service." To Stiglitz, apparently, the person who becomes a doctor, an accountant, a plumber, or a debt collector is not engaged in public service. But if they are not "serving the public," isn't it strange that members of the public willingly pay doctors, accountants, plumbers, and debt collectors for their services? Ironically, the one thing that seems to distinguish public service in Stiglitz's mind is that "public servants" are paid with taxes. And because they are paid with taxes, there is no market test for whether the public values their services. So the people he calls public servants are the ones whom we can be least sure really are.

This collectivism comes out again and again. In discussing how to reduce unemployment, for example, Stiglitz writes: "America could probably do even better—if it turned its mind to it." The non-collectivist, and correct, way of saying this is: "Americans could probably do even better—if they turned their minds to it." I'm guessing that he didn't write it this way because one of his goals is to convince people that America's "mind" is actually the minds of various officials in the federal government.

Or consider his proposal that everyone be provided "a basic modicum of health care." He writes: "The United States chooses not to provide these basic services, because it chooses not to tax itself." This is sneaky, because no entity can tax itself. What Stiglitz must really mean is that some people in the United States could choose to tax others but don't. But if he stated it this honestly, he would alert people to the idea that taxpayers, by definition, do not get to choose not to pay taxes—that is why they're called taxes. So he tries to lull his reader by making it sound as if we as a country are making a choice.

In opposing privatization of Social Security, Stiglitz asks: "Do we really want to leave individuals' retirement security to ill-informed, irrational investors, investing in capital markets which work imperfectly?" He makes it sound as if individuals are different from investors. But they are the same people. Had Stiglitz stated the issue more forthrightly, he would have asked: "Do we really want to let individuals choose how to save for their retirement?" But he does like the idea of having government use Social Security taxes to buy stocks. What about the fear that the government would use its stocks to influence companies' behavior? Stiglitz argues that the government could be proscribed from doing so. But don't bet on Stiglitz favoring such a constraint. Two sentences later, the mask slips. He writes:

Would it be that bad having a vote against the kind of corporate greed we saw in earlier chapters? Limiting the outlandish salaries for CEOs? Or in an earlier period, not doing business in South Africa during apartheid? The government's voice would be only one voice among many, but perhaps it is a voice that should be heard.

Forgetting Economics

Even Stiglitz's best chapter comes up short. In a chapter titled "Creative Accounting," he reviews the incentives that caused managers to mislead stockholders about earnings and, often, to falsify earnings data. Stiglitz notes that when he worked in a shoe store and was paid on commission, he lied to customers to sell shoes. Similarly, when corporate America made a massive shift to stock options as a way to pay management, managers had an incentive to distort earnings to drive up the share price. From what I understand of the facts, Stiglitz's assessment is accurate. But, as with much of the book, Stiglitz does not go back to fundamentals. He never asks why shareholders were so passive. One reason is that regulations made them passive. The anti-takeover laws that many states adopted in the 1980s substantially increased the difficulty firms had in carrying out so-called hostile takeovers—that is, takeovers of firms whose entrenched managers feared being tossed out or losing pay. These laws, therefore, meant that stockholders lost much of their ability to discipline managers. Stiglitz doesn't mention this.

There are a few high points in Stiglitz's book. He defends free trade, claiming that NAFTA cushioned Mexico's economy from an even worse fall after devaluation. I believe him, but his defense of NAFTA is a one-liner. As with much of the book, he gives no evidence for his claim. Stiglitz also, justifiably, criticizes the Bush administration for increasing trade barriers on steel and for subsidizing agriculture.

But Stiglitz is so blinded by his desire to criticize Bush's policies that he makes an elementary economic error. Opening the Arctic to more oil production, he writes, would cause "higher oil prices." How exactly does increasing oil production cause prices to rise? When I showed my students this quote from Stiglitz and gave no hint about its truth or origin, 66 percent of them answered correctly that more production causes lower oil prices. And some of those who got it wrong told me that they were expecting a trick question because, otherwise, why would I ask a question about something that seemed so straightforward?

In his closing two chapters, Stiglitz gives his vision of government that, though short on specifics, stoutly defends the death tax. He seems to agree with many death-tax critics that the tax-free threshold should be raised from the current level of $2 million to $10 million. But he wants a stiff tax on estates above that level. He writes that the argument that the inheritance tax destroys incentives is "patently self-serving." Well, first, many of us who argue against any estate tax don't expect our net worth ever to exceed $2 million, let alone ten. But, secondly, so what if the argument is self-serving? Does that make it wrong? Abolitionist Frederick Douglass's argument against slavery was "self-serving," and rightly so. How can a serious thinker dismiss arguments that, if accepted, would benefit those who make them?

Interestingly, in his 1988 public-finance textbook, Stiglitz reported two strong arguments against stiff death taxes. First, he pointed out, two-thirds of capital accumulation in the United States is due to inheritance. Reduce the death tax and capital accumulates, so everyone gains. Secondly, noted the earlier Stiglitz, people avoid the estate tax by putting assets in their children's names, the income from which is taxed at a lower rate. As it happens, Stiglitz's own behavior evidences this second way of avoiding the inheritance tax. One of the copyright owners for his 1988 book is "the Trustee of the Trust for the Benefit of Joseph E. Stiglitz's Children." I prefer that earlier Stiglitz—a more thoughtful, more informed, less-collectivist tax avoider.

David R. Henderson, a research fellow with the Hoover Institution and an economics professor at the Naval Postgraduate School in Monterey, California, is the author of The Joy of Freedom: An Economist's Odyssey.

This article was originally published in the March 2004 issue of Navigator magazine, The Atlas Society precursor to The New Individualist.

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