Once again, proponents of ‘free market’ economics are trying to convince the public that there is no need for regulatory intervention in business matters. Currently, this argument is being used for two topics: health care reform and consumer protection in financial markets. In both instances, millions of dollars are being spent by scores of lobbyists to reshape legislation in their favor…or to stall unfavorable bills until they die. Lobbyists are asking legislators and the public to trust the ‘free market’…unfortunately it appears that they are gaining traction as legislation in both issues is meeting increased resistance. Once again, big money apparently has big influence…but the promises of a self-regulating ‘free market’ are based on ideological wishful-thinking rather than real-world evidence. It’s time to talk about what markets…any markets…can and cannot do.
You can trust businesses to do what businesses do…they maximize profits while they minimize losses. Businesses provide goods and services to make money. Sure…if they do a good job in responsibly and ethically providing what consumers need and want, they are also increasing the quality of life while stabilizing the vitality of the economy. But…their purpose is to make money, not to be altruistic or philanthropic.
We’ve heard some people talk about our ‘business engine’…this is the ability of businesses and markets to move the economy along the road toward more jobs and more prosperity. As long as we’re clear on what business is intended to do, we can then recognize the need for some mechanism to provide direction for that ‘business engine’ horsepower and sometimes to apply the brakes when high-risk behavior threatens public welfare. What we’ve found recently and through history is that a totally ‘free market’ is a high-powered machine that will go basically wherever the profits are highest without much regard for long-term risk or public welfare. Of course, there are exceptions, but the question we need to ask is how well we can trust the profit motive to supply public well-being.
Let’s consider for a moment how this conundrum is playing out, concerning health care reform legislation. Here are several quotes from Paul Krugman in his New York Times Op-Ed today: “…private markets for health insurance, left to their own devices, work very badly: insurers deny as many claims as possible, and they also try to avoid covering people who are likely to need care;” “So here’s the bottom line: if you currently have decent health insurance, thank the government;” “…unregulated markets don’t work for health care — never have, never will. To the extent we have a working health care system at all right now it’s only because the government covers the elderly, while a combination of regulation and tax subsidies makes it possible for many, but not all, non-elderly Americans to get decent private coverage;” “Now Mr. Obama basically proposes using additional regulation and subsidies to make decent insurance available to all of us.”
Then let’s also consider a similar challenge by lobbyists, concerning the proposed Consumer Financial Protection Agency. Here’s what Simon Johnson wrote in the Washington Post last week: “…the primary counterarguments against the agency are based on either misunderstanding or misinformation. The consumer protection agency would not prevent the creation of products by the private sector, but it would make it much more likely that the products are not toxic for the people who use them–in the same way that we worry about the safety of cribs and medicine.” And “There’s no question that some financial firms would like to return to abusive practices, figuring they can once again make money and then move on. Yet serious financial sector firms would prefer to clean up their acts and work with properly informed customers.”
What’s at stake ultimately is public confidence. We’re addressing health care reform, because the public lacks confidence that current providers, insurers and policies can supply adequate and comprehensive coverage at a reasonable price. We’re addressing consumer protection in financial matters, because the public lacks confidence that banks, investment firms and insurers are willing to pursue their business without returning to the high-risk behavior that caused the current Great Recession.
What the opponents of these two reform efforts don’t understand is that they will benefit most when the public has confidence in the products they want to sell. Here’s the deal…I believe they will make more money by inspiring confidence with transparency and public oversight than by simply saying, “Trust us.” The ‘free market’ has proven its inability to safely and equitably support our long-term public needs. Its promise has fallen short enough times in the past 100 years or so that we shouldn’t be fooled again. The reforms being discussed in Washington, D.C. are necessary to revive the public’s trust in these two critical institutions…the health care community and the financial services sector of our economy. Of course, the specifics still need to be determined, but inaction on these legislative efforts will only keep the public’s risk and uncertainty at a high level.