Some Realism About Interventionism

(This is Part 2 of a review of Ian Bremmer, The End of the Free Market: Who Wins the War Between States and Corporations? (Portfolio, 2010); Part 1 appears here.)

Throughout his book, Bremmer contrasts “state capitalist” regimes (where the government is the lead economic actor) with “free market” nations which preserve more room for private initiative. While virtually every country has a few state-owned enterprises (SOE’s), in state capitalist regimes like China SOE’s predominate in “diverse sectors” and are used to enhance the political power of government (65). Such regimes also intervene in the economy pervasively. For example, Russia in 2008 “identified forty-two ‘strategic’ economic sectors in which restrictions applied for foreign investment” (109). In a chapter entitled “State Capitalism Around the World,” Bremmer piles up a litany of suspect interventions in places ranging from Nigeria to Mexico to Saudi Arabia.

Bremmer paints a stark contrast between the economies of liberal democracies and the state capitalist other. But at least since legal realist Robert Hale published his Coercion and Distribution in a Supposedly Non-Coercive State in 1923, the question of what constitutes state “intervention” in the market has been contestable. For example: at what point does licensing of doctors move from being a natural aspect of any competent health system to being termed a suspect “intervention”? If there is to be free trade in services, don’t we at least need some information about what constitutes genuine medical care? “Perfect information” is a cornerstone of idealized markets—isn’t some baseline of information necessary to any actual market?

Bremmer does not talk much about health care in his book, but it appears to be one important sector where the relative role of the government in state capitalist and “free market” regimes is flipped. On a cursory reading of Blumenthal and Hsiao‘s 2005 article in the NEJM, the US would appear to be more interventionist than China:

In the early 1980s, China virtually dismantled its . . . health care and public health system overnight, putting nothing in its place. In retrospect, this startling and almost inexplicable event seems to have been collateral damage from a much more carefully planned and successful policy strike: the privatization of China’s economy and a general effort to reduce the role of Beijing’s central government in China’s regional and local affairs. Only recently have Chinese authorities recognized the pain and the massive disruption in health care that they have caused.

In China, “public spending as a proportion of medical expenses . . . stands at 25 percent;” in the US, by some calculations, the “tax-financed share of health spending [was] . . . 59.8 percent” even before the ACA passed this year. Very recent Chinese stimulus spending may be reversing prior privatizations there. But it’s clear that Chinese savings rates are still high, largely because so many citizens are scared of being sick and broke in a market-driven health care system.

Admittedly, there are many important developments in Chinese health care nowadays—some moves appear to be doubling down on privatization, and others recall the types of reform we’ve recently seen legislated in the US. It is hard to develop any clear metric of private/public here; Blumenthal and Hsiao’s piece may only speak to financing and not criminal law or ultimate ownership of health facilities. If Americare fails, the US and Chinese health care systems may well be en route to the “superfusion” of Chimerica. Nevertheless, it’s important to note that state intervention in the economy differs by sectors, and that intervention comes in many forms.

Bremmer’s fallback position is that the state capitalist regime intervenes in the economy for political ends, or to preserve itself, whereas the free market regime promotes the commercial purposes of the entities it funds or regulates. But the finance sector challenges any effort to distinguish the U.S. from state capitalist regimes on this measure as well. The Chinese banking sector is clearly more tightly controlled than the US one is; but is there any doubt that both, at their root, depend on the state for their lifeblood (cheap capital)?

The US finance sector has parleyed its resources into enormous political power. As one critical commentator puts it, “The fact that the Fed is charged with being the lender of last resort ultimately puts it in a position of socializing financial losses (while privatizing gains).” During the crisis, the Fed chose winners and losers, and the banks left standing are essentially “taxpayer supported entities.” Given the failure of the banks to engage in anywhere near the amount of business lending they were supposed to do, it would appear more accurate to characterize the US bank bailout as a government self-preservation mechanism (state capitalism) rather than a promotion of commercial ends (“free market” capitalism).

As Johnson & Kwak’s 13 Bankers shows, this is not anomalous—the role of finance in the American economy has been politicized repeatedly, in fights ranging from the authority of the Bank of the US to Fed “independence” to the gold standard to derivatives and futures regulation. The rising tide of “deregulation” in finance was not merely an axiomatic application of economic principle. One can easily redescribe it as the occidental version of the fusion of politico-economic elites in China and other more familiarly “state capitalist” regimes.

Finally, Bremmer talks about intellectual property rights as if they are a natural cornerstone of free market practice. Certainly there is some core of protection of property that we should afford to those who develop our drugs and gadgets and movies. But as many commentators have noticed, often times these protections look far less like plain-vanilla “property” than administered pricing schemes or welfare. As Dean Baker puts it,

The government’s involvement in the economy has grown substantially in important areas, including patent and copyright protection. The percentage of GDP that is diverted to holders of patents and copyrights has increased enormously over the last three decades as Congress has approved a number of measures that increase the length and scope of these protections. . . The government’s role in protecting intellectual property has led to increasing interference with the free market in other ways. The Internet has made copyrights far less enforceable, yet rather than modernizing our system for financing creative work, the government has taken extreme measures to preserve copyrights. . . .

One could characterize certain trade rules the same way; as Kevin Outterson writes, the “AUSFTA selectively exports US generic drug laws . . . and is uniquely intrusive into domestic pharmaceutical and political spheres.” The more one understands the role of the USPTO, the USTR, the FDA, the ITC, and now Medicare Part D in affecting pharamceutical company practices, the more the US looks like the state capitalists Bremmer tries to contrast it with. Does the byzantine structure of Medicare Part D reflect an efficient way to get drug coverage for the elderly—or the optimal way to secure campaign contributions and keep the revolving door of lobbying spinning? Is there any doubt that the provisions of the loophole-ridden finreg bill have as much to do with supplying the “New Democrat Coalition” with campaign funds as they do with preventing another crisis?

Without acknowledging these ugly realities, Bremmer cannot say with confidence that the most progressive state capitalist regimes are any more recklessly self-regarding than current US elites. Of course, we are not Nigeria. But there’s a reason the leading public intellectual analyzing the US financial crisis has compared American political economy to that of Indonesia and Russia.

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