Why Elizabeth Warren Is Right That Capitalism Should Be Great

Posted in: Tax and Economics

One of the continuing annoyances of the political conversation in the US is pundits’ insistent belief that both parties have become extreme in the Trump era.  Supposedly, for every instance in which Republicans have enthusiastically endorsed, say, cruel and bigoted immigration policies, the pundits tell us that Democrats have also gone into their own extremist abyss.

This is simply wrong.  It is true that there has been some movement within the Democratic Party toward the more liberal (but still quite moderate) positions that have always been on offer under the Democrats’ tent.  On average, this has moved the party to the left of where its average used to sit.

But those policies are neither extreme in the policy sense nor unpopular in the way that the Republicans’ policies—from tax cuts for the rich to restrictions on women’s control of their bodies to climate change denialism to suppression of voting rights—are wildly unpopular among American voters.

There are two leading (not mutually exclusive) reasons for the default claim that “Democrats are becoming extreme, too.”  One is that journalists are uncomfortable down to the level of their DNA with the thought that they might be seen to take sides in a political fight, so they interpret non-extreme behavior by Democrats to be as bad as Republicans’ behavior.  This is the infamous problem of false equivalence.

The second explanation for both-sides-are-equally-extreme coverage is that some of the leaders of the more-left group of Democrats, most prominently including former (and possibly future) presidential candidate Bernie Sanders, call themselves “democratic socialists.”  And because no one apparently bothers to understand what a democratic socialist agenda looks like, the default assumption is that Democrats are becoming wild-eyed communists—an assumption that Republicans are, of course, all too willing to amplify at every opportunity.

Some commentators, however, are willing to look under the hood and try to understand what the Democrats are actually saying.  The best of these is Jennifer Rubin, a lawyer who is an apostate conservative and whose writings for The Washington Post’s op-ed page fairly beg Democrats not to become too extreme, so that they can trounce the Republicans and force her former party to reject Trumpian ugliness and begin to return to something resembling sanity.

Despite her default preference for middle-right policies, Rubin is at least willing to ignore the labels and ask probing questions.  In that spirit, she recently engaged with one of the icons of the Democrats’ progressive wing, Senator Elizabeth Warren, on the question of economic policy.

Here, I will discuss one of the central ideas that the Rubin–Warren exchange highlighted.  Rubin’s column, “Sen. Elizabeth Warren responds to our invitation to discuss policy,” is an example of the highest level of punditry, and it is well worth a read.  As it turns out, however, even Rubin has some blind spots that need to be cleared up.

The NeverTrump Conservatives and Economics

Rubin is among the most prominent NeverTrump conservatives, and she has been among the most resolute in that group in refusing to cave to the Trumpist right.  She wants her party back, and she is more than a bit annoyed that the Republicans have become apologists and enablers for Donald Trump.

Her commentary is unsparing, such as her assessment of the crowd at a rally that Trump held in Tampa, Florida a few weeks ago.  She wrote:

[W]e should stop infantilizing Trump supporters, treating them as hapless victims of forces beyond their control. We’ve done them wrong. They come from ‘real America.’ Bunk. Whatever one’s economic hardships, any threatening, unhinged conduct and crude insults shouldn’t be excused. Trump cultists claim to be injured by the disrespect of ‘elites’; the only ones showing disrespect in Tampa were those in the mob. (And anyway, what ever happened to personal responsibility for one’s life choices?)

The survival of our democracy requires that we not merely jettison Trump and his sycophantic party from power and attend to repair of our democratic institutions, but that we also insist on a level of rational, civil discourse and respect for facts. Mobs cannot practice democratic self-governance; for that we need an engaged, rational citizenry.

Those powerful words reflect what most people who are not in the Trump cult feel, no matter what their other policy views might be.  Trump’s outrages are shocking, after all, because they are so much at odds with what both parties used to share as common beliefs (such as the idea that democracies are better allies than dictatorships).

Rubin’s revulsion at the Trump era has caused her to try to engage with the Sanders/Warren wing of the Democratic Party, and her willingness to do so indicates that she might be willing to be convinced.  Even so, as I wrote in a column on the Dorf on Law blog six months ago, Rubin has expressed some rather outdated views that indicate that she absorbed the conventional wisdom in economics but nothing more.  This remains a problem in her exchange with Warren, as I will discuss at the end of this column.

One of the basic issues that Republicans and other conservatives have never quite understood about economics is that there can be no such thing as a “no-government equilibrium” toward which policy should aim.  The notion of laissez-faire economics, which is a touchstone of conservative dogma on economic policy, is based on the idea that the government can only make matters worse when it intervenes in the economy.  It should, by that logic, do nothing (or as little as possible).

The problem with the do-nothing mantra is not (only) that it is a Trojan horse for cruel policies but that it is actually impossible for any government to do nothing.  I am not making some kind of cynical crack here to the effect that politicians are so unreliable that they will always do something even though they should do nothing.  Rather, I am saying that no government—even one run by the purest of pure conservative ideologues—can do absolutely nothing because capitalism is premised on the government setting up and enforcing rules.  The government must always do something.

In the end, “do nothing” turns out to be Republicans’ code for “do only what business interests and rich people want the government to do.”

How can I make such a blanket statement?  Everyone who enters into transactions in any kind of capitalist economy is taking for granted that they can turn to the state to enforce certain rights.  A business that bills its clients upon delivery of services, for example, assumes that it can sue those clients if they fail to pay on time.

Enforcing contracts might seem like an uncomplicated matter that has only one default rule, but that is not true.  Does the non-paying party get a presumptive grace period?  Does she have to pay interest, or consequential damages, or only restitution?  Must she pay punitive damages, and if so, under what conditions?

The US economy operates under a set of rules that answers each of those questions (sometimes differently in different localities and states), but those answers are each policy choices – and under any set of rules, the government is certainly not “doing nothing.”.  We do not, for example, allow punitive damages at all in contract cases, but we could decide to do so—and if we did, that would not be “less natural” than our current rule, nor would it be more natural.  It would simply be a different rule.

Think about any of the other legal rules that people take for granted when they buy and sell in any economy, and it is obvious that the government could change its rules in ways that might be perfectly logical but in every case would change people’s expectations about what will happen when they make deals.

One extreme real-life example is Donald Trump himself, who became so infamous for abusing the rules regarding paying on contracts that many people and businesses stopped working with him.  One theory about his affinity for Russia, for example, is that he had burned his reputation so badly with US banks that he could only obtain financing from Russian-backed banks.  And the national and international legal rules governing foreign lending could easily have been changed in ways that would have closed that back door.

Elizabeth Warren, Capitalism’s Biggest Cheerleader

All of which brings us to Senator Warren, who has been the bête noire of the Republican business class ever since she emerged on the political scene a decade or so ago.  Because Warren wanted to change the laws governing Wall Street in a way that Republicans’ biggest financial donors did not like, she was branded a socialist and anti-business.

Yet that simply was not true.  Back in 2011, I wrote a column here on Verdict that carried the provocative (albeit wordy) title: “Whatever Happened to Making an Honest Buck? Wall Street Attacks Elizabeth Warren Because She Believes in Capitalism More Than They Do.”  My point was that Warren’s proposed changes to the nation’s banking and consumer laws would actually be better for capitalism than the preferred self-enriching policies of the self-styled defenders of free markets.

Consider a simple example.  Suppose that contract laws in the United States allowed parties to enforce extreme and absurd provisions of contracts, no matter how those words ended up in the written agreement.  What if, say, a contract said: “In the event of breach, the breaching party shall give the non-breaching party his first-born son.”

In the US today, notwithstanding the presence of a few hardliners, almost everyone agrees that such a clause would be unenforceable, because it would be deemed unconscionable or a violation of public policy or for a number of other reasons.  We would also look to see whether one party had slipped the fateful provision into the contract without the other party knowing about it, and we would want to know whether one party was under duress (or mentally incapable of making a decision, as a result of being drunk or brain damaged or a minor), and so on.

Even so, it is certainly possible to imagine a world of strict contract formalism in which every provision of every signed contract is enforced strictly.  The mantra would be: “Protect yourselves, because the government/courts are not going to step in as paternalistic saviors.”

But even though such a legal regime is imaginable, it would be economically disastrous.  Reaching any agreement would become an even more contentious and expensive process by which parties negotiate over every provision, double-check each other’s copies to make sure that nothing has been changed or added, and then look for the other party to slip up and make even a small error.

Even form contracts would become matters of contention, because people could no longer mindlessly click through a contract, safe in the knowledge that the consequences of not reading every provision would be non-catastrophic.

Warren makes the further point that, because there is no natural baseline set of legal rules, and because some legal rules produce outcomes that are more desirable along various dimensions, there is a policy space within which we can define “desirable outcomes” to include, say, preventing banks from secretly opening multiple accounts in customers’ names and then charging hidden fees on those accounts.

Indeed, Wells Fargo Bank was caught doing exactly that by the Consumer Financial Protection Bureau (CFPB), which was Elizabeth Warren’s brainchild and which she helped to create during the Obama administration.  For her efforts, the Republicans blocked her from being appointed the founding chair of the CFPB.  In a classic example of the beauty of karma, she responded by becoming a national political leader and potential presidential candidate.

In the end, Warren is absolutely not “opposed to capitalism.”  Quite the contrary.  She believes that capitalism works best when it avoids the extremes to which Republicans have taken it.  Big businesses should not be able to abuse regular people, nor should small businesses be harmed by bigger businesses (such as when Trump’s businesses stiffed mom-and-pop contractors).

Making better rules is not the antithesis of capitalism.  It is improving capitalism.

The Rubin Response: I Get It, Kind Of

In her column described above, Rubin reprinted a list of five questions that she had posed to Senator Warren in a previous column, reporting that Warren had surprised her by offering (without being directly contacted by Rubin) long, thoughtful answers, which Rubin then reproduced verbatim.  Again, I recommend the column highly, because Warren’s answers are clear and persuasive.

Rubin, meanwhile, ended the column with a list of responses to Warren’s responses.  Sadly, but unsurprisingly, Rubin is only dimly aware of the economic research about the minimum wage, so she links to one piece in Forbes in claiming that “there is a large body of data showing that increases in the minimum wage impair job growth.”  No, there is no such body of data.  Conservatives have been trying for years to prove that minimum wages kill jobs, but those efforts have been widely debunked.  She also unfortunately endorses the “third way” group that purports to stand against both Republicans and Democrats but always somehow manages to undermine Democrats the most.

More to the current point, however, Rubin still does not understand the idea that Warren is looking for a set of legal rules that are pro-capitalist in the sense of allowing businesses that want to make an honest buck to do so.  Rubin writes:

Well-meaning but excessive regulations can impair innovation, keep small competitors out of the market and add unnecessary cost to consumers. The question becomes how much regulation is too much, and that is best tested by examining the cost and the utility of government interference. The Trump team likely has swung too far, for example, in attacking fuel efficiency standards or basic consumer protections, but progressives will rightly be accused of trying to micromanage the economy to the detriment of consumers and workers if they seek to centralize economic decision-making in the federal government (like Trump’s tariffs!).

This is well meaning but confused.  Warren would surely agree that we should try not to impair innovation or keep small competitors out of markets or add unnecessary costs to consumers.  (I certainly would agree with that.)  That does indeed mean asking how much is too much, but even framing it as a matter of “too much regulation” misunderstands that what we are doing is changing rules, and Republicans like the rules as they are because they are so favorable to big businesses.  Calling them “regulations” adds nothing to understanding what is at stake.  We are choosing among possible rules, and Republicans baselessly denigrate some rules as “excessive regulation” while lauding other rules as “the free market.”

The ultimate point, however, is that Rubin cannot stop herself from engaging in some residual red-baiting, saying that progressives might “try[] to micromanage the economy to the detriment of consumers and workers if they seek to centralize economic decision-making in the federal government.”

This is nothing more than the old canard about having “the government” make decisions rather than businesses, which essentially resurrects the very idea that Warren so carefully rejected: Progressives are not interested in micromanaging the economy any more than anti-progressives are currently doing.  (Trump, as Rubin points out, is the worst micromanager of all.)  Progressives want to set better rules and then let people transact and compete.

What progressives understand is that setting rules changes outcomes, whereas referring to the setting of rules as “centralizing economic decision-making in the federal government” is just so much conservative cant.

Elizabeth Warren and other progressives base their work on the idea that economic decision-making should be in the hands of consumers and businesses, with rules set to make economic interactions transparent and fair even to people with less money and power.  That would be capitalism at its best.

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