Race to the bottom leads to corporatism

Right-wing advocates of limited government often argue that locating political power in state governments is preferable to locating it in the federal government. The reasoning they give for why this is the case is a bit complicated. On its face, it seems like it is irrelevant where government power is located. After all, a state government can be just as involved in regulation and social programs as the federal government is. Advocates of this view do not deny that, but they typically claim that locating power in state governments will force states to compete with one another which will lead them to reduce regulations and taxes in order to attract businesses.

That is, they believe that the natural conclusion of inter-government competition for capital investment is a race to the bottom which will force governments to increasingly dismantle labor laws, environmental laws, taxes, and other regulations. When the federal government sets nationwide standards, owners of capital have no way to escape them except of course to move out of the country, something they increasingly do. However, if a state sets a particular standard, owners of capital can just shift that capital to another state and easily avoid it. Thus, this strategy of relocating power in the states will usher in the kind of limited government those on the right-wing would like to see.

That is the theory at least. In reality, the mechanism used to force the creation of limited state governments — the profit-motivated decisions of investors — will actually create large state governments that provide generous handouts to attract businesses. Advocates of this strategy typically think of it in terms of the pairwise comparisons of investors. An investor choosing between two states would choose the one that had less environmental regulations, assuming everything else about the states was identical. Along the same lines, an investor deciding between two states would pick the state that had lower taxes, no workplace safety rules, and no unions. The state that was imposing these profit-reducing measures would then be starved of capital investment, and would thus be forced to dismantle them to stay competitive.

This analysis of what would happen makes good sense, but it does not go far enough. There is nothing that would constrain states that are competing with one another to only use decreased state intervention to attract investors. In fact, at some point all of the regulations would have to be repealed which would leave the states no choice but to compete in some other way. That other way would of course be through subsidies, corporate welfare, and other sorts of monetary bribes. If an investor is choosing between a state which will cut them a check from the public coffers and one which wont, clearly the state giving them money would be preferred. The same competition effects would kick in, and states would be off to the races to see who could hand out the most money to attract capital.

This kind of corruption of the state by owners of capital is quite natural and pops up in almost any place where a free market is supposed to exist. Noam Chomsky’s talk on this phenomenon which he refers to as the “really existing free market theory” is illuminating:

And the principle of really existing free market theory is: free markets are fine for you, but not for me. That’s, again, near a universal. So you — whoever you may be — you have to learn responsibility, and be subjected to market discipline, it’s good for your character, it’s tough love, and so on, and so forth. But me, I need the nanny State, to protect me from market discipline, so that I’ll be able to rant and rave about the marvels of the free market, while I’m getting properly subsidized and defended by everyone else, through the nanny State.

The brute fact of the matter is that a capitalist who has to choose between a perfectly laissez-faire state and a corporate welfare state will always choose the latter. Forcing states to compete to attract capital will consequently always lead to the construction of corporatist states, not limited-government paradises. To suggest otherwise is to pretend that owners of capital will not invest that capital where it will yield the best return, i.e. that capitalists will not act as capitalists.

The anti-libertarian nature of right-to-work laws

Right-wing libertarians tend to have a hostile relationship with organized labor. Labor unions have a long history of endorsing socialism, communism, and anarchism, all philosophies that libertarian capitalists vehemently oppose. Unions are also, by their very nature, collectivist organizations that primarily act to move the equilibrium price for labor higher than it would otherwise be. These union behaviors and ideological tendencies certainly annoy libertarians, but they are not necessarily inconsistent with right-wing libertarian principles.

As long as individual workers form into unions voluntarily, and the owners that they contract with do so voluntarily, there is nothing non-libertarian about the collective bargaining process. What more clear-headed libertarians object to then are not unions, but government policies which coerce owners into recognizing and bargaining with unions when they do not wish to do so. Requiring bosses to negotiate contracts with unions elected by the workers is, for libertarians, a wrongful violation of property rights and the imposition of government force. On this picture, the National Labor Relations Act is a violent infringement on the rights of individuals to freely trade with whomever they want.

This all makes sense if you accept the first principles and axioms of libertarian philosophy. If you happen to think property rights exist, and then think further that they are absolute rights, the libertarian conclusions follow. Pragmatically speaking, the historical reason for the construction of labor laws was the existence of persistent industrial strife. That strife would boil up periodically and shut down entire industrial sectors which imperiled people across the country and negatively affected the economy as a whole. Nonetheless, in the narrow libertarian view, interventions even for those reasons are still unjust, and so they must oppose laws which protect union activity.

On the same note, however, libertarians should also be opposed to so-called right-to-work laws. These laws — which are on the books in 23 states — forbid unions and business owners from signing agreements that make union membership or payment of dues a requirement for those hired by the business. Government policies which prevent owners from voluntarily entering into an agreement to create a closed shop are as coercive and anti-libertarian as the union-friendly labor laws that typically attract much more libertarian ire.

Why should a union and a business owner be forcefully prevented from signing an agreement that requires prospective employees to join a union in order to be hired? It is not a violation of anyone’s freedom, not in the negative libertarian sense of the word. A worker looking for a job does not have a positive right to a non-union job. If this prospective employee does not want to join a union, she is completely free to avoid doing so by simply passing up the job. Government intervention in the form of right-to-work laws violates the property rights of business owners, dictating to them what they can and cannot contract for in the execution of those rights.

The anti-libertarian nature of right-to-work laws is pretty obvious which makes it a bit strange that libertarians focus far less attention on them than they do the National Labor Relations Act. One possible excuse a libertarian might provide is that although right-to-work laws violate libertarian principles, they are created to counteract other violations of libertarian principles. A libertarian who holds this view is tacitly endorsing the following preference ranking:

  1. No federal labor laws and no right-to-work laws.
  2. Federal labor laws and right-to-work laws existing simultaneously.
  3. Federal labor laws and no right to work laws.

It is clear that option 1 would be the preferred world for libertarians. In that world, there is no government intervention forcing businesses to recognize unions and no government intervention forcing them to not enter into certain agreements with unions. What is not so clear is why option 2 should be ranked above option 3.

In an additive sense, option 2 actually imposes two instances of forceful government intervention while option 3 imposes just one. In a more qualitative sense, both 2 and 3 are deviations from the libertarian ideal; they just attack property rights in different ways. As a theory that focuses on an ideal, libertarianism is incapable of determining which of the two non-ideal worlds is closer to the ideal than the other.

Despite this theoretical impasse, right-wing libertarians persistently attack union-friendly labor laws as unjust, while barely mentioning the business-friendly labor laws that are just as problematic in their worldview. If libertarians want to be consistent, they should be attacking right-to-work laws as adamantly as they attack the National Labor Relations Act. That they choose not to is somewhat telling.

The ideological significance of the financial crisis

The financial crisis is nearing its three year anniversary, and the ideologically-tinged battles over identifying its causes are still roaring on. For champions of the free market, much is at stake in explaining what led to the 2008 financial meltdown. On its face, it appears that banks and investors foolishly jumped on the bandwagon of an asset bubble driven by the extension of easy credit. When that bubble popped, the investment vehicles built on top of it saw a huge loss in value, causing a panic that would have — if not for government intervention — precipitated a world-wide financial collapse and great depression.

Investors and banks incompetently bankrupting themselves and bringing down the rest of the world with them is hard to reconcile with the usual rhetoric about the self-correcting, rational, efficient market. Defenders of that particular ideology are then pressed to find some way to explain away the crisis that absolves the market actors from the colossal mistakes that they made. If they can blame their actions on something else — ideally government behavior — then they can protect their free market ideology from what would otherwise be a devastating counter-example to its practicality.

Efforts to provide a government-blaming explanation have revolved around two main claims. The first is that the Community Reinvestment Act — a 1977 law that outlaws the racist practice of redlining — forced banks to make the bad mortgages that drove the asset bubble and the eventual financial collapse. At first glance, this argument is very implausible given that the law has been around for three decades, and only requires community banks not to discriminate between equally creditworthy individuals. Whatever one thought of the viability of the argument, it was crushed in the Financial Crisis Inquiry Commission report which found the following:

The Commission concludes the CRA [Community Reinvestment Act] was not a signifcant factor in subprime lending or the crisis. Many subprime lenders were not subject to the CRA. Research indicates only 6% of high-cost loans — a proxy for subprime loans — had any connection to the law. Loans made by CRA-regulated lenders in the neighborhoods in which they were required to lend were half as likely to default as similar loans made in the same neighborhoods by independent mortgage originators not subject to the law.

With that attempt to blame the government defeated, the only other argument coming from those trying to defend the market ideology centers around Fannie and Freddie. The arguments surrounding that are fairly technical and largely depend on disputes about definitions. I wont go into the discussion in depth here, but Mark Thoma provides an abundance of different analyses explaining where those arguments go wrong. The short of it is this: even though Fannie and Freddie did foolishly participate in subprime lending and securitization, they were late to the game and were only responding to existing market trends set by private originators and investment houses.

To that analysis, I would add that even if the behavior of Fannie and Freddie did lead banks and investors to create a speculative bubble, there is no reason it should have. Private market actors were under no obligation to buy mortgage-backed securities; ratings agencies were under no obligation to provide AAA ratings to those securities; investment firms were under no obligation to leverage themselves in a way that left them insolvent when the bubble burst; AIG was under no obligation to insure the mortgage-backed securities in a way that would eventually leave the firm bankrupt; and, other mortgage originators and investment banks were under no obligation to copy the practices of Fannie and Freddie (although we know that Fannie and Freddie were actually copying their bad practices).

The fact that market actors freely chose to do all of these things reflect that they had misjudged the risk the housing bubble posed, a sector-wide misjudgment that had catastrophic consequences for the entire world. Defenders of the ideology of unrestrained markets have nothing that they can say about those freely chosen decisions. Market actors are supposed to be acting on all of the knowledge that is available to them, including any distortions that Fannie and Freddie introduce, information about which was public and accessible. They are not supposed to make decisions which bankrupt their own firms and bring down the entire financial sector, certainly not en masse. But in this case, they did exactly that.

What the financial crisis represents is a real-world refutation of the idea that the market is rational and can be counted upon to self-regulate. In theory that argument has some compelling features. After all, why would a firm trying to maximize profits take actions which destroys itself. Whatever the reason is — incompetence, misplaced incentives, or irrational exuberance — we have a perfect example of firms doing just that.

If proponents of a wide-open free market were intellectually honest about this financial crisis, they would have to revise their views in the same way that Alan Greenspan — previously a proponent of the ideology of self-regulating markets — did soon after the meltdown took place. Of course, just because they should do it does not mean that they will. Given the central importance of this view for the entire ideology of the right wing, I am doubtful anything could ever convince them to abandon it.