Salam on the US Economy

QOTD:

This is why it is so damn frustrating when people say, “Hey, Barack Obama has been great for the private sector economy. Check out those huge corporate profits!” Huge corporate profits reflect product markets that are not sufficiently competitive. Product markets become less competitive in economies defined by high barriers to entry, including costly labor market regulations. This isn’t about President Obama. Rather, it is about the accretions that happen in any stable, affluent society.

And this:

I really want to live in a world in which center-right types would say, “Yes, enormous corporate profits are a bad thing — they’re bad because they’re a symptom of crony capitalism. The solution isn’t to tax away profits and use them to expand an inefficient public sector. Rather, it is to facilitate exploratory innovation by reducing barriers to firm entry.”

This is something that center-left folks (and progressives) also do not understand. The TBTF problem and huge profits in finance are reinforced by regulations. Regulations, even the well-crafted and necessary, will tend to support large incumbent firms almost all the time. And not just because they can lobby more effectively, but because they have the resources and market base to comply more easily than new competitors would. The fact that our financial sector is so profitable and so top-heavy is a strong sign that our regulatory code is seriously screwed up. As is the rise of the shadow banking system.

Although perhaps desirable for other reasons, raising taxes does not solve this problem and could even exacerbate it, by reducing the gains to entry even further.

I would like to see a program along the lines that Salam suggests later in the post, including an overhaul of the tax code using Simpson-Bowles as a starting point. The swiss cheese system of deductions, depreciation write-downs, loopholes, and credits is distortionary and generally benefits those who don't need much help rather than those that do. I would like to see policies designed to reward innovators rather than incumbents, and that will mean less regulation in some areas. I would like to see a program of work supports similar to what Salam describes, which sounds (to me) like something similar to the German system. I do not want to see major cuts in entitlement programs, as Salam does, as I believe a stronger safety net is more important in a more-competitive and more skills-driven economic system.

In short, at the same time the US worked to make the global economy more open and competitive, it did not enact policies that made itself more open and competitive. For a long time, our dominant global position meant that we could collect rents from the rest of the world, which we then distributed according to political demand. But those rents are now being competed away while the political demands have not. It's a fixable problem*, I think, but not until we recognize what the problem is. Right now it doesn't appear that either major political party does.

*And, at the global level, it isn't a problem at all. Competing away US rents is a good thing for the world.