Advocates of low taxes and small government like to say that America's economy -- and our society -- works best when individuals and businesses direct how the nation's wealth is used, and government's hands are kept far from the tiller. The genuis of the market, it is said, is that myriad decisions based on self-interest produce outcomes that maximize overall prosperity and well-being.
Progressives tend to critique this emphasis on economic freedom on distributional grounds, pointing to the concentration of wealth that occurs when government is weak. Or they point to the ways that unchecked markets hurt investors and consumers.
But there's another obvious problem with letting private forces chart our economic destiny, which is that markets and individuals can make some pretty awful choices about how to allocate wealth.
Consider the disastrous record of capital markets over the past fifteen years. These markets ideally work to mobilize private capital for productive purposes -- such as allowing companies to raise the funds needed to invest in new technology or personnel.
But capital markets have spun far away from this mission during two separate speculative frenzies since the mid-1990s.
During the dotcom boom, the market channeled vast resources into unproven businesses in a bubble that enriched insiders but, ultimately, flushed a few trillion dollars in shareholder wealth down the toilet. As Ron Chernow wrote in 2001, after the crash:
Think of the stock market in recent years as a lunatic control tower that directed most incoming planes to a bustling, congested airport known as the New Economy while another, depressed airport, the Old Economy, stagnated with empty runways. The market has functioned as a vast, erratic mechanism for misallocating capital across America.
The same thing happened again just years later during the housing boom. The financial industry collectively lent out trillions of dollars that will never be paid back to Americans who wanted to buy bigger houses, put in new kitchens, speculate in the housing market, or just spend their imaginary home equity. Capital markets enabled this insanity by radically expanding the secondary market for mortgage debt, with the "lunatic control tower" ultimately directing all the misguided planes into one giant financial conflagaration.
It's hard to see how anyone could have blind faith in the genuis of markets after these two debacles.
As for how individuals allocate wealth, that record is not much better. We Americans tend to spend way too much on current consumption and save way too little for a rainy day. A study earlier this year found that 56 percent of workers had saved less than $25,000 for retirement. Now, granted, many Americans can't afford to save more because they are barely making ends meet, as Demos has documented in our research on the struggling middle class. But there is also a huge amount of irresponsible consumption that goes on in this country.
People's tendancy toward short-term thinking is one reason why government needs to make decisions for them. For example, while most Americans drastically under-fund their 401(k)s, the main voluntary way to save for retirement, Social Security ensures mandatory retirement savings every month and provides an all-important safety net that wouldn't otherwise exist.
Putting more wealth in private hands can also lead to bad outcomes at the societal level. The low-tax, low-spending regime championed by conservatives for a generation has created an America with lots of big houses and shiny toys, but where our crucial public goods -- like schools and transportation systems -- are falling apart.
My colleague Robert Frank points out in his book, Luxury Fever, that people are less likely to be happy in a society which prioritizes private consumption over public investment. That big house may be nice, but not if you don't have any parks nearby and have to commute through heavy traffic rather than take public transportation.
Economic freedom is an important value. But we're not better off when this value is taken to extremes.