Review: Rigged by Dean Baker

 

rigged-dean-baker

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So, after a bit of a break from the blog and political economy, I’m back with another one of my economics book reviews! This time, I’ll be reviewing Rigged: How Globalization and the Rules of the Modern Economy Were Structured to Make the Rich Richer by Dean Baker. While not quite on the same level as Michael Hudson, Baker is a very impressive economist in his own right. He, along with Hudson, was one of the few economists to get the housing bubble right. Baker is also not afraid to go against the grain and slay sacred cows, conservative and liberal alike. Whether he’s mocking liberals’ praise of Bill Clinton’s budget surpluses or pillorying conservative fiscal hawks, Baker demolishes conventional wisdom in a witty and accessible manner.

Most importantly, he advances an argument that is usually anathema to his fellow progressives, namely that the market can be a force for good. As Baker notes, most progressives tend to be suspicious of, if not downright hostile towards the market. They see the market (ie. untrammeled capitalism) as producing gross inequality, which necessitates government intervention. Meanwhile, the Randroid and National Review crowds insist that government intervention is an unjust imposition on free enterprise; we should curtail rules and regulations and let our brilliant job creators go about their business.

As Baker convincingly asserts, both sides are wrong: rules and regulations are what make the market. That’s why, rather than soaring inequality being an inevitable (if bemoaned) outcome of market capitalism, America’s current inequality was caused by deliberate policies designed to redistribute income upward. With thorough documentation and trenchant analysis, Baker convincingly demonstrates that we need to stop viewing the market as some law of God or nature.

Granted, those already familiar with Dean Baker’s work won’t find many new insights in Rigged that aren’t present in his older books such as The Conservative Nanny State. Nevertheless, in an era of surging anger and populism, Rigged vindicates many of our frustrations with the current economic order. If you think that certain wealthy individuals get paid way more than they deserve, you’re right! By analyzing the pay of highly compensated professionals (doctors, dentists, lawyers), CEOs, and intellectual property holders, Baker demolishes the notion that America’s winners deserve every last bit of their income. Once again, I’ll break this post down into various bolded sections. Here goes! I’ll begin with professionals.

Professional Protectionism

A common line from neoliberals, libertarians, and other economic sociopaths is that today’s “losers” in the global economy simply need to acquire more skills. If only they had the intelligence and discipline to properly educate themselves, they could get ahead. On the flip side, highly compensated professionals such as doctors, dentists, and lawyers are deserving winners reaping their just rewards. We can’t punish hard work and success, can we?

Actually, we can, if by “punish” you mean curtail these professionals’ rents. Just to review, economic rent is any income or pricing not tied to labor or production costs – a nice way of saying such income is unearned. While Michael Hudson focuses primarily on passive rentier income in the forms of land rent and capital gains, Baker zeroes in on rents that arise from market imperfections and anticompetitive behavior. In other words, while highly paid professionals are certainly not lazy and are much more active than the likes of landlords – and, unlike landlords, they actually provide necessary services (well, some of them) – they nevertheless make a lot more than they should, and certainly a lot more than their counterparts in other 1st world countries.

The secret of their success is that they essentially function as a cartel; they use their power and influence to reduce competition. Not only do they artificially limit their supply through various licensing restrictions, but they even monopolize certain services that lesser paid professionals in the same field are fully capable of performing. Baker writes:

Doctors are able to maintain such high salaries in large part because of measures that protect them from competition. We have limits on the number of people who go to medical school and on the number of foreign medical school graduates who can enter U.S. residency programs, the completion of which is a requirement for practicing medicine in the United States. State laws also limit the extent to which nurse practitioners and other healthcare professionals can perform tasks, such as prescribing medicine, that might limit the demand for doctors.

Protectionist barriers limit competition among other highly paid professions as well. Dentists cannot practice their field in the United States unless they graduated from an accredited dental school in the United States or, recently, Canada. State rules limit the extent to which dental hygienists can perform tasks like cleaning teeth without the supervision of a dentist. State bar exams limit the number of people who can practice law, sometimes sharply curtailing the supply of attorneys by making the exam more difficult.

Some may wonder why I’m gratuitously bolding everything with the word “state.” The reason is because I want to make it abundantly clear just how much government policies shape the economy. As Baker says, no “economic rule states that doctors, dentists, lawyers, and other professionals at the top of the pay ladder should be protected from the wage-depressing effects of globalization.”

Memo to the meritocrats: even those who do possess “marketable skills” would be priced out – or at the very least have their salaries significantly reduced – if we lived in a truly competitive free market. After all, there are hundreds of millions of bright, diligent people all over the world, and most of them would gladly do the jobs American professionals do for significantly lower salaries – what liberals and Conservatism Inc hacks call “doing the jobs Americans won’t do” when it’s low-wage immigrants displacing native workers. Of course, the difference between affluent professionals and despondent working class people in ex-industrial towns or cities like Detroit is that the former have the political and social clout to safeguard their interests.

Now, many people would insist that these rules and regulations are necessary to ensure safety and quality. To a certain extent, they have a point, since most of us would rather be treated by Dr. Hibbert than Dr. Nick.

dr-nick

Others might argue that due to the high debts these professionals incur while pursuing their education, they’re entitled to a big payday. Nevertheless, as Baker has argued on countless occasions, markets don’t care about rationalizations. Protectionism and government intervention by other names are still protectionism and government intervention.

Indeed, the most important takeaway from this section is that the economic effects of globalization on workers were/are politically determined. If America wanted to, it could devise new agreements designed to get as many cheap and qualified foreign professionals as possible. Regulations could also be relaxed to allow nurses, dental hygienists, and paralegals to perform more tasks. As Baker clarifies, this isn’t a matter of vindictively picking on the happy and successful; subjecting American professionals to market discipline would translate into significant savings for regular people.

So too would reigning in exorbitant executive pay.

Writing Their Own Paychecks

The rents they collect notwithstanding, doctors and dentists have nothing on the modern American CEO, who always seems to get paid handsomely even when he drives his company into the ground. As Baker remarks, this isn’t supposed to happen. For most workers, companies are always looking for ways to reduce labor costs and increase efficiency. I can also guarantee you that regular workers who royally screwed up at their jobs wouldn’t depart with generous compensation packages.

So what gives? With all the rhetoric you hear about “shareholder value maximization” and the modern corporation’s “fiduciary obligation” to shareholders – idiotic and dangerous notions, to be sure, but that’s for another time – why aren’t these esteemed shareholders bringing overpaid and incompetent CEOs to heel?

In reality, regular shareholders don’t wield much influence. Baker writes:

Stockholders are a diffuse group of individuals and institutions, most with little direct stake in the running of the company since the dividends and capital gains are a small portion of their income. Organizing among shareholders to improve corporate practices and to change top management has high transaction costs, and so it is far easier for shareholders to simply sell the stock of a company if they are unhappy with its performance. In this environment, top management will often have effective control over the running of a company.

Predictably, when left to their own devices, top managers such as CEOs effectively get to write their own paychecks. Long story short, CEO compensation is ultimately approved by members of the board, who seldom reject proposed CEO pay packages. The main reason boards seldom deny CEOs play money is because directors often owe their very positions to CEOs, and one doesn’t bite the hand that feeds him; especially when directors get paid six figure salaries to attend around 6-12 meetings a year. Unsurprisingly, there aren’t meaningful incentives to subject CEOs to market discipline, which means that rents comprise a significant percentage of CEO pay (which, should go without saying, is much higher in the US than other 1st world countries).

Aside from siphoning off income that could instead benefit shareholders and even regular workers, what makes comically high CEO pay especially toxic is the “trickle down” effect of raising executive salaries at hospitals, nonprofits, and educational institutions. After all, they can reasonably claim that they deserve their large paychecks since they can always work in the private sector. To make matters worse, because nonprofit organizations are tax-exempt, the high incomes of non-profit profiteers are directly subsidized by US taxpayers. Even obvious business endeavors such as college athletic programs enjoy tax-exempt status. As Baker comments, it would be akin to making university-owned hotel chains tax deductible. There is absolutely no reason why we should have to subsidize the salary of Alabama’s football coach. 

Fortunately, thanks to the magic of the market, there are ways to bring these executives’ salaries down to earth. Since limited liability corporations (LLCs) are legal entities – that is, creations of Big Government – that are subject to rules and regulations, then the rules of corporate governance can be restructured to ensure that top managers can’t just grab the loot and run.

For nonprofits, bringing executive pay down to earth is much more straightforward: if nonprofits want tax exemptions, they have to limit executive pay to reasonable levels. Simple as that. Of course, this doesn’t mean that nonprofits are prohibited from paying their executives whatever they want; they just can’t do so at our expense. Unfortunately, until these reforms are enacted, they still can and do.

However, all of that being said, nobody profits at our expense like Big Pharma and other intellectual property holders.

Hidden Monopolies

We all know that piracy is bad. As a typical American who grew up watching movies, I was bombarded by messages – FBI warnings threatening $250,000 fines for copyright violations, and ominous sounding movie theater ads asserting that malevolent pirates harm creative workers – meant to convey that copyright offenders aren’t much better than muggers who rob old ladies. Sure, many Americans don’t exactly heed these warnings and pleas, at least if the enduring popularity of Pirate Bay is any indication. Nevertheless, most Americans still take copyright laws for granted and see them as a natural part of the economy.

However, it turns out that copyright laws are yet another creation of Big Government. The government essentially grants copyright holders an exclusive right to sell a product, and penalizes anyone else who distributes said product without permission. Put another way, the government gives copyright holders a monopoly. Yes, a monopoly. One can argue that copyrights – and their cousin, patents – are necessary to incentivize creative work (they’re not, but more on that later). One can even claim that diligent creative workers deserve to enjoy the fruits of their labor in the form of intellectual property claims. Yet again, markets don’t care about rationalizations; a monopoly by another name is still a monopoly.

These government granted monopolies are what enable predators such as Mylan to charge insane amounts for EpiPens that contain around $1 worth of epinephrine. Patents also give Big Pharma perverse incentives to push various drugs – sometimes of dubious quality – on the market, knowing that they can charge monopoly prices. Just to put this all in perspective, high intellectual property charges are the equivalent of tariffs around 1000%.

To compound matters, IP monopolies have their own negative “trickle down” and ripple effects. All the time and money squandered on copyright and patent litigation alone represent significant economic waste. According to Baker, there are even “patent trolls” – companies whose sole purpose is to push patent claims against profitable companies. Not to mention that large corporate giants can use their arsenal of copyrights and patents to frustrate, delay, and at times eliminate would-be competitors. And since the government continues to strengthen and lengthen these protections, even going so far as to force third parties to enforce copyright laws, this form of rent-seeking will only get worse.

Yet you will almost never see ardent “free trade” proponents denounce this form of government intervention in the economy. Indeed, their inability and/or unwillingness to condemn such infringement on free enterprise is rather telling. It’s almost as if these cocktail conservatives only care about the wants of the wealthy.

But anyway, we all know that the game is rigged, and that there’s socialism for the rich and capitalism for the rest. We get that the current way of doing things is inimical to the long-term health of American society. What, then, can we do without going to the other extreme and crippling genuine job creators?

Rigging the Market in Our Favor

Obviously, we cannot just immediately throw open the doors to foreign professionals, restructure corporate governance, and abolish patents and copyrights. We need to make sure that our professionals are competent, that better forms of corporate governance are developed, and that there remain sufficient incentives to pursue creative work.

In the case of professionals, there’s no reason why market discipline must compromise high standards. By establishing a global accreditation process and mandating that foreign professionals meet various qualifications, we can substantially lower expenses for the average person while ensuring that we’re not at the mercy of a Dr. Nick or Lionel Hutz. After all, we demand safety and quality (with flaws, obviously) when it comes to various imported goods; we can do the same for doctors, dentists, and other professionals.

For CEOs – the most overpaid professionals of them all – corporate governance can be regulated by the government to curtail exploding CEO pay. For example, the government could enact a law stipulating that directors lose their stipend in the event that shareholders vote no on any proposed CEO pay package. As Baker says, directors might then think twice about handing tens of millions to incompetent CEOs. To complement the stick with the carrot, directors who reject exorbitant CEO pay packages could share in half of the money originally intended for the CEO. Not a bad way to reform corporate governance without unduly interfering with business. 

Likewise, there are alternatives to America’s broken intellectual property laws. For starters, there is always the option of publicly funding research in advance, which to some extent is already done through public agencies like the National Institutes of Health. Companies could also be incentivized to accept shorter and weaker patents in exchange for R&D tax credits. Similarly, as an alternative to copyrights, individuals and institutions could receive tax credits for supporting creative work.

Anyway, if this section seems a bit truncated and disorganized, it’s simply because I’m not a policy wonk; it’s not my style. Nevertheless, these are just a few alternatives to our current rent-seeking system, and we might as well give at least some of them a shot. Otherwise, we’ll keep getting price gouged in a tollbooth economy.

Conclusion

To be clear, Dean Baker analyzes a lot more than professionals’ pay, CEOs, and intellectual property rents. Nevertheless, the reason why I focus on these topics is because it’s important to refute the pernicious myth that people are paid what they’re worth. Besides being a pure tautology, this myth is the foundation of America’s 3rd worldish inequality, which is primarily justified by the belief that one’s financial status reflects character.

Both bootstrapping conservatives and liberal meritocrats embrace this notion. Conservatives regard the poor as weak excuses for humans who don’t deserve to eat, while liberal strivers take the current structure of the market for granted because they consider themselves deserving winners. On the flip side, many genuine economic progressives also take the market for granted, only they think the government should tax the wealthy to fund a stronger social safety net.

As Baker has long argued, this is a losing formula for those who actually care about economic justice. By taking the market at face value, albeit grudgingly, progressives buy into economic conservatives’ frame. This allows neoliberals to claim that any attempts to mitigate the effects of inequality penalize enterprising winners and reward losers – and we all know that Americans hate losers.

Therefore, even though I’m generally suspicious of the business community and support a large government role in the economy, Baker makes a convincing case that the market can be used in progressive ways to benefit “losers.” By reforming intellectual property laws and forcing high-earning professionals to join the rest of us in the wonderful world of global competition, society stands to save hundreds of billions annually. These savings would reverse some of the effects of debt deflation, and help stimulate some real demand in the economy.

Even better, this approach can resonate with the majority of Americans. While most Americans – especially white Americans – support capitalism, they are nevertheless rankled by what they correctly see as a rigged game. Courtesy of Dean Baker and his myriad proposals, we can reform the game – one in which the refs aren’t on the take. Similar to tackling the FIRE economy, we only lack the political will to do what is necessary.

 

Disclaimer: Before anyone reads this post and concludes that I’ve transformed into some ardent open borders supporter and globalist in 2017, nothing could be further from the truth. Just to be crystal clear, my views on immigration have not fundamentally changed.

However, the fact of the matter is that most immigrants are cheap and low-skilled. Consequently, while many regular American workers have borne the brunt of globalization – which, to be clear, entails a lot more than immigration – their affluent counterparts have remained mostly unscathed.

One of my goals is to makes these elites share some of this economic pain. Forcing affluent professionals to endure globalization’s deleterious effects could play a big part in engendering the political will necessary to effectively challenge neoliberalism as a whole. As Baker has argued in some of his previous books, if the 1% were the only class thriving in today’s economy, there would be virtually no support for our current system. However, between the 1% and supposed 99% resides a class of comfortable professionals who by and large embrace our meritocratic status quo; if they can make it, why can’t you?

By making things uncomfortable for these smug strivers, they would have fewer reasons to buy into the current paradigm, and might actually develop some empathy for regular working people. Then, with a real 99% polarized against the 1%, we may just see some real unrest and demands for change.

What do you think?

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3 Responses to Review: Rigged by Dean Baker

  1. Oscar says:

    Excellent review, BAG! If only these kind of books were more widely read in America, especially in flyover country. I particularly liked your final observation about the “class of comfortable professionals who by and large embrace our meritocratic status quo”, they are undoubtedly one of the driving forces behind the GOP strength. They might grasp how unfair the system is since they are smart, but they see voting for Republicans in their interest, a sort of “I have got mine, buddy!”. From a European perspective it has always amazed me how a run-of-the-mill dentist could make six figures in America, but now I understand it better. There is always an explanation.

  2. Bay Area Guy says:

    Thanks for kind words! It’s always nice when someone leaves an insightful comment on one of my economics posts.

    they are undoubtedly one of the driving forces behind the GOP strength.

    Not just the GOP, but the neoliberal, corporatized wing of the Democratic Party. You’ll find a lot of affluent professionals in the Bay Area who are socially liberal, but who are nevertheless very cutthroat and socially darwinistic on economic matters.

    They’ll support gay marriage, denounce open bigotry, and check all of the right liberal boxes; but by and large, they’re comfortable with the status quo, and are not interested in fundamentally overhauling our current political economy (even if they recognize some of the unfairness).

  3. Pingback: Robert Stark interviews Bay Area Guy about our Rigged Economic System - The Stark Truth With Robert Stark

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