Everything for Sale: The Virtues and Limits of Markets. - book reviews

Washington Monthly, May, 1997 by David Reich

by Robert Kuttner Alfred A. Knopf, $27.50

BEWARE THOSE MARKET loving politicians, With their hands-off approach to economic policy!

According to Robert Kuttner, this approach--dear to Gingrich conservatives and some Clintonites--can actually lead to the wasting of economic resources. And while Kuttner probably goes further in his rejection of laissez-faire capitalism than can be justified by his evidence, he makes an important contribution in his new book by discrediting the rhetoric of the laissez-faire policy makers.

Advocates of this approach maintain that in a free market, companies that can use resources to generate the highest profit will offer the highest prices for them. So investment, labor, and raw materials will be directed to the sectors in which they can be best and most profitably used. The resulting efficiency will be reflected in lower prices.

But Kuttner demonstrates that national wealth can actually be damaged by unrestrained capitalism. And he backs up his claim with hard-headed economic arguments. Readers inclined to dismiss "soft" liberal complaints that free markets lead to inequality of wealth or individualistic consumerism will have a hard time brushing Kuttner off. In case after case, Kuttner shows how naive support of a free-market orthodoxy that does not consider the imperfect conditions in which deregulation is applied or the subtle ways it can fail, has lead to distortions in markets such as health care, labor, electric power, telephone service, and even finance--with huge losses in economic and social welfare.

Take the case of health care. Kuttner explains how the inherent flaw in this particular market is the consensus--among conservatives and liberals alike--that everyone should have access to medical treatment during an emergency. Since someone (in many cases the hospital) will always foot the bill, there are few incentives for doctors, hospitals, and insurance providers to compete on the basis of price. Most profits come not from increasing efficiency and weighing costs against benefits, but from offering expensive services. The free-marketeer's solution to these cost over-runs is Health Maintenance Organizations (HMOs)--which currently serve over 55 million Americans. HMOs cut costs by dismissing doctors who tend to offer expensive treatment, and by restricting patient access to expensive care except when absolutely necessary. To this extent, HMOs support the claim that making markets free rein maximizes efficiency for society as a whole. But, Kuttner goes on to describe how HMOs also devote a great deal of effort to promoting strategies that have little social benefit--such as shedding the least profitable patients from their insurance rolls. This may be good for an individual HMO; but since the imperfections of the market mean that someone else must pick up the tab for those patients who've been ditched, there is no net gain for society as a whole. Therefore, instead of allowing HMOs to waste resources on risk assessments and marketing (at least a 15 percent overhead, according to Kutmer), the government should concentrate on keeping costs down within a legislated framework of universal health insurance.

So just what sort of regulation does Kuttner approve of? He advocates subsidies for key industries, reminiscent of the aggressive trade policies of his colleague and co -founder of The American Prospect, former Labor Secretary Robert Reich. He also calls for regulation that is responsive and specific to a particular industry's needs and that makes the market work more smoothly and conform to social goals. By and large, this regulation can rely on market mechanisms--for example Kuttner approves of the markets that have been created in the Midwest which allow companies to trade vouchers for the right to pollute. On occasion, however, Kuttner believes regulation should also be driven by forces beyond those of the market, as in the case of health care. How can such regulation be prevented from damaging the economy? Kuttner advocates a process of "iterative" regulation, in which regulatory policies are evaluated and reevaluated until they're made effective--a process that would rely on high-minded public servants who carry out their work within designated parameters and according to a generally good regulatory ethic. This iterative regulation, of course, would require oversight and political control to root out bad regulatory agencies that have become over-friendly with the very industries they are supposed to regulate.

As an example of successful iterative regulation, Kuttner points to the way Assistant Attorney General Anne Bingaman handled the anti-trust case against Microsoft in 1995. According to Kuttner, the government "walked a careful tightrope between discouraging Microsoft from using its market power to savage smaller rivals and resisting moves that might undercut Microsoft's own earned market leadership"

The Microsoft case, and others like it, inspire some confidence in the officials who are responsible for the regulatory machinery. However, some of the regulations Kuttner proposes can have unintended, negative consequences. For instance, Kuttner argues that it would have been good to moderate the leveraged-buyout craze of the later 1980s because several companies were damaged by predatory practices. But there are now many mainstream economists who see the craze as having had a good effect on the economy, forcing the management teams of other companies to stay on their toes for fear that they, too, would be bought out. Thus, leveraged buyouts contributed to the efficiency-and productivity-oriented business environment of the 1990s, a benefit which more than outweighed the negative effects to particular companies. This points to an important lesson that Kuttner ignores: Markets, more than regulators, tend to be self-correcting, and we should never lose sight of the fact that America has done passably well in the last 20 years as many regulations have been lifted.