Economic solutions won't come without finesse, compromise

WASHINGTON — If you step back and look at the big economic policy issues — health care, financial regulation, immigration, education reform, the budget deficit — they appear to boil down to one question: What is the best tradeoff between fairness, stability and social cohesion on one hand and disruptive and growth-inducing innovation on the other?

At its simplest level, this debate comes down to a choice between big and small government, between regulation and deregulation, between European-style socialism and American free-market capitalism.

Jim Manzi provides a perceptive analysis of these trade­offs in the latest issue of National Affairs, a new conservative journal. Best known as a corporate executive and high-tech investor, Manzi began his career in a newsroom.

"We are between a rock and a hard place," he writes. "If we reverse the market-based reforms that have allowed us to prosper, we will cede global economic share; but if we let inequality and its underlying causes grow unchecked, we will hollow out the middle class — threatening social cohesion, and eventually surrendering our international position anyway. This, and not some 'world-is-flat' happy talk, is what the challenge of globalization means for America."

Manzi is concerned that the pendulum is about to swing back too far, that the United States is on the verge of turning itself into France. But the debate, it seems to me, needs to go beyond simply determining where the pendulum should come to rest. Equally important is how effective the two sectors are in delivering all that social justice and growth-inducing innovation.

When investors engage in herd behavior and deploy scarce capital merely to bid up the price of assets, that does nothing to improve economic output or efficiency.

What good is competition if it drives corporate executives to knowingly engage in increasingly risky behavior?

What good is innovation that is used to snooker consumers, mislead investors or subvert sensible regulation?

The question is not simply whether innovation will be "stifled," as the business community likes to suggest, but whether those innovations serve a larger social purpose.

But just because markets have recently failed us does not excuse a free pass to those who argue for tougher regulation or bigger government.

History is replete with examples of well-intentioned regulation that turned out to be easily evaded or resulted in unintended and unwanted consequences. And too much of what passes for vital public expenditure turns out to be nothing more than special interest rent-seeking and economy-distorting subsidies.

And while it is now beyond dispute that labor markets are generating incomes that are increasingly unequal, governments have found it difficult to come up with cost-effective programs that offset those effects.

"An America that wants to keep its global edge cannot neglect the necessity of innovation and growth, any more than it can ignore the necessity of social cohesion and stability," Manzi concludes. The political challenge for the next decade is to strike the proper balance while perfecting the public and private institutions that can deliver on those promises.

Economic solutions won't come without finesse, compromise 01/03/10 [Last modified: Monday, January 4, 2010 7:27am]

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