U.S. economy doesn't need radical intervention

Politicians in both parties seem to believe that the U.S. faces looming catastrophes that require a radical rethinking of economic policy. They're wrong. The nation certainly has serious challenges, but the foundations of the economy are healthy. Radicalism is not required.

The populist right and progressive left seem to agree that the dominant consensus in economic policy of recent decades — a central role for markets, friendliness toward globalization and free trade, and wariness of over-regulation — has been bad for Americans. This bipartisan consensus is predicated on the false view that the past several decades have been bad for typical workers and households.

The most recent example is President Joe Biden's wide-ranging executive order to bolster market competition. It contains 72 initiatives, some of which conservative populists will applaud. For example, the Biden administration will apply greater scrutiny to proposed technology-company mergers. It will encourage the Federal Trade Commission to establish rules restricting the ability of tech companies to accumulate data on users and to limit the power of large online retailers like Amazon to overwhelm smaller competitors.

It recognizes that the Department of Justice and the FTC have the legal authority "to challenge prior bad mergers that past administrations did not previously challenge." This is pretty radical because the administration seems set on moving antitrust policy away from the durable consumer-welfare standard, which has long defined monopoly power in part as the ability to raise prices above competitive levels. That standard, not a conviction that big is necessarily bad for market competition, has been supported for decades by the mainstream of both political parties and by the courts.

"We are now 40 years into the experiment of letting giant corporations accumulate more and more power," Biden said, referring the adoption of the consumer-welfare standard for competition policy. "And what have we gotten from it? Less growth, weakened investment, fewer small businesses." The president concludes, "I believe the experiment failed."

As with antipathy toward tech companies, the president will find allies among conservative populists. U.S. Sen. Josh Hawley, the rising Republican star from Missouri, has a bill that would ban mergers and acquisitions by companies with more than $100 billion of market capitalization.

According to Hawley: "While Big Tech, Big Banks, Big Telecom, and Big Pharma gobbled up more companies and more market share, they gobbled up our freedom and competition. American consumers and workers have paid the price."

"Big Pharma" is profitable. It also created multiple vaccines that are remarkably effective against a once-in-a-century global pandemic in less than one year. And "Big Telecom" allowed millions of Americans to work from home while the pharmaceutical companies were saving lives.

Some of the president's 72 initiatives are laudable, like efforts to increase competition for workers in the low-wage labor market. It seems reasonable to me that hearing aids could be sold over the counter, which is included in the executive order. But many of the initiatives represent significant government overreach, efforts to micromanage the economy to its detriment.

Similarly, I applaud the White House for calling for more rigorous antitrust enforcement — but that enforcement should be guided by the consumer-welfare standard.

For example, you can make an argument that social media giants reduce consumer welfare by gobbling up competitors, or that online retailers may keep prices low until they have captured a larger share of the market, at which point they will raise prices.

In my view, the tech companies pass the consumer-welfare test, and it takes rigorous analysis to make these determinations. Even so, the decades-old standard is not a free pass for anticompetitive behavior. The radical step of tossing it aside in favor of "big is bad" is unnecessary, and could lead to politicized enforcement and consumers facing higher prices while enjoying less varied, lower quality goods and services.

Politicians from both parties argue that the game is rigged against workers in favor of elites. In 2019, Hawley declared that 70% of Americans haven't seen an inflation-adjusted wage increase in 30 years. In 2016, U.S. Sen. Bernie Sanders proclaimed that living standards have fallen for workers. "For many, the American Dream has become a nightmare," he said.

The data tell a different story. Over the three decades from 1990 until 2019, inflation-adjusted wages for non-supervisory workers increased by one-third. Over roughly the same period, median household income grew by 44% after accounting for taxes and government transfer payments. In the years following the 2008 global financial crisis, concern about income inequality soared, but the measure of inequality used by the nonpartisan Congressional Budget Office stagnated or declined. According to my calculations, around three-quarters of people in their 40s have a higher household income than their parents did when they were of comparable age.

The U.S. faces considerable economic challenges. It needs better policies to overcome them. But the American Dream is not dead. Populism on the left and right could put its survival in jeopardy by pushing for radical changes in public policy, predicated on a distorted understanding of economic outcomes.

In his executive order, Biden seems to be going down this misguided path.