Clifford Winston: “Market Corrections Not Government Interventions”

That’s the title of a new book (Palgrave MacMillan) by Clifford Winston, Senior Nonresident Fellow in  Economic Studies at Brookings.

From the Introduction:

Economists have long argued that government should complement markets by implementing a policy intervention if markets fail. For example, if a firm monopolizes a market by using anticompetitive strategies and sets supracompetitive prices, they hold that the antitrust authorities should bring a monopolization case against the firm and seek
a remedy that eliminates the cost to consumers from elevated prices.

However, economists generally have not considered that markets could complement government by self-correcting when government does not intervene or when a government intervention fails. For example, if the government loses a monopolization case or decides not to bring one, a new entrant could reduce consumer prices by using a new technology
to develop a product that competes effectively against the monopolist’s product.

…

…the pendulum has not moved when it comes to government failure. Economists have long acknowledged government failures but tend to associate them narrowly within their field of specialization.

For example, government failure results from inefficient regulations and rules according to industrial organization economists; from price controls according to health economists; from rent controls according to urban economists; from tariffs and quotas according to trade economists; and so on. And in most cases when a market failure occurs, more economists would contend that imperfect government action to correct an alleged
market failure is preferable to no government action, instead of no government action being preferable to harmful government action.

Because economists generally believe that market failure is a greater social problem than government failure, they are unequivocal about recommending a government policy intervention to address an economic goal, such as correcting an alleged market failure due to imperfect information about a product, or a social goal, such as reducing poverty.
My view, however, is that economists should be cautious before recommending any policy intervention because government policies often fail in practice, even if they should work in theory, and they are rarely reformed in the long run. In contrast, markets may fail in the short run but could self-correct in the long run, so economists should be more cognizant
of markets’ capabilities.

Here’s the table of contents:

1 Introduction 1
Part I Government Failure
2 Defining and Measuring Government Failure 9
3 Government Policies, Institutions, and Benchmarks for Assessing Government Performance 15
3.1 Government Institutions to Formulate and Implement Public Policies 18
3.2 Benchmarks for Assessing Government Policies 19
4 Empirical Evidence of Government Failures 25
4.1 Government Policies that Reduce Social Welfare 26
4.2 Government Policies that Have a Negligible Effect on Social Welfare 36
4.3 Government Policies that Increase Social Welfare at Excessive Cost 39
4.4 Common Features of Government Failures 42
4.5 Pushback From Policymakers and Their Supporters 45
4.6 Potential Policy Improvements to Reduce Government Failures 47

5 The Failure to Explain Government Failure 53
5.1 Theories of Government Successes 54
5.2 Theories of Government Failure 55
5.3 Empirical Evidence on Explanations of Government Failure 57
Part II Market Corrections
6 Defining and Illustrating Market Corrections 71
6.1 Why are Market Corrections Possible in Theory? 72
6.2 Illustrating Market Corrections 74
7 Empirical Evidence of Market Corrections to Address Economic and Social Goals 81
7.1 Market Corrections that are Independent of Government Policy 82
7.2 Market Corrections Facilitated by Government Policy Reforms 91
7.3 Preliminary Market Corrections That Have the Potential to Produce Large Benefits 94
8 An Assessment of and Ongoing Challenges for Market Corrections 101
8.1 A Comparison of Government Failures and Market Corrections 101
8.2 Challenges for Markets 108
Part III Implications for Economists and Policymakers
9 Implications for Economists 119
9.1 Distinguishing Between Market Failure and Government Failure 120
9.2 Comparing Market and Government Long-Run Performance 124
9.3 Identifying a Market Failure but Ignoring Government’s Failure to Address It Efficiently 128
9.4 New Empirical and Theoretical Contributions by Economists to Improve Policy Debates 133
9.5 Include Extensive Discussion of Government and Market Performance in Course Content 135

10 Implications for Public and Private Sector Policymakers
10.1 Government Failures in Multiple Branches of Government
10.2 Could Journalists Help Bridge the Gap Between Economists and Policymakers?
10.3 Recommendations for the Private Sector
Epilogue: The Challenge of Changing Attitudes Toward Markets and Government in a Divided Nation

Given the timing of the publication, one might wonder how policy-making in the Trump 2.0 era fits in with the prescriptions in the book. Readers interested in that question could well turn to the Epilogue.

(As a side note, Dr. Winston, along with Dr. Robert Crandall, was my supervisor as a RA at Brookings – right after working for Peter Navarro).