The price of 'free' markets finally causes sticker shock

Sunday, June 19, 2005

By WAYNE M. O'LEARY,

The marketplace will make us free. So we've been told for going on three decades now. All that's necessary to do, the conventional wisdom holds, is to make sure the market itself is free - that is to say, untaxed, unregulated, unaccountable.

America's ruling elites have believed this since the 1980s and have acted (or not acted) accordingly. With few exceptions, the nation's centers of power and influence have all coalesced around the free-market ideal.

In practice, the theology of the market has meant unhesitating support for deregulation, privatization, tax cuts and free trade - and for the proposition that using government as a counterbalancing force in economic life is inherently bad.

It has also meant a touching faith in Wall Street and its institutional structures that has withstood corporate scandals, boom-and-bust cycles and stomach- churning stock fluctuations.

It has likewise signified a disbelief bordering on denial that such economic phenomena as labor outsourcing and downsizing can seriously threaten the job security of the American middle class.

This may be about to change.

Even as the incumbent administration seeks to pay further homage to the gods of the market by instituting a risk-embracing "ownership society" and sacrificing Social Security on the altar of speculation, cracks are appearing in the foundation of our civic religion.

One fault line runs directly through the heart of the financial system. After 20 years of double-digit returns in the range of 10 to 15 percent, ending in 2000, America's stock and bond markets will, according to a sobering new analysis, be lucky to achieve one-third to one-half that level of growth over the next decade; the conditions that fueled the expansion of the 1980s and 1990s (high company earnings, rising GDP, steadily falling inflation and interest rates) just won't be there.

The widely respected international investment-research firm BCA (Bank Credit Analyst) of Montreal predicts average annual returns, beginning this year, of less than 5 percent on bonds and no more than 4 to 6.5 percent on equities (2.5 to 4.5 percent after inflation) through at least 2015, well below previously anticipated gains.

Professional investors will have to drastically scale back their overly optimistic expectations under this likely scenario; more important, so will the millions of future U.S. retirees depending on market-sensitive "defined-contribution" retirement plans.

The first baby boomers exiting the work force stand to receive substantially less than they're counting on when they cash in those 401(k) mutual-fund investments that have been allowed to replace the traditional defined-benefit pensions of their parents' generation.

As for the personal-accounts scheme advanced by the Social Security privatizers, BCA's stock-return projections, which are seconded by economists at Morgan Stanley and Prudential Equity Group, reveal it to be a potential Trojan horse poised to undermine the entire social-insurance system.

Perceptions of the free market's benevolence could also be altered by another development. One of the blessings of liberated capitalism was supposed to be globalized free trade, the sacred doctrine of modern conservative, or "neoliberal," economics.

For years, no reputable member of the economics profession could afford to be heard criticizing open markets, low tariffs and the unrestricted flow of capital. To suggest imperfections in these concepts was to commit free-market heresy - to say nothing of jeopardizing one's university tenure or advancement in most departments of economics.

GAINS IN DOUBT

Now, that intellectual sclerosis has eased considerably. Prominent mainstream economists formerly in sync with the received wisdom have suddenly broken ranks. Most notably, Paul A. Samuelson of MIT, Nobel Prize winner and dean of the profession at age 89, has advanced the revolutionary notion that free trade may not always benefit advanced nations like our own.

Writing in the summer 2004 Journal of Economic Perspectives, Samuelson questioned whether, in an era when huge economies like India and China produce at comparable efficiency to the United States, but at a fraction of its wages, gains from free trade really offset the losses entailed.

Criticizing by name such eminent figures as Federal Reserve chairman Alan Greenspan and presidential economic adviser Gregory Mankiw (he of outsourcing-is-good fame), Samuelson called their assertions that trade-induced disruptions produce more winners than losers a "popular polemical untruth."

Samuelson proceeded to attack what he labeled his profession's "oversimple complacencies about globalization" and pointedly argued that the current enthusiasm for outsourcing "can induce for the United States permanent lost per capita real income."

The likely effect of uncontrolled trade liberalization, Samuelson concluded, will be a lowering of real wages in this country, brought about by what are for the United States new, harmful terms of trade.

Almost as eye-opening are the revelations of J. Bradford DeLong, a deputy assistant treasury secretary in the free-trading Clinton administration. In a recent retrospective for the Internet journal The Economists' Voice, DeLong admitted to creeping disillusionment with NAFTA, which, as a staunch neoliberal economist, he championed in the 1990s.

DeLong also expressed misgivings about the uncontrolled worldwide capital mobility that has left poorer nations more vulnerable and has increased international economic inequities.

Courting apostasy, DeLong dared to advocate modest regulatory limits on speculative reverse capital flows that devastate individual national economies by abruptly removing foreign investment. He thereby chipped away at one of globalization's key underpinnings.

SEEDS OF REVOLT

Such ideological conversions have had the effect of weakening the universal cachet of the free market, but an actual reversal of market-oriented policies will require a political revolt on the part of the broader public.

Conditions for a peaceful insurrection are certainly ripe, as The Economist magazine, no liberal broadsheet, established in a stunning year-end report on the decline of socioeconomic mobility and meritocracy in the United States.

Citing data for the last 25 years and a wide range of expert analysis, The Economist reached the inescapable conclusion that not only is American income inequality - the gap between rich and poor - the greatest it's been since the Gilded Age of the 1880s, but that social mobility - the chance to rise above one's station in life - is rapidly disappearing in the so-called land of opportunity.

America, the magazine's editors reluctantly inferred, is fast developing a static, calcified class system on the order of 19th-century imperial Britain.

What they didn't say, but what is readily apparent, is that the stagnation of American egalitarianism has coincided, almost exactly, with the triumph of the "free" market. Could it be the two are inextricably linked? Food for thought.

Wayne O'Leary is an Orono writer specializing in politics and economics.

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