Gary H. Stern - President, 1985-2009
Published June 1, 1992 | June 1992 issue
Elsewhere in this issue of The Region, the views of Milton Friedman and Friedrich A. Hayektwo eloquent spokesmen for the virtues of free market capitalismare summarized. Reflecting on their contributions, I am struck once again by the intellectual force of their positions, many of which have been confirmed by developments in the global economy in recent years. Further reflection on their views leads me to consider two additional issues, namely those circumstances in which limitations on market-determined outcomes may be appropriate and, second, the depth of the commitment to a market economy prevailing in the United States today.
While I firmly believe that most economic decisions are best left to the market or to Hayek's "spontaneous order," I also recognize that there are circumstances in which government intervention in economic affairs is appropriate. Even Milton Friedman is "not in favor of no government." The banking system, at least as it has evolved, provides a fine example of an industry in which government supervision and regulation is essential.
A key development in banking was the introduction and ultimate expansion of federal deposit insurance. Whether such insurance was really necessary to stabilize the system is debatable, but it is also largely irrelevant at this point. We have an extensive deposit insurance system in place, one which, as we have seen, puts the taxpayer at significant risk as banking institutions encounter performance problems. Regulation and supervision are needed to limit risk-taking by banks, in order to protect the interests of the taxpayer. Otherwise, bank depositors would have virtually unlimited and unfettered draw on the taxpayer. The banking legislation passed last fall by Congress and signed into law (The FDIC Improvement Act) has been criticized on many grounds, but I thought it rather good legislation in that it did not add to the taxpayer's exposure.
Maintaining that there is a legitimate role for government in a market system like ours does not answer the question of the size and scope of that role, however. Like Friedman, I am concerned that the government already looms too large in our economic affairs. Put another way, I fear that we are losing confidence in market outcomes, not because the market has failed but because we are unhappy with the results. As a consequence, we turn too often to government for redress.
Friedman cites several specific examples of this phenomenon, but the question that intrigues me is: Why is confidence in the market economy diminishing? There is no single answer to this question, but in my judgment a major factor is the domestic impact of global competition. An increasingly competitive global economy has put a good deal of pressure on some sectors of domestic industry, its management and employees. To be sure, many consumers and producers have been the beneficiaries of heightened competition, for they can purchase a wide range of quality products at favorable prices, but these benefits are generally subtle and widely dispersed. In contrast, plant closings, job losses and weak earnings are highly publicized, and almost inevitably call into question the health of the economy.
In this environment, not only are the benefits of competition obscured or forgotten, but also perspective on the fundamental nature of a market economy is lost. A healthy economy is characterized by diversity, with some industries growing rapidly, some contracting and some maintaining their position. This diversity is far preferable to preservation, at whatever cost, of the status quo. In short, declining businesses are a normal part of capitalism, for in a successful economy resources move from areas in which they are redundant to sectors which are expanding.
For those adversely affected, these adjustments can be painful and costly. Thus, there is often a legitimate role for government to facilitate such transitionunemployment compensation is a program that quickly comes to mind. But I see no reason that these adjustments should undermine our fundamental confidence in free markets.
This conclusion is reinforced since it is simply not true that America has failed to compete successfully in manufacturing and in other major sectors internationally. Since 1986, the U.S. foreign trade deficit has narrowed significantly and persistently. Further, the volume of exports of U.S. manufactured goods has grown far more rapidly in the aggregate over the past five years than those of other industrial countries.
In short, the apparent diminution of confidence in the market system does not square with the facts of U.S. global competitiveness. While it is true that consolidation and contraction have characterized some major industries recently, others have thrived and expanded in this environment.