A few weeks ago, American Compass released Rebuilding American Capitalism, A Handbook for Conservative Policymakers. This Forbes column (American Compass Points To Myths Not Facts) provided a very brief critique of the handbook’s “Financialization” chapter, and Oren Cass, American Compass’s Executive Director, released a response titled Yes, Financialization Is Real.
Today’s Cato at Liberty post is the second in a series that expands on the original criticisms outlined in the Forbes column. (The first in the series is available here.) This post deals with American Compass’s claim that the financial sector has siphoned off “top business talent” to the detriment of the rest of the economy.
The evidence does not support American Compass’s claims. The post also points out the inconsistency between American Compass’s complaints about (allegedly) stagnant American income and an influx of people working in higher‐paying fields.
Another of the three papers is a Kelley School of Business working paper from 2022 by Nandini Gupta and Isaac Hacamo. This paper is an even stranger choice for American Compass to cite as proof of some kind of harm caused by financialization (or coin‐flip capitalism). It shows that the net effects of people working in finance boost entrepreneurship.
So, on balance, none of this evidence – especially not the papers cited by American Compass – supports the idea that finance is responsible for robbing the nation’s businesses of talent. Nor, as American Compass argues in Confronting Coin‐Flip Capitalism, does any of this evidence support that finance is robbing talent “from the real economy” and “further discouraging productive investment.”
These conflicts are invisible to the casual observer. As one drives through Great Barrington and other quaint towns across New England, we admire their historic quality, the homes with white picket fences, and the open countryside with sheep and cows peacefully grazing. As Robert Ellickson notes in his 2022 book America’s Frozen Neighborhoods: The Abuse of Zoning , studies show that homeowners are “socially embedded” in their neighborhoods and usually value their homes at greater than the market value. Any change in the environment disrupts the homeowner’s expectations about the neighborhood’s amenities and characteristics, as well as the effect on property value. For many people, the equity in their house is the single largest component of their accumulated wealth.
Indeed, large apartment complexes are few and far between in the Berkshires, even though there is an underlying demand by workers and business owners for more inexpensive housing. No doubt the complexes would be seen as “ugly” by many of the locals, intent on preserving the area’s pristine beauty and controlling traffic. But as we know, there is a cost to everything, including beauty. This cost surfaces as an unintended consequence of using regulation as a tool to control the type of housing stock. In cities run by residents intent on preserving the beauty of the environment, an unintended outcome is discrimination by social class. Those who work in town are far less able to enjoy its many delights as a resident, since they likely live almost an hour away.
Economist George Stigler and others transformed the economics profession by thinking about regulation not as a benign rule but arising from a demand-supply framework. A demand for a regulation was met by a supply of regulation, which helped inspire the Public Choice school of economics. One consistent theme of the Public Choice school is that a regulation meant to solve one problem ends up unexpectedly creating another, which is sometimes called “the law of unintended consequences.”
Inventions happen at the same time because unlike hard goods, knowledge about what is state of the art travels fast. Ideas are fluid, more so in today’s digital world. As Victor Hugo put it, the most powerful thing in the world is an idea whose time has come. Competition pushes, creating races until winners emerge. Forget the “aha” moment or a lightbulb turning on, the hard work that follows is what matters. The default mode in physics is entropy or gradual decline. Similarly, progress is lazy. It takes competing humans to drag things over the finish line.
There’s also the fact that Doughty was appointed to the bench by Trump in 2017 and confirmed in 2018, a fact universally reported in the stories on Missouri v. Biden. But, remind me—weren’t we pretty outraged when Trump habitually criticized court decisions he disliked as being written by “Obama judges”? That practice led to a rare rebuke from Chief Justice John Roberts, who publicly said “we do not have Obama judges or Trump judges, Bush judges or Clinton judges,” and that “an independent judiciary is something we should all be thankful for.” That’s the ideal, anyway.
Unlike politicians, federal judges are required to “show their work,” and it is through that we can all decide for ourselves how close they come to the ideal. Here, Doughty gives us 155 pages to work with, including the breathless claim in the opening paragraph that “the present case involves the most massive attack against free speech in United States history.”
Rather than reversing Doughty’s decision, the 5th Circuit on appeal should use this as an occasion to reaffirm the rule in Dart, that a governmental entity “is entitled to say what it wants to say—but only within limits.” There are many good reasons for government officials to communicate with social media platforms, but they are “not permitted to employ threats to squelch the free speech of private citizens.”