Suranjali Tandon

This is the fifth and the final piece of LSPR’s Blog Symposium on ‘From Free to Fair Markets’.

Economic disruption following the Covid-19 pandemic presented a unique challenge. Its comparisons to war were inexact yet one striking similarity between the two was the primacy of government. An unprecedented event necessitated knee jerk policy reaction, yet the ramifications of these policies continue to have a bearing on the economic performance of many countries. The pandemic has left deeper fissures between economic and industrial classes. In fact, the progress on sustainable development goals that are to heal inequalities, was also reversed.^[1]

As countries rebound from the successive lockdowns, the Russia-Ukraine war has tempered the optimism around recovery as they face economic distress from high energy prices. The importance of the State and the role of public finances has assumed centre stage. Yet, the answer to what must the State do is not concrete. In this context the book is very timely and observes the challenges of the 2020s through the prism of liberalism.

The authors articulate that democratic liberalism calls for policies that advance “fair” rather than “free” markets.^[2]  A call for fair markets became louder at the beginning of the Global Financial Crisis of 2008, yet human memory is short, and markets continued as usual after the sizable bailouts. However, the demand for equality grew louder. Covid-19 has further exacerbated these inequalities. The World Bank estimates that the COVID-19 increased the global Gini index by 0.7 point and global extreme poverty (using a poverty line of $2.15 per day) by 90 million people compared to counterfactual without the pandemic^[3]. In such circumstances, it is important that policy is designed to ensure the minimum to those who are vulnerable. Consistent with the theme of liberalism, the book emphasises the demand side of the economy and insists that the fair markets mean citizens, workers and consumers take priority and not just multinationals, employers and producers (Holden & Dixon, 2022, p.8). The book focuses on three problem areas that according to the authors represent the crisis in liberalism- the decline in work and wages, rise of the mega-corporations and income and wealth inequalities, and failure to tackle social costs-including climate change.^[4] The book discusses the three ‘mega-trends’ in detail.

To an observer of our times, it is obvious that the nature of employment is changing. Globally, there is a trend towards rapid digitalisation and the replacement of conventional jobs with contractual jobs-a trend more prominent in developing countries such as India. The authors use the example of US manufacturing, to demonstrate the declining wages- a trend associated with globalisation that has propelled China among the leading manufacturers around the globe, as well as treaties such as NAFTA that has worked to the detriment of American employment^[5], especially in particular regions and industries. The book revisits globalisation in different contexts to suggest that there are elements of it that are compatible with democratic liberalism.

It is also argued that digitalisation could exacerbate the trends in employment. The authors ask a very pertinent question- why is the replacement of jobs with technology different from previous advancements?^[6] Implicit in their distinction is that there is a fundamentally ‘human’ characteristic to work that involves thinking which is now being carried out by machines and one can imagine a range of sophisticated functions such as financial advisory or legal research being performed by machines.

While the pessimism on jobs losses is not misplaced it needs to be tempered with alternative explanations. The World Bank finds that while 9% of all jobs in OECD are automatable^[7] which contrasts with the more ominous job loss of 47% over the next 25 years estimated by Oxford researchers.^[8] Nevertheless, the authors’ claims that this in turn could put a downward pressure on wages is well taken. Contractualisation and offshoring is likelier, that in turn can put a pressure on wages paid to conventional jobs so as to make them comparable to the ‘outside option’^[9]. Yet there is an entire spectrum of jobs that remain exposed in varying degrees to these phenomena. It would have perhaps also been interesting for authors to speculate the options of reskilling workers that are in line with future job prospects, as an alternative approach the state could have adopted to cope with the challenge.

Related to the structure of the labour market is the changing contour of the markets. That is, the rise of mega-corporations is allowing companies monopsony power that they may use for the purpose of negotiating terms of employment. The authors take the example of non-compete clause that is often inserted in the terms of employment of seasonal workers^[10].  The design of contracts is also symptomatic of the weakening ability of labour to negotiate. This coupled with the ability of firms to price, extends the powers of the firms.  It is true that large technology companies were the beneficiaries of Covid-19 restrictions. Governments across the world are responding through regulatory action, including the recent fines of INR 13 billion and INR 9 billion imposed by competition commission of India on Google.^[11] However, the performance of companies after have been less than stellar and compels the reader to question if these are trends that will persist. That is, if market power of these companies is permanent and if it is the more structural shifts in the economy that  have contributed to unemployment.

The rising inequality is also the culmination of how markets function. The existing inequalities are not entirely explained by digitalisation or the large companies operating in this space. In my view the financial markets can explain better the pervasive inequalities, a factor that the authors may consider.

Lastly, the growth witnessed in the past decades is based on unfettered use of fossil fuels. The emissions therefrom have caused irreversible damage leading to extreme weather events. The authors rightly consider this among the important challenges.

It is suggested that these tensions have become more pronounced with the Covid-19 and this has caught the attention of governments in different countries.  The authors attribute this to the fanaticism among the neo-liberals that conflates pro-markets approach to being pro-business.^[12] There is a subtle distinction between the two. Pro-markets approach involves setting fair rules that include legal and regulatory frameworks. Whereas, pro-business means picking winners.^[13]  This is a nuanced point, where markets are seen to comprise not just business but its employees and consumers. Therefore, the authors make a case for democratic liberalism that is inclusive rather than the lop-sided approach of neoliberalism. The tenets of liberalism are to respect individual freedom while putting government at the centre. To address the challenges confronting liberalism, the authors work through a series of suggestions that can restore liberal democracies.

The very first step in achieving this is through the provisioning of ‘core minimum’ goods and addressing inequalities in access to the minimum.^[14] While it is irrefutable that such a minimum can preserve the ethos of a liberal democracy, the question is that there are binding constraints of fiscal rules that are now imposed as best practices on countries. The fear of reneging on public debt often keeps governments from extending themselves and more so the inflation targeting limits growth to confines of acceptable range. Until modern macroeconomics remains confined within these limits, it is difficult to imagine how states may guarantee this minimum.  The book instead discusses tax as a tool available for this but this will need to be considered carefully. This particular issue will be discussed in greater detail, in the following paragraphs.

Since the 2008 crisis, it is widely accepted that markets can lead to outcomes that aren’t socially optimal. More so, when markets become concentrated. Therefore, regulation is seen as an important element for correcting firm size as well as addressing social costs, as is argued in the book. However, it is observed that the legal frameworks that regulate market imperfections can often be difficult to administer. A typical example of this may be the application of competition law, which requires establishing the existence and abuse of market power.^[15] While these are fundamental issues, they are pre-conditions of liberal economic structure and precedes regulation.

The authors do allude to the democratic processes of decision making as a means to address the question of what is a social minimum  and an externality.^[16] However, a more important and related point is that the proximity of regulators to the private sector can impact the regulatory responses, where the revolving door between the two can blur the distinction between interests of business and social good. Though the book talks about campaign finance, that can destroy the level playing field, but it is the institutional set up that also explains the prevalence of neoliberalism in countries like the US. The book takes a more pragmatic approach and does not venture into the complicated subject. However, it is possible that the resistance to liberalism is entrenched precisely on account of such institutional design.

The success of democratic liberalism requires a careful management of the role of the State and the functioning of the markets. The book attempts to provide a list of actions that can ensure that this balance is achieved. The authors suggest three solutions- green jobs guarantee, universal healthcare, regulating market power and carbon dividend. The authors suggest that the job guarantee should meet the often-competing goals of being purposeful, universal coverage, incentive computability and affordability. For this the scheme should ensure a living wage for all citizens, access to basic benefits, but at the levels below the private sector. It must be complemented, in the authors’ view, by stronger trade unions^[17].  The question then is in which sectors can such jobs be created and are these where there is enough supply of skills to employ the unemployed labour. The authors also consider complementary policies such as earned income tax credit, place-based policies and wage-earner shadow equity. Some of these require further fiscal support and the sources of revenue would have to be carefully thought through.

More importantly, the place-based policies are seen as a means to mitigate the negative consequences from globalisation. But within a demand constrained economy, such a solution can only yield results if a policy to promote industry is in place. It is suggested that industry policy have been proven failures, but for new specialisations to emerge and especially in areas that have historically not been successful industrial hubs, there are only two ways to tackle the issue- tax exemptions/incentives or protection of industry. The former distorts tax systems whereas the latter free trade, the choice for a liberal democracy would then be between domestic and international priorities.  That is, if the policy is to promote domestic industry and self-reliance or if the growth is to be outward looking. This in turn would require an estimation of the net-benefits of these policies to consumers and prioritisation of interests, which remains unclear. This would require thinking on whether the pro-business approach, as is referred to in the body of literature, i.e. favouring few companies or industries in regions is compatible with the idea of a liberal democracy.

As for the other baseline, i.e., healthcare, the authors argue in favour of public baseline being costless at the margin for citizens and that provides universal access to benefits such as annual sick leave, parental leave. There are examples of the private sector providing such a minimum to its workers, but the nature of the benefits may vary across organisations. The authors’ suggestions imply that the government will have to mandate these basics. Similarly, education and childcare can be made universally available through a “Cadillac Tax” which is an interesting take on levelling down private education rather than levelling up of public education. However, such a tax assumes that income taxes are not progressive enough and there will not be a pass forward of this cost to the users, that in turn does not address the issue of quality of services. Using tax as a means to solve a problem is easy but it also necessitates efficiency in redistribution. The experience with the latter is not always remarkable and therefore requires a more detailed examination of if taxes are enough.

The other challenge to the operation of fair markets is that unregulated markets breed concentration. The lack of regulation has been a cause of concern for governments across the world after the financial crises and now with the emergence of big tech. The authors consider several alternatives, such as open banking in Australia or breaking up of tech monopolies but as pointed out by the authors the benefits of competition, the underpinning tenet of fair markets, must be weighed against the loss to consumers from limiting the economies of scale. This links back to the previously mentioned problem with defining what constitutes abuse of power. In the case of open banking, the customer controls her financial services data but that does not consider a more important issue of regulatory practices governing banks to operate and the compliances involved. It is likely where the regulations are stringent, competition in the industry may not naturally result. The fine balance between regulation and competition is difficult to establish but may be critical for the success of liberalism.

In fact, it is argued by some that concentration in banking industry can improve financial stability up to a level and thereafter can lead to fragility^[18]. What is the optimum level of concentration? Further, the benefit in terms of stability is not easily measured in consumer preferences. The suggestion to allow interoperability is reasonable, but the authors suggestion that preventing mergers of large companies with startup competitors may be pursued more aggressively^[19] requires answers to when does concentration do more harm to consumers? It is therefore important to pursue this point further.

Carbon emissions and their impact on climate is the biggest challenge of our times. The authors write about the various means by which the emissions may be limited. There is the cap-and-trade system and then there is pressure to tax, output and trade. The authors are cognisant of the distributional effects that the taxes can have. Therefore, they recommend a carbon dividend. However, the discussion on a border adjustment tax looks at it purely from a domestic point of view and does not consider the common but differentiated responsibilities. This is important for the wider relevance of liberalism. A CBAM that does not allow a moratorium to developing countries that are still entitled to a carbon budget, will only hinder free trade. Would such a tax then put citizens and consumers first? It lays bare that democratic liberalism pursued by different countries would mean different things and can lead to outcomes that may deviate from the goals of open and fair trade. One wonders how one resolves this conflict?

As has been mentioned, to meet the principles of democratic liberalism would require that the enhanced role of government is adequately financed. Throughout the book there are suggestions on how to tax better but the chapter eight looks at this matter in depth. The authors consider the options of raising income, wealth, estate taxes and value added taxes. It is well known that raising these taxes can have an impact on how people hold their wealth, report their incomes and spend their time. The authors suggest that ‘wealth tax’ is not consistent with the idea of liberalism and will not raise enough revenue. Instead, a progressive VAT with higher capital taxes and ‘competitive’ corporate tax rates would help support the policies. While these are all reasonable suggestions, there is a need to explore in greater detail what stands in the way of their implementation. Is it that capital has a hold on policy, particularly through the financing of elections, or is it that there are limits to the revenues these proposed taxes would generate or their growth effects? The book offers a balanced perspective and a bird’s eye view to policy compatible with liberalism that can address the challenges of our time. Yet, a  more critical question that the books leave unanswered is – what is the acceptable size of government? The size of the government is fixed by regulation and budgets. There is no consensus or even a benchmark that defines a size that is compatible with the ideology. Moreover, the discussion is based on a critical assumption, as is true for literature on redistribution through taxes,  that the  government is a benevolent planner that allocates equitably and efficiently.

Suranjali Tandon is Assistant Professor at National Institute of Public Finance and Policy, India. She currently leads the institute’s work on international taxation and sustainable finance.

^[1] United Nations, ‘Deeply negative impact’ of Covid pandemic, reverses SDG progress’ (UN News, 15 July 2021) <https://news.un.org/en/story/2021/07/1095942&gt; accessed 21 October 2022.

^[2] Rosalind Dixon and Richard Holden, From Free to Fair Markets: Liberalism after Covid (OUP 2022) 8.

^[3] D. G. Mahler, Nishant Yonzan and Christoph Lakner, ‘The Impact of COVID-19 on Global Inequality and Poverty’ (2022) World Bank Policy Research Working Papers <https://openknowledge.worldbank.org/handle/10986/38114#:~:text=This%20paper%20estimates%20that%20COVID,to%20counterfactual%20without%20the%20pandemic.&gt; accessed 21 October 2022.

^[4] Dixon and Holden (n 2) 19.

^[5] ibid 21.

^[6] ibid 23.

^[7] Melanie Arntz and others, ‘Digitization is unlikely to destroy jobs, but may increase inequalities’ (World Bank Blogs, 31 October 2016) <https://blogs.worldbank.org/jobs/digitization-unlikely-destroy-jobs-may-increase-inequalities&gt; accessed 21 October 2022.

^[8] Philip Perry, ‘47% of jobs will vanish in the next 25 years, say Oxford University researchers’ (Big Think, 19 April 2022) (2022, April 19) <https://bigthink.com/technology-innovation/47-of-jobs-in-the-next-25-years-will-disappear-according-to-oxford-university/&gt; accessed 21 October 2022.

^[9] Dixon and Holden (n 2) 25.

^[10] ibid 27.

^[11] BBC, ‘Google: India orders Google to pay another $113M Fine’ (BBC News, 26 October 2022) <https://www.bbc.com/news/world-asia-india-63396248&gt; accessed 16 November 2022.  

^[12] ibid 42.

^[13] Sean Speer and Charles Lammam, ‘Pro-markets not pro-business: There’s A difference: Op-ed.’ (Fraser Institute, 17 June 2020) <https://www.fraserinstitute.org/article/pro-markets-not-pro-business-theres-difference&gt; accessed 16 November 2022.

^[14] ibid 45.

^[15] John Vickers, ;Abuse of market power’ (2005) The Economic Journal, 115(504), F244-F261.

^[16] Dixon and Holden (n 2) 51.

^[17] ibid 98.

^[18] Pietro Calice and Leone Leonida ‘Concentration in the Banking Sector and Financial Stability: New Evidence’ (2018) World Bank Policy Research Working Paper, (8615) <https://openknowledge.worldbank.org/handle/10986/30583&gt; accessed 21 October 2022.

^[19] Dixon and Holden (n 2) 139.