In Ashwin Parameswaran’s view, policies that blur the distinction between the public and the private fuel crony capitalism. Critics of neoliberalism from the left lament what they see as the retreat of the public sector while critics on the right often object to the expansion of the regulatory authority of government and state intervention in the private marketplace. That is, as the scale of government in its various domains has been reduced relative to other actors (for-profit contractors and providers, civil society organizations, etc.), its scope has greatly increased. While the left is content to increase government’s scale and the right is content to shrink its scope, Ashwin suggests that the key to making the world’s fragile market economies more resilient is to actually do both: shrink the scope of government, but make it stronger in its narrower domain.
Radical centrism involves a strengthening of the safety net for individuals combined with a dramatic increase in the competitive pressures exerted on incumbent firms. Today, we bail out banks because a banking collapse threatens the integrity of the financial system. We bail out incumbent firms because firm failure leaves the unemployed without even catastrophic health insurance. The principle of radical centrism aims to build a firewall that protects the common man from the worst impact of economic disturbances while simultaneously increasing the threat of failure at firm level. The presence of the ‘public option’ and a robust safety net is precisely what empowers us to allow incumbent firms to fail.
The safety net that protects individuals ensures robustness while the presence of a credible ‘invisible foot’ at the level of the firm boosts innovation. Moreover, as Taleb notes programs that bail out people are much less susceptible to being gamed and abused than programs that bail out limited liability firms. As I noted in an earlier post, “even uncertain tail-risk protection provided to corporates will eventually be gamed. The critical difference between individuals and corporates in this regard is the ability of stockholders and creditors to spread their bets across corporate entities and ensure that failure of any one bet has only a limited impact on the individual investors’ finances. In an individual’s case, the risk of failure is by definition concentrated and the uncertain nature of the transfer will ensure that moral hazard implications are minimal.”
Though I disagree with Ashwin in important respects — the modest success of charter schools strikes me as a rejoinder to at least one version of his thesis — he makes an intriguing case.