There has been a barrage of criticism from the American right over the economic teachings of Pope Francis in Evangelii Gaudium. I think much of this criticism reflects the fact, as I argued already, that Pope Francis is tackling some sacred cows among a significant cohort of American Catholics who try really hard to align traditional Catholic social teaching with their understanding of the supremacy of the free market.

Much of the criticism is vitriolic nonsense, and to be ignored. But some of it is more well-meaning and intelligent, including from the Acton Institute’s Samuel Gregg. It is this that I want to respond to.

To start with, Gregg challenges the pope’s claim that there are people who support the “absolute autonomy of markets”. He argues that nearly all countries have sizeable governments and sizeable regulations.

But this misses the point. For sure, no market exists in pure form, devoid of any oversight or cultural context. What the pope is criticizing is a philosophy and a mindset, one that sees the role of government as a neutral referee, laying down the basic rules of the game, while standing back and giving people the autonomy to make their own market choices. In fact, Gregg openly admits to this libertarian view when stresses the key role of government is to “provide infrastructure, property arrangements that identify clearly who owns what, and, above all, the rule of law”.

For sure, this role is important. I do not deny that. But it is by no means enough. Catholic social teaching holds that the state exists to promote the common good -“vigilance for the common good” is how Pope Francis defines it. This means it cannot stay aloof from economic matters – it must get into the mix, not just sit on the sidelines.

The market needs oversight

The Church is also quite clear on how this should happen. First, the market needs proper regulation and oversight. As John Paul II put it, market activity – to be legitimate – must be circumscribed within a strong juridical framework. Or, as Pius XI put it, “subjected to and governed by a true and effective directing principle”.

But Gregg criticizes the practical application of this principle, claiming that rules and regulations in too many countries are “approaching the status of beyond counting”. What point is he trying to make here? He claims that this is leading to rule of law problems and causing perverse effects. There is no doubt that he is right in some circumstances. I am well aware of rules and regulations being used to protect favorites and vested interests, especially in developing countries. But this is not an argument for less rules and more “freedom”. It is an argument for better and fairer rules.

I am particularly interested in what Gregg has in mind for North America and Western Europe. In the US in particular, I can think of plenty of areas where regulations are not strong enough to support the common good. Two areas come to mind: inadequate control over the dangerous activities of the financial sector, and ineffective support for labor rights – including a living wage, affordable healthcare for all, family leave, and collective bargaining.

Gregg argues that Francis is invoking a straw man argument, since no serous person is calling for no regulation whatsoever. But there are plenty of people who support a generalized rollback of regulations, and not just for reasons of prudence (the rules won’t work well) but reasons of principle (freedom is being curtailed).

Indeed, there has been a hugely influential push all across the world over the past few decades to deregulate and liberalize. This is not always bad. But we cannot slide easily from a specific case on prudence to a general case on principle – which is what has been done.

Looking at the big picture – at least among the advanced economies – the overall effect of this push for deregulation has been to ramp up inequality, quash opportunity, and increase the likelihood of crises. The conclusion is unavoidable: the market has not been properly circumscribed by a strong juridical framework.

The market needs social solidarity

Another complaint made by Gregg is that governments control a chunk of GDP – up to 40 percent in western Europe – so that the pope cannot really talk about the autonomy of the market.

But again, he fails to mention that how this ties directly to Catholic social teaching. If the first condition for the legitimacy of markets is a strong juridical framework, the second is a strong social safety net.

The idea here is straightforward: since we all must participate in a market economy, then we have a responsibility to protect each other from the vagaries of market swings. The universal destination of goods in a modern setting implies decent insurance and income security – especially for unemployment, old age, and healthcare. Protecting the poor must always be a policy priority – this is non-negotiable.

Gregg waxes nostalgically about pre-war norms on the size of government – he quotes Keynes on limiting it to 25 percent of GDP – forgetting that the rise in the postwar state came exclusively from this social insurance function, not from the state getting actively involved with the productive economy. More often than not, this was the brainchild of Christian Democrats under the heavy influence of Catholic social teaching, in a way that twinned solidarity with subsidiarity.

For sure, there are valid prudential question on the efficiency and sustainability of this kind of spending, and there are valid points about the efficacy of “predistribution” over “redistribution”, but Gregg does not engage this debate. He seems more interested in the “principle” of government being too big, which is a point of ideology, not prudence.

Gregg also likes to make the argument that this kind of spending does not work. But this not right. It is demonstrably true that higher levels of social spending lead to lower levels of poverty and inequality, other things being equal. This is the main reason why social outcomes are better in the Europe than in the United States.

It is also not the case that this kind of safety net hurts economic progress. Many point to higher income growth in the United States than in Europe, without fully understanding the dynamics. For a start, productivity – the key driver of long-term growth – is broadly similar between the regions, and much of the difference come from the fact that European work fewer hours, surely a pro-family outcome!

Another point is that the US economy works well for the top cohort, but not so well for everyone else. Since 1980, if you strip out the top 1 percent, income growth in France has been higher than in the US. This is heavily-regulated, short-work-week, big-government France!

Trickle-down economics

This brings me to my final point: Gregg also criticizes the pope for criticizing trickle-down economics.

He has two responses – first, opening up markets has indeed led to poverty reduction; and second, what holds countries back is poor governance (what he deems the “rule of law”).

As I have said already, he is surely right about the governance point, even if I think he ties it too neatly into his preferred “night watchman” view of the state in a market economy. In fact, he doesn’t push this point hard enough. When he notes that redistribution, including foreign aid, too often fails to help the poor, the reason is typically due to lousy governance and weak institutions. He doesn’t go there, because it would hurt his argument against redistribution. But if we fixed the governance problem, not only would the market work better, but redistribution works better too.

Let me address his first point, which has become a common rallying cry for critics of Evangelii Gaudium. Yes, the economic opening in Asia since the 1980s has lifted hundreds of millions from poverty, mostly in China. This is undeniable.

But it also does not disprove the pope’s main point. Nobody is arguing in favor of cruel and inhuman collectivization over a market economy – the question is what kind of market economy, underpinned by what principles.

What happened in China is no surprise, given its abysmal starting point. If North Korea cast aside its wicked ruling elite and opened up tomorrow, we would likely see the same extent of poverty reduction over the next three decades.

Of course, how fast it grows – and just as importantly, how many are included in this growth – depends on the social and cultural context of the market. It certainly, as Gregg would stress, depends on governance and the rule of law. But it also depends on issues like proper regulation, wages and labor conditions, education and training, infrastructure, the adequacy of the social safety net.

For while growth is important, inclusive growth is even more so. As the pope says, growth in justice requires more than just economic growth – “decisions, programmes, mechanisms and processes specifically geared to a better distribution of income, the creation of sources of employment and an integral promotion of the poor which goes beyond a simple welfare mentality.”

There are many who claim that these policies work against growth itself, so the strategy backfires. But this is not the case. We have evidence now that more equal countries have more sustainable growth, less prone to fits and starts. On this point too, the pope is right.

It is simply a fact that China’s growth has not been inclusive – while a (relatively) small number benefitted, hundreds of millions of others were excluded in exactly the ways described by Pope Francis. Measured inequality has jumped remarkably in China over the past quarter century.

It doesn’t have to be that way. The first big wave of the Asian economic miracle – think Japan and Korea – gave rise to an economy that was much more inclusive: high growth with low inequality. Gregg mentions none of this.

Gregg also compares countries that escape poverty with countries trapped in the mud like those in Latin America. But he fails to mention that Latin America has some of the highest levels of inequality in the world – a fact that surely weighs on its economic progress, and is tied to poor governance and elite dominance. Once again, it is not just a matter of growth; it is a matter of making growth inclusive and leaving nobody behind.

Gregg also includes a more peculiar comparison, one that mixes longer-term development with shorter-term business cycle dynamics – he warns about countries following the “prolonged stagnation” of Japan and western Europe. Of course, this relates to the long time it takes to recover from a financial crisis (Japan in the late 1980s, Europe in the last five years) and the inadequate policy response to this financial crisis (unwillingness to tackle deflation in Japan, excess austerity combined with unwillingness to tackle national financial vested interest in Europe).

This is a fundamentally different kind of argument, and it affects the US too – just look at Larry Summers’ recent argument that this country too could face the kind of stagnation lamented by Gregg. If anything, the scale of this financial crisis is one more argument for underpinning the market economy with the right principles – a strong juridical framework and keeping social imbalances to a minimum. As always, it is the poor who suffer most in crises, and it is their cry that we must heed first.

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Overall, there is no doubt that the pope’s point on “trickle-down” economics is right. In his piece, Gregg criticizes Europe, Latin America, and much of the developing world. But he never criticizes the US, which has been subject to these very “trickle-down” policies for decades now, with not very encouraging results.

But this has not discouraged the zealots. A whole political movement continues push for tax cuts for the rich combined with a weaker social safety net for the poor. The only justification for these policies is that they will “trickle down” in the form of growth and jobs. They have not. They never will. They lead to an economy of exclusion.

The pope understands all of this, but I’m not sure Samuel Gregg does.