THE BEAR'S LAIR
A less-free world dawns
By Martin Hutchinson

We now know who the two major candidates for president will be in November and one thing has become abundantly clear: we are in a new policy era. The free-market economic policy consensus that appeared so firmly established in the 1990s has broken down, and participants in both the US and global economies will have to deal with a much more difficult policy environment.

Free-market economics is a tough sell to the voting public. Too much of it is counter-intuitive, and it creates an environment where jobs, incomes and savings appear more insecure than is comfortable. From the 1940s to the 1970s in both Britain and the United States, the consensus among the electorate, including its more conservative half, was that the state needed to intervene in the economy to preserve full employment, that strong unions

 

created jobs for their members and extracted high wages from companies that could well afford to pay them and that moderate inflation was a price worth paying to ensure against a return to the high unemployment of the 1930s.

In Britain, this consensus further extended to the view that the economy could benefit from a degree of state ownership and national planning; however, this further step however never really caught on in the United States. To the extent Britain and the United States objected to communism, it was more for its manifest failings in human rights than for its economic tenets, which were thought by most to be plausible in theory and fairly successful in practice. My Economist Desk Diary for 1991, using 1989 figures but published nearly a year after the Wall fell, still claimed that East Germany was richer per capita than Britain.

This consensus broke down in 1979-80 not because the electorate suddenly became convinced of the benefits of free markets, but because two bold free-market politicians, Ronald Reagan and Margaret Thatcher, were able to gain power though exploiting the manifest failures of the existing economic order. For the first few years of their rule, they were subject to huge opposition, almost consensus opposition - in one famous 1981 episode no fewer than 364 academic economists wrote to The Times (London) saying that Thatcher's policies were a disaster.

Yet successes gradually won the populace round. In the United States, Reagan's tax cuts produced prosperity, declining inflation and sharply rising stock markets. In Britain, Thatcher defeated the miners, who had held sway over previous governments for a generation, then carried out her first great privatization, of British Telecom, showing that state ownership was neither inevitable nor beneficial. Finally, in March 1985, a new leader, Mikhail Gorbachev, came to power in Russia, suggesting that the monolithic Cold War enmity between the superpowers might thaw and that communism might be adapted in a market-oriented direction.

From about 1985 to 2001, free-market economic policies were accepted by general consensus worldwide. Third World governments introduced the price mechanism to areas that had never seen it, privatized state behemoths and opened their economies to the international market. Property rights, denigrated in most countries since the Keynesian equivocations of the 1930s, became once more recognized as the lynchpin of a successful economy, the protection of which in the broadest sense was the principal function of government.

The Soviet Union began by opening communism to the possibilities of the free market then collapsed altogether, ending the apparent competition between communism and the West and allowing some of its satellite states to become among the most free-market societies on earth.

Drive for free trade
Britain and the United States pushed for free trade internationally and, on the whole, for smaller government domestically. Even the intellectual left in academia and the World Bank seemed to accept the new paradigm, forming the "Washington Consensus", which was in certain respects counterproductive but nevertheless primarily free-market in orientation. With the intellectual challenge having collapsed, it appeared that the "end of history" had indeed been reached, at least economically, and that small-government, free-market policies would lead the world to a 21st century of unprecedented liberty and prosperity.

It was not to be. Even in the 1990s, rearguard actions took place, in which true free-market policies were subverted by those who did not wholeheartedly accept them and sought to manipulate them to their advantage. In Britain, Chancellor of the Exchequer Kenneth Clarke began to ratchet up government spending and forbade a bailout of the merchant bank Barings, thereby killing off the merchant banks and ensuring that the City of London came to be controlled entirely by foreign institutions.

In the United States, Fed Reserve Board chairman Alan Greenspan abandoned in 1993 the highly effective monetarist policies that had brought down inflation, while the Boskin Commission of 1996 subverted the consumer price index, allowing monetary policy to become over-inflationary and asset bubbles to take hold. In both countries, immigration, legal and illegal, was allowed to run riot, destroying the living standards of the domestic blue-collar workforce.

Thatcher was removed in December 1990, the Tories lost power to Tony Blair's "New Labour" in 1997 and in 2000 Al Gore, instead of running as a supporter of the pro-market Clinton administration, launched an economically populist campaign straight from the 1970s.

Yet free-market ideas retained considerable strength. The statist Kyoto global warming treaty was rejected unanimously by the US Senate in December 1998. Attempts by trade protestors to derail free-trade talks had only temporary success at Seattle in 1999 and appeared to have been decisively defeated at the Doha meeting of 2001.

Even Russia's Vladimir Putin appeared a free-marketer, instituting a radically libertarian "flat tax" at a rate of only 13% and seeing state revenues markedly increase after doing so. On September 10, 2001, the free-market consensus appeared to be still in control, having recently scored a significant success through George W Bush's tax cut program.

The 9/11 attacks changed everything, not because of the tragic event itself but because of the policy responses to it and their second-order effects. Since that time, anti-free-market forces have been strengthened and free-market supporters have found themselves fighting a rearguard action. The Doha round of trade talks, which opened so successfully in the immediate aftermath of the attacks, collapsed in failure within a couple of years and by 2007 it appeared that protectionism was on the advance everywhere.

Public spending restraint was abandoned in the United States and Britain, producing deficit levels in both countries larger than those in the much more threatening environment of the 1980s. The United States, since World War II the principal global force in a free-market direction, ceased championing free markets aggressively, becoming mired in the Iraq war and thus easy for free-market opponents to ignore.

Starting with Argentina at the end of 2001, country after country repudiated free markets, even in the watered down Washington Consensus version, and returned to state control and destruction of property rights. The huge and heart-warming economic successes of China and India, in which the adoption of free-market principles had been followed by spectacularly positive results, were matched by economic growth in commodity-producing countries, most of them mere beneficiaries of higher prices where state control and corruption remained supreme.

In a number of cases, countries that had struggled under free markets in the 1990s while commodity prices were low proved unexpectedly prosperous under renewed statism and high commodity prices after 2003.

Solidifying trend
The presidential election of 2008 now looks like solidifying this trend. Whereas the first version of the Kyoto climate change agreement was defeated unanimously by the Senate, both presidential candidates favor a cap and trade system of carbon emissions permits, the less market-oriented of the two available means of controlling carbon emissions, with John McCain's proposal, in which the government hands out free emissions permits rather than selling them, being significantly less market-oriented than Barack Obama's.

On public spending, Obama would introduce a national health system, albeit one without a full mandate, which is estimated to add US$100 billion to annual Federal spending. McCain on the other hand would build up US military capability and prolong the occupation of Iraq, thus preventing a reduction in spending that might otherwise be possible. Both candidates would repeal almost entirely the 2001 and 2003 tax cuts. Obama has promised to do so, and has further tax increases planned for the unfortunate "wealthy" without good tax lawyers, while budget balancing is a key element in McCain’s economic policy and the budget is currently almost $500 billion out of balance.

Thus by 2013 the state will take a considerably larger slice of the economy than in 2008, with Federal spending probably moving decisively above the 20% of gross domestic product that has been its limit since the last great increase under Lyndon Johnson 40 years ago.

Internationally, the trend towards renewed statism also seems to be gathering momentum. Privatizations almost ceased several years ago; the new trend is the rise of sovereign wealth funds, in which excessive international liquidity has been deployed by governments to make foreign acquisitions.

The idea that governments are competent owners of commercial assets died in the early 1980s but now seems to have been resurrected in an eldritch new form. However, with the possible exception of Britain, the major Western countries are becoming significantly more protectionist, so can probably avoid the folly of strategic Western assets being sold to Gazprom.

The other major international trend that disquiets free-market enthusiasts is the continued growth of transnational institutions. By definition, these are not committed to the free market in any form; they are committed to their own power and aggrandizement and use that power to appropriate resources to themselves.

Nationalism may have caused innumerable wars, but it also performed an essential function in preventing governments from combining, thus ensuring that companies and individuals which became subject to tyrannical taxation or regulation could move their assets or themselves to a new jurisdiction. Swiss bank accounts are a key civil liberty, as are anti-extradition rules and un-harmonized tax systems. The erosion of these liberties must be fought vigorously.

The electorate is not to be blamed for this backsliding on its commitment to free markets. Voters' jobs have been endangered and their wealth destroyed by more than a decade of cheap money, which has encouraged outsourcing to emerging markets, and excessive immigration, which has depressed wage levels domestically. Voters have supported tax cuts, only to see the great majority of those cuts' benefits go to the very rich through an unwarranted surge in asset prices that has left home ownership an impossible dream for many middle-class people.

They have supported smaller and less wasteful government, only to see the number of Washington lobbyists double under a Republican administration and the volume of "pork-barrel" earmarks rise 10-fold under a Republican Congress. The statist policies of McCain and Obama are not random fluctuations in candidates chosen though an eccentric primary process; they accurately reflect the current views of the voting populace.

Outlook grim
The future is grim for believers in free markets. Increasing lifespans will be used by governments to justify not lengthening careers of productive activity but lengthier periods of senile reliance on state handouts. Governments will increase their share in national output everywhere, and environmentalism will play the role in the 2010s that socialism played in the 1940s, pushing political systems towards ever tighter state control.

Internationally, protectionism will increase, and the inadequacies of rich-country economies will be used as an excuse to block the development of free markets in poor countries. Naturally, this new Leviathan will be extremely inefficient, but we await the emergence of another Reagan and another Thatcher, battling against new statist forces such as the EU and the green lobby, to reverse the downward spiral. Needless to say, the emergence of such heroes, and their success in the political arena, cannot be relied upon.

Once before, in the Britain of 1783-1830, a political system produced a series of governments wholeheartedly committed to the free market. That political system gave us the economic flowering, unique so far in world history, which has become known as the Industrial Revolution. However, William Pitt and Robert Lord Liverpool found no successors, and their era of unapologetically free-market government proved fleeting.

The free-market polities of 1985-2001, less wholehearted in their free-market commitment than their predecessor, also appear to have been transient. If we have to wait another 150 years for the next such bright moment, the human economic story will be an unhappy one.

Martin Hutchinson is the author of Great Conservatives (Academica Press, 2005) - details can be found at www.greatconservatives.com.

(Republished with permission from PrudentBear.com. Copyright 2005-07 David W Tice & Associates.)