The Economist: Is this the end of free markets?

Sometimes in wars and revolutions, fundamental changes come with a bang. But more often, they take root by stealth. That is the case of what we call “internal economy” (homeland economics), a protectionist ideology, with great intervention and generous subsidies administered by an ambitious State.

Fragile supply chains, growing national security threats, the energy transition and the cost of living crisis; Each of these issues has required governments to take action, and rightly so. But when viewed together, it becomes clear how systematically the presumption of open markets and limited government has been relegated.

Less than eight years ago, President Barack Obama was trying to sign the United States into a giant Pacific trade alliance. Today, if you argue for free trade in Washington, you will be mocked for being hopelessly innocent. In the emerging world, you will be portrayed as a neocolonial relic of the era when the West called the shots.

The foundation of this new regime is the idea that protectionism is the way to deal with the blows dealt by open markets. China’s success convinced working-class Westerners that they had much to lose from free trade of goods across borders.

The COVID-19 pandemic made elites think that global supply chains needed to be “stripped of risks”, largely by relocating production closer to home. The rise of China under thestate capitalism,” with its disdain for rules-based trade and its challenge to American power, was seized upon in rich and emerging economies as a justification for intervention.

This protectionism goes hand in hand with greater public spending. The industry is gobbling up subsidies to boost the energy transition and guarantee the supply of strategic goods. The generous handouts given to families during the pandemic raised expectations of the state as a bulwark against life’s misfortunes. The governments of Spain and Italy are even forgiving the debts of those who cannot cope with the high costs of mortgages.

Furthermore, it is inevitable that state economic assistance will involve additional regulation. The fight against monopolies has become activist. Regulators are targeting nascent markets, from cloud gaming to artificial intelligence. Since carbon prices remain too low, governments end up micromanaging the energy transition by decree.

This mix of protection, spending and regulation is very costly. To begin with, it is a wrong diagnosis. Indeed, risk management is an essential function of governments, but not of all risks: for markets to work, actions must have consequences.

In contrast to the most accepted view, COVID-19 and the war in Ukraine have shown that markets are better able to weather shocks than planners. Globalized trade endured huge shifts in consumer demand: throughput at US ports in 2021 was 11% higher than in 2019.

In 2022, Germany’s economy repeated the trick, suffering no calamity in its rapid transition from Russian gas to other energy sources. In contrast, state-dominated markets, such as the supply of projectiles to Ukraine, continue to struggle. Like long-standing complaints about trade with China—which has raised Americans’ real incomes—complaints about the supposed fragility of globalization have built a cathedral of fear on a grain of truth.

Another defect of the internal economy is the overload for the State. Governments are losing all restraint just when they need to limit welfare spending. Increasingly older populations place a burden on budgets through additional spending on pensions and medical services.

Rising interest rates aggravate the entire situation. Following the bond market crisis in 2022, the UK’s right-wing government raised taxes, as a percentage of GDP, more than they had been increased in any other parliamentary term in the country’s history.

As long-term bond yields rise, an indebted Italy returns to instability. America’s ballooning debt service bill is likely to reach an all-time high before the end of the decade, a reflection of the fragility of new-age public finances.

The less visible but perhaps more costly defect is that the internal economy is a crude instrument in an era of rapid change. Planning the energy and artificial intelligence transitions is too big a task for any government. No one knows what the cheapest ways to decarbonize are or the best uses of new technology.

Ideas should be tested and channeled in markets, not subject to central government checklists. Overregulation will inhibit innovation and, by raising costs, make change slower and more painful.

Despite its shortcomings, it will be difficult to restrict the domestic economy. People like to spend other people’s money. As government budgets grow, the special interests that feed off them will increase in size and influence. Removing protections and subsidies is harder than providing them, especially for older voters who participate less in economic growth. Anyone who continues to believe that the arc of history bends toward progress should remember that a century ago Argentina had almost the same level of wealth as Switzerland.

Plan for what’s ahead

However, in the end, disappointment will come. Perhaps it will come because budgetary profligacy often takes its toll on indebted governments, or perhaps the greed of rent-seekers becomes too difficult to conceal, or perhaps a stagnant and repressive China will no longer be able to sustain the promise of state-led prosperity. .

When change comes, it can be surprisingly rapid, at least in democracies. In the 1970s, the tide turned in favor of free markets almost as quickly as it has now turned against them, leading then to the election of Margaret Thatcher and Ronald Reagan.

The mission of classical liberals is to prepare for that moment by defining a new consensus that adapts their ideas to a more dangerous, interconnected and blasé world. It won’t be easy, particularly given the rivalry between the United States and China, but it has been achieved in the past, and we must think about the reward.