Emerging Threats to Economic Freedom

By Kevin D. Williamson

Thursday, December 03, 2020

 

The year National Review was founded, 1955, was a study in contrasts — and confrontations — between the free world and the unfree world. The United States saw a series of new beginnings as Disneyland opened, Ray Kroc launched the first McDonald’s, and cars with tail fins began crossing the Tappan Zee Bridge. General Motors became the first business ever to turn a $1 billion profit, and the FDA approved the Salk polio vaccine. Meanwhile, in the Soviet Union, the government began a campaign of ethnic cleansing (“repatriation”) of Poles. Communist hard-liners pushed out Imre Nagy in Hungary. The Warsaw Pact was formed. And even in the free world, pockets of authoritarian brutality remained: Spain and Portugal labored under dictatorships, 60,000 black South Africans were evicted from a Johannesburg suburb because of their race, and Emmett Till was lynched in Mississippi.

 

In the immediate post-war years, the future was up for grabs.

 

To the extent that the years between the end of World War II and today are a story of competing economic visions, the short version is this: Karl Marx was wrong, and Milton Friedman was right. Market-oriented reforms over the past several decades have cut severe poverty around the world by more than half. As late as 1980, more than 40 percent of the world’s population lived in severe poverty, according to World Bank figures. Now, that share is less than 10 percent. There is simply nothing else in the history of the material affairs of this world that can compare to that.

 

So, our hubris might have been understandable.

 

The partisans of capitalism believed for a generation — not without some reason — that a free economy and a free society naturally must go hand in hand. Instead, we have seen China develop a thoroughly modern entrepreneur-driven economy while maintaining a vicious single-party police state, while variations of the free-market model thrive in such relatively closed societies as that of Singapore, under Arab monarchies, and under other undemocratic or less-than-free arrangements. The hope that wider and deeper international trade and economic integration — globalization, for lack of a better word — would create pressure sufficient to achieve real-world liberal-democratic reform has been dashed, and instead we have a grotesque rebuke to those ideals in the form of Chinese engineers, working at VC-backed firms, shopping for new Volks­wagens alongside Chinese jailers working at CCP-backed concentration camps.

 

So the optimism of the 20th-century capitalists has proved unjustified to the extent that in many cases the (allegedly) un­stoppable force of the market has not so much as budged the immovable object of autocracy. Put another way: The liberal democracies had assumed that a rules-based international economic order would naturally evolve into an order in which nations shared not only formal rules of exchange but also values. What we are seeing now is that if there is to be a values-based order, it will have to be pursued separately as an end in itself. The immediate problem is that the pursuit of a values-based order is something that would most naturally be undertaken by deepening and widening the cooperation of the world’s liberal democracies — i.e., by the kind of formal, institutional, multilateral action that has fallen into disrepute not only in the United States but among nationalist-populist-minded elements everywhere from Venezuela to Switzerland.

 

And so we find ourselves in a paradox: The world is richer and freer than it ever has been, and many of those at the top of the heap, the rich world, are enraged about that state of affairs. Partly this has to do with the local economic and social impacts of globalization, but mainly it has to do with the disjunction between the social and political values of the world’s biggest economic players: North America, the European Union, and the ever-expanding Sinosphere.

 

That is why the first threat to the future of the free economy that must be considered is populism. In the United States, populism’s political energy is split between two warring tribes that are forever at each other’s throats — the Donald Trump element and the Bernie Sanders element, to (over)simplify things — but that have strikingly similar policy agendas and assumptions when it comes to trade, immigration, the regulation of large technology companies, entitlement programs, fiscal reform, and much else. Together, these forces have deformed the thinking of both major political parties, resulting in a U.S. retreat from international engagements ranging from NATO to the Trans-Pacific Partnership. Much of this backlash has been driven by the rise of China as a manufacturing power, a development that has been ripe for demagoguery in spite of the fact that U.S. manufacturing output continues to climb to new heights while none of the gold-plated populists in Washington and on cable news aspires to have his own children one day labor in a tire factory.

 

Populist economic proposals are by nature a disorganized grab bag of rent-seeking and opportunism on the part of both politicians and their domestic business clients, and range from the Trump administration’s destructive tariffs on steel and aluminum (exported to the United States at low prices by those dastardly Canadians), to Democratic proposals to use the tax code and the federal bidding process to punish companies with overseas operations, to the bipartisan rejection of the TPP, which cleared the way for a new Beijing-dominated Asia-Pacific trade bloc.

 

The first wave of populist backlash has been driven by dislocations associated with automation and the integration of global supply chains and, to a lesser extent in the United States than in Europe, by immigration, especially the immigration of refugees from the Middle East and North Africa. That backlash is likely to be intensified as businesses incorporate more-sophisticated artificial intelligence into their operations, which is likely to wipe out jobs ranging from loan officer and stock analyst to radiologist, positions in which AI in some cases already outperforms human competitors. Where robotics and other forms of automation replaced the muscle labor of factory workers, AI will undermine the previously comfortable position of the educated and politically connected affluent professional classes.

 

We must at some point bring the federal books if not quite into balance then closer to balance. The joint political clout of the middle class and the affluent is already the main barrier to entitlement reform and fiscal stabilization. The combination of sudden and acute employment pressure on the professional classes with the eventual fiscal crises toward which the United States is heading could produce very bad policies and very bad economic outcomes, including increased protectionism, enforced Ludditism, and inflation driven by the canard of “modern monetary theory.” The sooner we face these challenges, the better — and the less likely the United States will slide into economic illiberalism.

 

The second threat to the future of a free economy to consider here is China — both China per se and Western (especially U.S.) misunderstandings of the Chinese situation.

 

China is neither free nor democratic, but neither is it the unitary CCP-run corporate state of the fearful American imagination, nor a pseudo-capitalist economy of mechanical copycats and Potemkin workshops. China’s economy is genuinely — indeed, viciously — entrepreneurial. The failure of U.S.-based technology firms such as Google and Facebook in China has less to do with Beijing’s protectionism (a real but secondary factor) than it does with the inability or unwillingness of those firms to compete in the Chinese market on Chinese terms — that is the analysis of Kai-Fu Lee, a Microsoft and Apple veteran who also served as the president of Google China. The idealistic, techno-utopian mentality of Silicon Valley has led to failure after failure after failure in China. But this is not the first time this kind of story has played out: Japan practices some mild protection of its automobile market, but the main reason U.S. firms — unlike Mercedes, BMW, and Audi — have failed to get much of a foothold there is that they spent decades trying to sell Japanese buyers the kinds of cars they don’t want. And it wasn’t protectionism that saved U.S. firms from Japanese competition in the 1980s and 1990s — it was the shift toward trucks and SUVs, a segment where U.S. manufactures excel. Protectionism and regimentation weren’t the answer for Ford vs. Japan, and they aren’t the answer for Google vs. China.

 

At the same time, China faces many of the same internal challenges as its Western competitors: the possibility of sensitive firms’ and industries’ failing in high-stakes global competition, workers made restive by the insecurity of their positions, and a political class and associated financial interests that are resistant to necessary reform. But unlike Washington, Beijing is mostly unconstrained by institutions, by respect for public opinion, or, indeed, by decency in its possible responses to economic crisis. Its policy menu includes everything from invading neighboring countries to imposing even more brutal repressive measures on its people than it already does. China could as easily move in the direction of less economic freedom as it could more economic freedom, and it could drag many of its allies and trading partners, even the United States, in the same direction as they conclude that the best way to compete with China is the way China learned to compete with the West: imitation. They won’t copy Beijing’s prison camps or its social-credit system (probably), but they will be tempted to lay a heavier governmental hand on economic activity, protecting politically sensitive businesses and industries even if that means artificially reducing the overall standard of living, curtailing traditional economic rights, or violating the rule of law. It is easy to imagine the kind of thinking behind, say, the Export-Import Bank being applied systematically, especially as Beijing’s footprint in areas such as international infrastructure financing grows larger.

 

And with the United States turning away from the pursuit of international trade relationships, we must consider the fact that a highly integrated, Beijing-led Asia-Pacific bloc is likely to be more successful competing with or excluding the North Americans and the Europeans than vice versa. American-style liberalism may out-compete “capitalism with Chinese characteristics,” or it may not.

 

The third, related area of concern is the persistence of “emergency” powers in the United States and abroad. The coronavirus epidemic already has given rise to extraordinary measures — many of them necessary and prudent but extraordinary nonetheless. And Washington under the Trump administration already has flirted with the abuse of other emergency powers, as in the president’s threat to simply order all U.S. firms to pull up stakes from China with his supposed powers under the overly broad Inter­national Emergency Economic Powers Act of 1977. Washington already has been in a state of pseudo semi-crisis for most of a generation as regular order in Congress has been supplanted by a series of last-minute continuing resolutions and budgetary adhocracy. Democrats face pressure from the left to use climate change or other pretexts to implement long-standing progressive economic priorities through “emergency” fiat.

 

The coronavirus epidemic has too quickly accustomed policy-makers from Washington to the local level to order businesses shuttered or reorganized, and it has established precedents for lavish spending to pay down the political consequences of such heavy-handedness. The Joe Biden administration is likely to try to use the coronavirus epidemic as an excuse to execute a very large wealth transfer from the nation at large to a handful of Democrat-run fiefdoms with dangerously out-of-balance pension systems and balance sheets. A few trillion dollars in capital would in that way be taken out of the market and sunk into political boondoggles and bureaucratic pockets rather than being made available for productive investment.

 

Emergencies are easy to get into. They are difficult to get out of. And the needful things are easy for rich and complacent societies to put off as their leaders enjoy the pleasures of a comfortable decadence.

 

The free modern economy has served us well for the better part of a century. But its institutions require tending, its borders need defending, and its natural cycles of exhaustion and parochialism need counteracting. At the moment, neither the United States acting on its own nor North America or the European Union acting collectively has the capacity or the inclination to undertake that work single-handedly. The future of freedom will require cooperative effort, and that effort will rest upon the willingness of the peoples of the free world to undertake it.