The week of June 26, 2023: The free markets debate, the Fed, transportation, climate, inflation, and much, much more.
The week of June 26, 2023: The free markets debate, the Fed, transportation, climate, inflation, and much, much more.
To economist Deirdre McCloskey, “the legislation currently being pushed by left and right to try again the policies of antitrust, trade protection, minimum wage and, above all, subsidy for certain technologies,” is evidence that Leviathan’s cheerleaders are yet again on the march. So they are. That the big state crowd is swollen by recruits from the right, “common good” conservatives, and all the rest makes this current moment — and it may be much more than a moment — all the more troubling.
McCloskey’s observation comes in the course of a review for the Wall Street Journal of Power and Progress: Our Thousand-Year Struggle Over Technology and Prosperity by Daron Acemoglu and Simon Johnson, both of the Massachusetts Institute of Technology and (to oversimplify) the center-left. I have not (full disclosure) read this book, but according to McCloskey, its authors are “especially eager to regulate digital technologies such as artificial intelligence,” arguing that, “technology should be steered in a direction that best uses a workforce’s skills,” and that, “education should . . . adapt to new skill requirements.” “How,” writes McCloskey, “the administrators of the Economic Development Administration at the Department of Commerce would know the new direction to steer, or the new skills required, remains a sacred mystery.”
McCloskey writes:
During the past two centuries, the world has become radically better off, by fully 3,000% inflation adjusted. Even over the past two decades the lives of the poor have improved. The “great enrichment” after 1800 and its resulting superabundance has brought us out of misery. Even the poor workers who did not benefit in the short run have done so enormously in the long run. The number of people on the planet living on $2 a day has fallen to 1 billion out of 8, and the income average is $50 a day. The state didn’t do it, and forcing short-run egalitarianism or handing power to the Office of Economic Development can kill it, as it regularly has. Messrs. Acemoglu and Johnson see great imperfections in the overwhelmingly private sources of the enrichment. With such imperfections, who needs perfection?
I first read a reference to McCloskey’s article in a post by John Cochrane on his excellent blog, The Grumpy Economist in which, based on McCloskey’s review, he paired the book by Acemoglu and Johnson (which he too hadn’t read!) with another attack on “classical liberal ideas,” this one mounted by Patricia Cohen in the New York Times. Very early in the post, Cochrane also turns his attention to the question of “perfection:”
The case for free markets never was their perfection. The case for free markets always was centuries of experience with the failures of the only alternative, state control. Free markets are, as the saying goes, the worst system; except for all the others.
In this sense the classic teaching of economics does a disservice. We start with the theorem that free competitive markets can equal — only equal — the allocation of an omniscient benevolent planner. But then from week 2 on we study market imperfections — externalities, increasing returns, asymmetric information — under which markets are imperfect, and the hypothetical planner can do better. Regulate, it follows. Except econ 101 spends zero time on our extensive experience with just how well — how badly — actual planners and regulators do. That messy experience underlies our prosperity, and prospects for its continuance.
But on to the New York Times’ Cohen.
She writes:
The economic conventions that policymakers had relied on since the Berlin Wall fell more than 30 years ago — the unfailing superiority of open markets, liberalized trade and maximum efficiency — look to be running off the rails.
During the Covid-19 pandemic, the ceaseless drive to integrate the global economy and reduce costs left health care workers without face masks and medical gloves, carmakers without semiconductors, sawmills without lumber and sneaker buyers without Nikes.
Over to Cochrane:
That there ever was a “consensus” in favor of “the unfailing superiority of open markets, liberalized trade and maximum efficiency” seems a mighty strange memory.
Indeed.
Cochrane has his doubts about this “ceaseless drive,” too, which implies something rather more planned than markets doing what they do. All the same, the space in which they could operate was broadened (in part anyway) thanks to doors opened wider by governments liberalizing trade, either within a bloc, such as the EU’s single market or, in a geographic region, such as North (NAFTA) or parts of South America (Mercosur). And globally, the WTO was established in 1995 as an expanded successor to the GATT. But, if Cohen wants to use the word “ceaseless,” she must deal with the history of the WTO’s development-centered “Doha round,” which has relatively little to show for it since being launched in 2001.
That year, however, China was admitted to the WTO. Cohen writes that this was seen as “transformative”: “Linking a huge market with 142 countries would irresistibly draw the Asian giant toward democracy.” That belief, a form of liberal historical determinism, was indeed fairly widely held at the time, although the word “toward” is doing a lot of work, as is “irresistibly.” Nevertheless, there was more awareness of the risks involved in admitting China to the WTO than is now often remembered.
Here is the first paragraph of an article by Joseph Khan for the New York Times from November 11, 2001:
China joined the World Trade Organization this evening, completing a quest that required 15 years of haggling over whether the nation’s fitful embrace of a market economy entitled it to the full trading rights of capitalist countries.
China then, as now, was a mercantilist state (although then it was, in its Chinese way, liberalizing, whereas now it is moving in the opposite direction). Despite that, it was thought that the political and economic advantages of bringing it deeper into the global trading system were a gamble worth taking.
But 2001 was, as Cohen implicitly acknowledges elsewhere, less of a turning point than it may seem. Globalization was well underway before then. And she concedes that economically it has been a success:
The favored economic road map helped produce fabulous wealth, lift hundreds of millions of people out of poverty and spur wondrous technological advances.
But there were stunning failures as well. Globalization hastened climate change and deepened inequalities.
Cochrane:
More fact free narrative spinning. How are “inequalities” plural? Globalization brought the sharpest decline in global inequality in the history of our species. Perhaps it “hastened climate change” in that if China had stayed desperately poor they wouldn’t be building a new coal fired power plant a week. US emissions went down because of… choose 1: enlightened policy 2: fracking, a shift to natural gas made only possible by the curious US property rights system absent in Europe, and pretty much over the dead body of the entire energy regulatory apparatus.
Cochrane also challenges Cohen’s criticism of other supposed free market failings, not least where the pandemic was concerned. There he sees “failures of government all over the place, not failures of some hypothetical free market.” Pretty much. And while supply chain weaknesses were certainly revealed by the disruptions caused by the pandemic, markets will price them in and/or adapt. Given the chance, that’s what markets do. Nevertheless, while I’d argue that our economic policy (and trading arrangements) may need to respond more to today’s more treacherous geopolitics than Cochrane (I would imagine) would recommend, the point he made quoted just below is one worth keeping in mind — even if I would not discount the extent to which China, like Germany some eighty years ago, can use harnessed capitalism as the economic foundation for a formidable fighting force.
Cochrane:
[F]ree markets, and free markets alone, make a country wealthy enough to fight and win wars, if the country has the will and desire to do so. The US and NATO military budget vs. Russia’s, larger by a factor of 10 at least, seems to bear that out, along with the much greater quality of our weapons. Heaven help us militarily once the protectionists lead us to state-directed penury.
Cohen also discusses the jobs lost to globalization:
In the United States and other advanced economies, many industrial jobs were exported to lower-wage countries, removing a springboard to the middle class.
To deny that some of that took place would be foolish, but the far greater killer of those industrial jobs has been technology. Writing for the New York Times in 2016, Claire Cain Miller quoted Lawrence Katz, an economics professor at Harvard. His view was that “over the long haul,” automation had been much more important: “It’s not even close.” She also cited analysis which attributed roughly 13 percent of America’s manufacturing job losses to trade and the rest to enhanced productivity because of automation.
In this connection, it’s worth paying at least some attention to the fact that manufacturing output has been growing for years, while the percentage of workers employed in manufacturing has been falling. However, I have no doubt that accelerating automation will pose profound economic, social, and political challenges (I wrote as much in 2016, and don’t see any reason to change my mind). To assume that we will cope well with this latest chapter of technological change because “we always do” is to rose-color the past, and to dodge thinking too hard about the future. To start with, the current labor shortage (such as it is) will, if I had to guess, be a fond memory within a decade or so which would suggest that, economically anyway, the current panic over a stagnant or one day falling population is overdone.
Concerns over the impact of technology on the workforce are a focus for Acemoglu and Johnson. It’s an important topic, and I’ll be reading their book while keeping the long history of technocratic failure firmly in mind.
Cochrane does not (shockingly!) want to review a book he has not yet read, but has similar concerns:
The idea that bureaucracy has the capacity to figure out not just what new technology will work, but to guide its social and distributional consequences seems… far beyond the historical record of bureaucratic accomplishment.
Indeed it is. Cochrane adds:
The bulk of economic regulation serves exactly the purpose McCloskey basically alleges of Acemoglu and Johnson: Preserve rents of incumbents against the threats of technological improvements. From medieval guilds to trade protection to taxis vs. Ubers, that is really its main function. So we have an extensive bureaucracy that is very good at it, and extensive experience of just how well it works. Which is, very well, at protecting rents and stifling growth.
This is true, but in addition to the benefits that heavy economic and technological regulation may bring to (preferred) incumbents, a highly interventionist state also works very well for those who run it. It is a source of jobs, power, prestige, and, often, money. Historically, central planning has been a failure (with certain exceptions in the case of wartime or postwar reconstruction) and, as the destructive antics of the West’s climate policy-makers remind us, that’s not going to change. But it has typically been a tremendous success for those in charge, a reality that will not have been lost on some of those, whether on the left or the right, now calling for it to be given another chance.
The Capital Record
We released the latest of our series of podcasts, the Capital Record. Follow the link to see how to subscribe (it’s free!). The Capital Record, which appears weekly, is designed to make use of another medium to deliver Capital Matters’ defense of free markets. Financier and National Review Institute trustee, David L. Bahnsen hosts discussions on economics and finance in this National Review Capital Matters podcast, sponsored by the National Review Institute. Episodes feature interviews with the nation’s top business leaders, entrepreneurs, investment professionals, and financial commentators.
In the 125th episode, David was joined once again by Dr. Alexander Salter for a comprehensive talk on the economy, current policy problems causing significant harm, the dangers of cronyism, and most importantly, the subject of distributism. They unpack the good and bad of valuing more widespread ownership of private property and seek to work within first principles in understanding how one’s opinions on these things ought to work.
No Free Lunch
Earlier this year, David Bahnsen launched a new six-part digital video series, No Free Lunch, here at National Review. In it, we bring the debate over free markets back to “first things”—emphatically arguing that only by beginning our study of economics with the human person can we obtain a properly ordered vision for a market economy.
The series began with a discussion with Fr. Robert Sirico of the Acton Institute. Later guests include Larry Kudlow, Dennis Prager, Dr. Hunter Baker, Ryan Anderson, Pastor Doug Wilson, and Senator Ted Cruz.
Yes, the six-part series now has seven parts.
Enjoy.
The Capital Matters week that was . . .
Climate
Young people understand hypocrisy. They know that celebrities who fly private jets yet advocate small electric vehicles for the masses aren’t serious about reducing CO2 emissions. They distrust those who prescribe wind and solar power but oppose nuclear power, which has produced most of France’s electricity for decades with no accidents. And they’re wary of those who would drive manufacturing out of Europe to China and then declare success for the approach of “Net Zero.” …
There is nothing, I suppose, horribly wrong with deploying wind turbines as just one source of energy among many, so long as that is how they are used. Unfortunately, climate zealots are assigning this technology a prime-time role for which it is not yet ready. Most importantly, we have yet to overcome the problem caused by intermittency (the wind doesn’t always blow), but there have also been signs that the nature of the “race” to net zero may also be leading to quality-control issues…
Charles is, of course, entitled to his opinions on climate change. He is not, however, entitled to use his throne as, so to speak, a platform to express them. This presents him with a choice he should not be allowed to dodge. As noted above, if the crisis is as grave as he suggests, it is surely his duty to step down so that he can be free to speak out about the approaching apocalypse, beginning, perhaps, like his younger son, with a book, and an interview with Oprah.
Monetary Policy
After ten consecutive hikes, the Federal Reserve kept its interest-rate target at 5.25 percent. While this comes as a relief to banks with troubled balance sheets, it means the battle against inflation will take longer to win. Consumer prices are up 4 percent since last year. Excluding volatile food and energy prices, the figure is 5.3 percent.
Judging by interest rates, monetary policy is appropriately tight. But liquidity conditions indicate that things are more dire…
But what if all this focus on targeting inflation, however defined, is misguided in the first place?
A large body of research suggests that central banks should target a measure of total spending or income in the economy, such as nominal gross domestic product (NGDP), instead of inflation. NGDP growth is equal to inflation plus real economic growth. A major advantage of NGDP targeting is that it allows inflation to fluctuate in response to changes in productivity in the short run…
Transportation
In one of the battles of the progressives’ war on things that work, California is making life harder for truck drivers and everyone who depends on them.
The California Air Resources Board (CARB) was created in 1967 under Governor Ronald Reagan, and it was one of Reagan’s greatest mistakes. The CARB is an independent agency of the California state government. The federal Clean Air Act governs emissions standards nationally, or at least it’s supposed to, but the EPA waives the Clean Air Act for California to set stricter standards. Over time, a coalition of 14 other states and the District of Columbia have glommed onto California’s rules. Since California plus that coalition make up a large portion of the total U.S. vehicle market, the CARB has de facto power to set national emissions standards for the country…
In 2021, the Teamsters celebrated their first-ever contract to represent drivers at the transportation company XPO. Now, XPO workers have voted to decertify them…
Major disruptions to shipping might be on the way. As I’ve written about before, UPS is in an especially contentious round of negotiations with the Teamsters Union, which represents about 340,000 UPS employees. The Teamsters have already voted to approve a strike if no deal is reached before the current contract expires on July 31, and they set a deadline of today to reach a new pay-rate deal.
On top of that, less-than-truckload (LTL) carrier Yellow might go out of business this summer…
Fiscal Policy
Conservative House Republicans frustrated by the Biden-McCarthy debt deal recently won a symbolic victory by shutting down House floor operations. The protest revealed the ongoing struggle for power between the moderate and conservative factions of the conference.
But these attention-grabbing efforts risk distracting from more politically feasible ways of achieving significant savings. By requiring federal agencies to implement nonpartisan watchdog recommendations, Congress could save taxpayers more than $100 billion while showing the American people that the legislative branch is capable of overseeing the executive…
Included in the debt-limit legislation that recently passed Congress was a clawback provision targeting unspent Covid-19 funds. To date, trillions have been spent fighting Covid-19, but now $27 billion in unspent funding will be pulled back from federal agencies. Getting a clawback provision to President Biden’s desk was a good first start. However, Congress should go further and defund a new vaccine program that is likely to continue to burden taxpayers and provide dubious benefits to public health.
The University of Wisconsin System, like other public university systems, spends millions every year on diversity, equity, and inclusion (DEI) offices. Conservatives argue that these offices are staffed by progressive ideologues who contribute little to education outcomes and pursue divisive political ends with taxpayer money. Wisconsin assembly speaker Robin Vos (R.) is currently in a battle with Governor Tony Evers (D.) about whether those offices should get funding in the next state budget.
Vos wants to cut the $32 million the UW System wants to spend on DEI. He has rebranded it as “division, exclusion, and indoctrination.” He went so far as to say he’s embarrassed to be an alumnus of the UW System…
Industrial Policy
Electric-truck manufacturer Lordstown Motors is going out of business, despite being championed by politicians including Donald Trump as an example of successful industrial policy. Politicians pose for pictures at groundbreaking ceremonies and brag when these projects are started, then vanish when they fail…
The Economy
A recession has been widely expected but has yet to arrive. The economy seems wavering on the brink, with March data at recessionary levels while April data were strong. Ambiguous signals characterize economic turning points. Payroll numbers remain strong but must be discounted, since every post-World War II recession arrived with payroll expansion, in most cases exceeding the current rate. Broad GDP growth continues too, albeit at an anemic 1.6 percent…
The Dollar
We are currently in the midst of broad-based speculation that the U.S. dollar’s role at the center of the international economic system is under threat. These fears have been catalyzed both by sentiment, including Russia’s and China’s stated desire to avoid the long arm of U.S. sanctions, and concrete actions like the agreement between Brazil and China to invoice and settle bilateral trade in Chinese yuan. However, a close examination of long-term economic data reveals that the dollar’s international status remains unchallenged despite the ongoing de-dollarization hysteria…
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