Saturday, October 7, 2023

The Economist against Bidenomics

The magazine The Economist was founded in 1843 to defend free trade and a limited government. Since then, free trade has globally expanded (and contracted several times) and the size of government has expanded almost continuously, together with life expectancy, education but also the destructive power of wars. Today, public expenditure is more than 50% of GDP in some of the richest and more advanced countries of the world. In the future, if societies want to improve their welfare, it will most probably come from a combination of free trade and good (and large) governments.

In a special report and an editorial this week, The Economist calls “Homeland Economics” the protectionist turn in the economic policies of the US, the EU and other jurisdictions, including Japan and India.

The usual arguments against protectionism (free trade promotes efficiency) are combined with an attack on new industrial policies targeted to strengthen value chains. The Covid-19 pandemic and the war in Ukraine have triggered an increase in the resources spent on public intervention in specific industries. At the same time, governments like the Biden administration (with Bidenomics) have taken advantage of the enhanced tolerance with government activism to introduce subsidies that accelerate the Green transition.

In what The Economist calls the era of neoliberal globalization (the decades between the fall of the Berlin Wall and the global financial crisis, where poverty and global inequality decreased), government intervention was not absent. At the same time, inequality in specific countries increased or was scarcely reduced from very high levels (as in Latin America), and climate change reached scaring dimensions. It is hard to see how to achieve better living standards (equitable and sustainable growth everywhere) without a balanced combination of markets and governments.

New Industrial Policies, according to The Economist’s special report (which sounds the alarm about introducing geopolitical objectives in economic policies, as if the two had been disconnected in history), will in fact increase inequality, because it is no longer clear that with new technologies manufacturing jobs (the traditional objective of “industrial” policies) are low-skilled any more. At the same time, less trade will mean more global inequality because the improvement of living standards in emerging economies will stop.

The environmental critique of the new interventionism is more moderate. The magazine’s special report accepts that New Industrial Policy can be a second best instrument to address climate change, because voters will better accept sacrifices from these imperfect policies if they create new jobs.

The Economist will not stop Bidenomics and similar policies and governments will remain as necessary as ever if not more. Some cautions are in order, though. Some protectionist policies have a high cost in terms of budgets and loss of productivity. And shocks are often better absorbed by markets than by planning.

That is why new forms of intervention should probably focus on: global infrastructure and development; limiting the power of global multinationals; accelerating the fight against the climate emergency; productivity and job quality. That will not mean more markets and less government, but better institutions including both.

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