Here’s my GMU Econ colleague Bryan Caplan’s first post at his new blog Bet On It. Visit it daily. I will!
As the U.S. pounds plowshares into swords for a second Cold War, lessons from the first one may serve those who care to consider them. The American policy of peace through strength, market-driven economic growth, and open trade defeated the Soviet Union. The emerging conflict with China, excepting the military threat to Taiwan, will for the foreseeable future be almost entirely economic. That will make it unlike the military conflicts with the Soviet Union and its proxies in Eastern Europe, Korea, Vietnam, Cuba and countless global insurrections. If the U.S. maintains peace through strength, it can lose this struggle only by forfeiting the source of its economic success: economic freedom.
China is currently expanding government dominance of its economy and suffering a concomitant reduction in economic growth, tech-stock valuations and employment. If President Biden and Congress have their way, Chinese-style industrial and antitrust policies will soon come to the U.S. The America Competes Act is the House’s effort to outdo the Chinese Communist Party’s latest five-year plan. The 2,900-page bill would make an old Soviet commissar blush. The Senate version of the bill is better, but why would Republicans try to compete with China in a way they know doesn’t work when they are heavily favored to win back control of Congress in November?
America’s success in the world economy has never depended on industrial policy or government subsidies. It has come from the relative absence of government planning and subsidies. This is hardly news. The U.S. government provided support for the efforts of Samuel Langley, the greatest aviation expert of the 1890s, in his effort to make America first in powered flight. His manned Aerodrome flopped into the Potomac River. It was the Wright brothers, two unsubsidized but determined bicycle makers from Dayton, Ohio, who flew at Kitty Hawk, N.C., and changed the world.
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A more competitive America requires resurrecting and strengthening fiduciary standards to guarantee that retirement and mutual funds act in investors’ interests, using appropriation riders to stop the oppressive regulatory and antitrust overreach of Mr. Biden’s regulators, lifting H-1B visa quotas to allow more legal immigration by those who have skills America needs, and giving every foreign graduate in key business and technical areas green cards along with degrees. The country needs their hands, minds and hearts.
It is time to revitalize the system that made America the world’s economic colossus, won the Cold War, and moved billions out of poverty world-wide, including hundreds of millions in China. No nation will ever be as productive as the U.S. while the American economy is powered by limited government, economic freedom, and free markets.
Earlier this month, the House passed a $350 billion initiative known as the COMPETES Act, which was widely promoted as a bill aimed at increasing semiconductor chip production and boosting U.S. competitiveness with China.
The initiative was largely sold as a much-needed national security effort to counter the threat of economic competition with China. In reality, less than 15 percent of the funding in the 2,912-page bill will go toward manufacturing semiconductors. The rest will go to corporate subsidies, pie-in-the-sky industrial planning, expensive environmental initiatives, welfare for union workers, and creating even more barriers to free trade.
With record levels of public debt, 7 percent inflation, and an ongoing supply chain crisis, the last thing the United States needs is $350 billion in additional government spending and more price-hiking protectionism.
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A close examination of the COMPETES Act reveals what it really is: a shift away from bottom-up economic dynamism in favor of top-down industrial policy whereby the state picks winners and losers. This is bad news in light of the immense power of interest groups to steer policy and the government’s famously inefficient efforts to divert resources to successful industries.
Industrial policy fails wherever it’s tried. It has failed even in Japan, a country that’s often upheld as a success story by advocates of industrial policy. Japan’s industrial planning ministry actively discouraged Honda from entering the automobile industry and discouraged Sony from entering the consumer electronics business—sectors in which they’ve come to thrive. The top-down approach of industrial policy is deeply destructive. In 1985, economist Don Lavoie noted how the idea behind industrial policy was to replace the decentralized decision-making process of the market with centralized decision-making by government agencies. The institutional shift from bottom-up to top-down leads to serious, unchecked abuses of power that harm economic well-being, morality, liberty, and human dignity.
In Biden’s telling, rising prices are the result of monopolies and near-monopolies in the economy taking advantage of consumers by jacking up prices. “Capitalism without competition isn’t capitalism. It’s exploitation—and it drives up prices,” he said during Tuesday’s address. Later, he promised a “crackdown on these companies overcharging American businesses and consumers.”
There’s not a lot of evidence to support that diagnosis, but let’s just go with it for a moment. If concentration in the marketplace was somehow to blame for rising prices, then it would make sense to attack that problem by expanding competition. Give consumers more choices and they will naturally flock to lower-priced alternatives, putting pressure on other sellers to keep prices down.
The problem, for Biden, is that so much of his economic agenda is pointed in exactly the opposite direction. In one breath, he complains about the lack of consumer choice driving up prices. With the next, he proposes to further restrict consumer choice.
“We will buy American to make sure everything from the deck of an aircraft carrier to the steel on highway guardrails are made in America,” Biden said, before promising that his administration would make some of the “biggest investments in manufacturing in American history” to bring about “the revitalization of American manufacturing.”
So much for his supposed “top priority.”
Even Larry Summers, a top economic adviser in former President Barack Obama’s administration, called out Biden for trying to pass off this economically illiterate attempt to combat inflation.
Also rightly critical of Biden’s protectionism is Christian Britschgi. A slice:
“I’m announcing that this year we will start fixing over 65,000 miles of highway and 1,500 bridges in disrepair,” said the president to Congress tonight. “When we use taxpayer dollars to rebuild America, we are going to Buy American. Buy American products to support American jobs.”
The $1.2 trillion infrastructure bill that Biden signed into law in November 2021 expanded requirements that the new roads, bridges, buses, and trains that it would fund would be made in America from American-sourced materials. Those same Buy American provisions ensure we won’t get nearly as much infrastructure for the money as we otherwise could.
That’s because domestically manufactured materials and products often cost more than foreign alternatives. Otherwise, you wouldn’t have to require that project sponsors use them.
Last night, Biden’s SOTU address was remarkable for its terrible economics. At a time when a growing number of people recognize the role played by the American Rescue Plan Act in the current inflation, President Biden bragged about the overflow of money. He then proceeded to list all the ways he would make the situation worse by spending more: increasing the restrictions on supply with Buy American and minimum-wage requirements, price controls, and blocking foreign trade or supply chains. Better yet, all of this, he claimed, would help fight inflation.
Unfortunately, when the president moved away from left-wing policies, it was to embrace more populist policies such as increased industrial policy, less immigration, business subsidies (to be fair, that’s a bipartisan disease), trade protectionism, and more police funding without any concrete criminal-justice-reform proposals.
If the president’s goal were truly to lower costs and to have “more goods moving faster and cheaper in America,” he could have proposed to repeal the Jones Act, the Trump China and metal tariffs, and reduce regulations on energy production. But that would make too much economic sense.
The most amazing part of the speech, however, was when he actually said with a straight face that all this new spending “to fight inflation will lower your costs and lower the deficit.”
Bruce Yandle clarifies our understanding of the bottlenecks at American ports.
