The Republican Party wages an internal battle while the US economy teeters on the edge of a potential recession, marked by a weakening labor market and volatile financial conditions. The debate within the party is not just over political leadership, but the very economic principles that will define the nation’s future. With inflation-adjusted wages down since January 2021 and savings rates at historic lows, a pro-growth economic agenda is urgently needed. 

Yet, some within the GOP or right-leaning groups are pushing for a dramatic shift away from the free-market capitalism that has historically driven American prosperity. The deviation threatens to undermine decades of economic success.

The “New Right,” represented by groups like American Compass, advocates for a return to big-government policies. Under the guise of a new form of conservatism, this faction argues for increased government intervention in the economy, protectionist measures, and the strengthening of monopoly labor unions.

Oren Cass, who leads American Compass, pushed this interventionist approach in his article “Free Trade’s Origin Myth” at Law & Liberty: 

“As the American people, and American policymakers, rediscover the importance of promoting domestic industry and protecting the domestic market, economists have a vital role to play in analyzing how best to accomplish the nation’s goals.”  

Cass claims these policies will benefit workers and domestic industries, yet history and economics tell us otherwise. The New Deal, Great Society, and more recent Obama-Biden policies, all rooted in similar principles, have repeatedly demonstrated the failure of such approaches to deliver sustainable economic growth.

This misguided movement threatens the free-market policies that have been the hallmark of much of GOP economic policy. American Compass and its allies call adherents to these principles “free-market fundamentalists,” suggesting that the time has come for the GOP to abandon the policies that have lifted millions of Americans out of poverty and spurred innovation and economic growth.

Consider the economic successes of the Trump administration during its first term — a period characterized by substantial deregulation and tax cuts. 

The American Action Forum calculates the final rule costs at the same point of the last three administrations. The latest through August 23 in the fourth year of each term had final rule costs of $311.7 billion for Obama and $1.67 trillion for Biden, while Trump had a decline of $100.6 billion. The cost of doing business was lower under Trump than the other two. According to the Competitive Enterprise Institute, there is always room for more cuts: the high costs of regulations currently top $2.1 trillion per year. 

The Tax Cuts and Jobs Act helped boost the economy by lowering tax rates, contributing to more incentives to work and invest. The Trump tax cuts and deregulation empowered more economic growth, more job creation, and greater income distribution, by allowing the private sector to thrive. Before the destructive pandemic-related lockdowns, real median household income increased by $5,000, wages increased by nearly 5 percent, and the poverty and unemployment rates reached their lowest in 50 years. 

These gains, however, are now at risk as key provisions of the tax cuts are set to expire in 2025, and the fiscal crisis driven by government overspending threatens to reverse this progress.

The GOP must resist the allure of the “New Right” and reaffirm its commitment to pro-growth policies that prioritize economic freedom and limited government. This begins with reducing government spending, which is essential to making the Trump tax cuts permanent and preventing a tax hike that would stifle economic recovery. Simplifying the tax code by eliminating special provisions that pick winners and losers would further enhance economic efficiency and equity.

In addition to tax reform, the GOP must focus on streamlining welfare programs and enforcing work requirements. These policies would reduce dependency on government assistance, encourage labor force participation, and strengthen families by promoting self-sufficiency. The economic benefits of such reforms are clear: a more robust labor market, higher productivity, and greater economic mobility.

Embracing free trade is likewise crucial for maintaining America’s competitive edge in the global economy. Protectionist measures, as advocated by the “New Right,” may offer short-term relief to specific industries but ultimately harm consumers, reduce innovation, and weaken the broader economy. On the other hand, free trade fosters competition that drives technological advancement and delivers lower prices and more consumer choices.

The GOP should also prioritize fostering innovation, particularly in the technology sector. The US can lead the next economic revolution by reducing regulatory barriers and promoting a pro-innovation environment, driving productivity and economic growth for decades.

The alternative — a retreat into the big-government policies championed by the “New Right” — would be disastrous. Higher tariffs, increased taxes, and greater government and union control over the economy would exacerbate economic stagnation, fuel inflation, and increase poverty. They echo the failed strategies of progressive leaders like Woodrow Wilson, Franklin D. Roosevelt, and Lyndon B. Johnson — policies that expanded government power at the expense of economic freedom and prosperity for ordinary Americans.

The path forward for sound policy is to embrace a pro-growth approach championed by the American Institute for Economic Research, Club for Growth’s Freedom Forward Policy Handbook, Americans for Tax Reform’s Sustainable Budgeting, among others. Reducing government spending, taxes, regulations, and the money supply will unleash abundance.

By recommitting to pro-growth principles, the GOP can present a compelling alternative to the electorate and pave the way for a more prosperous future. Or, it can follow the “New Right” down the progressive road to serfdom.

The Federal Reserve’s efforts to bring down inflation appear to have worked. Indeed, the latest data from the Bureau of Economic Analysis (BEA) suggests the Fed may have reduced inflation even more than it intended. The Personal Consumption Expenditures Price Index (PCEPI), which is the Fed’s preferred measure of inflation, grew at a continuously compounding annual rate of 1.9 percent in July 2024. It has averaged just 0.9 percent over the last three months.

Core inflation, which excludes volatile food and energy prices, also came in low. Core PCEPI grew at a continuously compounding annual rate of 1.9 percent in July 2024, and 1.7 percent over the last three months.

Despite the recent low inflation, prices remain elevated. Headline PCEPI is around 8.8 percentage points higher than it would have been had the Fed hit its 2-percent inflation target since January 2020. Core PCEPI is 7.9 percentage points higher.

The Fed increased its federal funds rate target range by 525 basis points between February 2022 and July 2023, and has held its target steady over the time since. With inflation running slightly below target, the Fed now looks poised to begin cutting its target rate.

Speaking at the annual Jackson Hole symposium earlier this month, Federal Reserve Chair Jerome Powell suggested rate cuts would begin in September. “The time has come for policy to adjust,” he said.

It may even be past time for policy to adjust. Remember: monetary policy works with a lag. Today’s inflation reflects the stance of monetary policy months ago. Correspondingly, today’s monetary policy will affect inflation months from now. With inflation already running below target, today’s tight monetary policy will likely see inflation fall further still.

Additionally, disinflation tends to passively tighten monetary policy. Recall that the implied real (inflation-adjusted) federal funds rate target is equal to the nominal federal funds rate target minus expected inflation. Since inflation expectations tend to move in line with inflation, falling inflation typically causes the implied real federal funds rate target to rise. Ideally, the Fed would gradually reduce its nominal federal funds rate target as inflation falls, in order to prevent monetary policy from passively tightening. It hasn’t. Instead, it has maintained its nominal federal funds rate target.

To recap: monetary policy is already too tight given observed inflation in recent months and will likely tighten further as inflation continues to decline unless the Fed course corrects quickly.

A September rate cut would certainly be a step in the right direction. But the Fed has a long way to go. Its federal funds rate target range is currently set at 5.25 to 5.5 percent. In order to achieve a neutral policy stance and 2-percent inflation, the Fed must set its nominal federal funds rate target 2 percentage points above the natural rate of interest. Estimates from the New York Fed would put the neutral nominal policy rate at 2.7 to 3.2 percent. Similarly, in the June Summary of Economic Projections, the median Federal Open Market Committee member thought the midpoint of the (nominal) federal funds rate target range would eventually return to 2.8 percent.

How quickly will the Fed shave 2.5 percentage points off of its nominal federal funds rate target? Markets think it could move fast. The CME Group reports a 69.2 percent chance that the federal funds rate target range is at least a full percentage point lower by the end of the year. That would significantly reduce the distance the Fed needs to travel in order to return monetary policy to neutral.

Alas, history suggests the Fed will move slower than markets currently project. Fed officials were notoriously slow to react when inflation picked up in 2021; slow to reach a tight policy stance once they began raising rates in March 2022; and slow to respond to the disinflation experienced over the last year. Absent a severe economic contraction, it is difficult to believe the Fed would now pick up the pace.

The Fed will almost certainly cut its federal funds rate target by 25 basis points in September, and it will likely continue to cut its target rate by 25 basis points every month or every other month thereafter, until the stance of monetary policy has returned to neutral. Such an approach would shave 50 to 75 basis points off the federal funds rate target this year, not the 100 basis points or more that futures markets are currently pricing in.

Let’s hope that’s enough.

Vice President Kamala Harris recently announced an economic plan for her presidential campaign. A centerpiece is the transformation of the Child Tax Credit (CTC) into a child allowance. If it became reality, the policy would discourage parental employment and risk harming the long-run prospects of children. These unintended consequences together with the plan’s cost should lead voters to reject it. 

The existing CTC provides up to $2,000 per child and is only available to parents with a tax liability or earnings. The Harris plan would increase the credit to $6,000 for newborn children, $3,600 for children age 1 to 5, and $3,000 for children age 6 to 17. Just as important, Harris would delink the CTC from work by delivering the full amount to families who pay no taxes and have no earnings. 

Delinking the CTC from work would turn back the clock on decades of progress improving the safety net. In the 1990s, bipartisan welfare reform moved the country away from unconditional cash welfare to a safety net that required and rewarded work. Defying the predictions of skeptics, the policy shift was tremendously successful in leading single mothers in particular to go to work. Child poverty fell as more resources were brought into homes, and children’s long-run outcomes — as later research demonstrated — improved as well. 

Harris’ CTC plan would risk undoing this progress by going a long way toward bringing back welfare as we knew it. A non-working single parent with two children would receive between $6,000 and $9,600 from Harris’ child allowance. This is in addition to the $9,000 they currently receive in food stamps, totaling around $15,000 to $19,000 in guaranteed assistance not tied to work. This would exceed the combined (inflation-adjusted) value of food stamps and cash welfare the same family would have received in 1996 in the majority of states. In other words, the Harris plan would increase the amount of guaranteed cash or near-cash assistance paid to non-working families beyond what they received the year prior to welfare reform, even before accounting for the growth in the rest of the safety net over the past 30 years.  

In addition to making it more possible to get by without working, the bigger concern is that the Harris plan would diminish the reward to work — that is, a family’s resources would not increase as much as a result of working. Economists have generally attributed most of the pro-employment success of welfare reform to expansion of the Earned Income Tax Credit, which provides a several thousand dollar work reward per year. The CTC is structured the same way in providing up to a $6,000 work reward for a family with three children. The Harris plan would eliminate that work reward by making the credit a guarantee for everyone regardless of work effort. 

The best prediction is that the Harris plan could lead well over a million parents to exit employment, an effect concentrated among single parents. This was the conclusion of a study I coauthored on the effects of making the 2021 CTC permanent. The Harris plan adopts the same policy with the exception of an even higher $6,000 benefit for newborn children, which would tend to slightly magnify the employment loss we found in our study. 

Employment exit is not the only risk voters should consider. The effect on children is at least as important. In the short run, the greater amount of resources sent to low-income families via Harris’ child allowance would reduce child poverty. But in the long run, employment exit could deprive some children of resources and undo the non-financial benefits of having a parent who works.  

Research suggests that the long-run risks to children are real. A large body of evidence finds that work-rewarding tax credits drive academic improvements among children which translate into gains in employment, earnings and self-sufficiency upon reaching adulthood. The evidence for positive long-run effects of government aid that does not require work is weaker. So turning the CTC from a work-rewarding tax credit into unconditional government aid could risk reversing some of the gains children experienced as a result of welfare reform.  

Proponents of a child allowance may respond that some amount of employment loss — and the associated risks to children’s long run prospects — are a worthwhile tradeoff for a safety net that provides a basic level of protection to poor families with children. That’s a valid point.  

But we should keep in mind the fairly robust set of assistance programs that we already have. A family of four bringing in no income of its own receives around $12,000 in food stamps plus benefits from other nutrition programs, free health insurance coverage via Medicaid, and is eligible for (though may or may not actually receive) cash welfare, energy assistance, and rental housing assistance. We do not need to create a child allowance to ensure families have a floor of government aid. 

The final and arguably most important concern with Harris’ child allowance is its cost. According to the Committee for a Responsible Federal Budget, the proposal would cost over a trillion dollars over the next decade. Given the lack of political will to control the cost of existing government programs to tackle the $35 trillion federal debt, now is not the time to add even more spending to future taxpayers’ tab. The very Americans who the Harris plan seeks to help — children — are the ones who will ultimately face the burden of repaying it in the form of higher taxes and dampened economic growth. 

The Harris child allowance is not worth the costs. More resources would help children in the short run. But the risks to parental employment and the long-term wellbeing of children, not to mention the fiscal costs, are too big a price a pay. We learned from welfare reform that a pro-work safety net helps lift up families. We owe it to families and taxpayers not to forget that lesson. 

“The Old Lady of Threadneedle Street” is the affectionate nickname of the Bank of England, as respected an institution as Britain ever had. Calling something as “safe as the Bank of England” was the highest praise of surety and soundness. Should any financial institutions get out of line, it was said that a simple rise of the Governor of the Bank’s eyebrow would get them back in line. It was a symbol of British tradition and stability. 

Because of the Bank’s stalwart reputation, the incoming Labour government of Tony Blair in 1997 announced that it would hand over responsibility for monetary policy to the Bank. This was meant to reduce the risk of politicized decision making. As an institution above politics, the Bank seemed to be the model for a new form of governing body: the respected, impartial, independent agency. Governments of left, right, and center have followed suit by increasingly turning over contentious decisions from Ministers to independent bodies. 

Yet, as anyone who has read the Federalist Papers could tell you, democratic and judicial checks and balances are important. Without them, power tends, as Lord Acton noted, to corrupt. In the Bank’s case, that fall from nobility is most apparent in its role in the fall of former Prime Minister Liz Truss. The consequences of its actions may be in the process of destroying Britain. 

The received wisdom of the fall of Truss was that she proposed an irresponsible “mini budget” that would have been fiscally disastrous and that sparked “the markets” to respond, sending a clear signal that her sort of supply-side policy was unacceptable and leaving her position untenable. This story just doesn’t stand up to scrutiny. All her policies were either expected or well-signaled in advance. The main fiscal issue was the cancelling of scheduled tax rises and a reduction in the top rate of income tax. None of this should have caused financial Armageddon. So what did? 

As the Wall Street Journal reported this week, the Bank is tacitly admitting to its role in the whole business. Unlike other central banks, including the Fed, the Bank had doggedly held on to low interest rates until even it could not credibly do so in the face of COVID-caused inflation. The trouble was that Britain’s legacy pension funds, which paid out guaranteed benefits, had followed a risky high leverage hedging strategy during the low-interest rate era. Once low interest rates evaporated, the funds were left with no alternative but to sell off government bonds. The Bank estimates that most of the rise in bond yields that followed the mini-budget was due to this sell-off, rather than to Truss’s announced policies. 

The Bank’s actions were compounded by the rest of what we can term “the economic blob” – officials insulated from effective oversight, just like the Bank. According to Truss’s autobiography, officials at the Treasury didn’t even know these hedges existed. At the Office of Budget Responsibility, another independent agency set up, this time by David Cameron, to ensure the depoliticization of fiscal matters, officials sent out critical letters to Truss and her Chancellor, containing an analysis that has since proved incorrect, and which were immediately leaked to the press. The damage was done – the Bank and the blob had their fall guy. 

The consequences of the blob’s actions have proved to be significant. The Conservative Party lost its reputation for economic competence, free-market policies became anathema, and the consequent Tory government of Rishi Sunak plunged headlong towards its worst defeat ever. 

This meant the election of a Labour government with an enormous majority and virtually no mandate. It has presided over the introduction of what many regard as a two-tier justice system, with native Britons sent to jail for Facebook posts while ethnic minority violent offenders get much lighter sentences or are let off entirely. The actual situation is more complicated, but the nuances are probably less important than the perception. 

As far as the economy goes, Prime Minister Keir Starmer has announced that things are going to get worse and his budget will need to be tough – this from the party that condemned “austerity” after the financial crisis. What Starmer has not done is show any sign of tackling the blobs that rule Britain. 

No wonder. As Stephen Davies of the Institute of Economic Affairs has noted, the school of politics that produced these blobs “combines designed and regulated markets with social engineering and government-by-experts.” That model is coming apart together with the country it tries to govern. The Bank of England may survive Britain’s potential collapse. Its reputation should not. 

Rising grocery costs continue to put the squeeze on families. Overall, the cost of a trip to fill the pantry rose nearly 22 percent since the beginning of 2021. Many specific staples rose far more — eggs are up 110 percent, flour up 29 percent, orange juice up 82 percent. A family of four spending $1000 per month just three and a half years is spending an additional $2,640 annually for this same shopping list.  

Unfortunately, Vice President Harris misdiagnosed the source of the problem as “bad actors” seeing their “highest profits in two decades.” She blames the initial surge in food prices on supply chain issues during the pandemic — certainly a major contribution to the shortages and price increases on many items early in the pandemic.  

However, Harris mixes this truth with falsehood by claiming businesses are now pocketing the savings after these supply-chain issues have subsided. Her proposed solution — “the first-ever federal ban on price gouging on food” — will compound the misery.  

First, the faulty diagnosis. A look at the data easily counters this.  

An insightful way of analyzing whether price increases are due to “gouging” is to focus on the variable production costs of the goods sold plus the selling, general, and administrative expenses. Tyson Foods — the world’s largest chicken, beef, and pork processor — saw its margin drop from 8.4 percent in 2020 to just 1.1 percent last year. Kraft Heinz and General Mills — food processors with combined revenue nearly equal to Tyson Foods, suffered similar results. Kraft Heinz’s margin declined from 21.4 percent to 20.2 percent. General Mills’s shrank from 17.8 percent to 16.8 percent. Far from “gouging,” these industry leaders are failing to fully pass along the entirety of their own cost surges to consumers. Expenses relative to sales increased during the past three and a half years of elevated inflation.  

After accounting for all expenses — including extraordinary items, taxes, and interest — margins are even tighter. Notably, Tyson Foods experienced a net profit margin last year of NEGATIVE 1.23 percent. Kraft Heinz realized a 10.72 percent net profit margin last year, and General Mills a 12.91 percent margin.  

What about industry-wide? Profit margins are shrinking as food manufacturing costs rose 28.4 percent since January 2020, exceeding the 26.3 percent retail price hikes on food items. Grocery store profit margins sank to 1.6 percent in 2023, the third consecutive year of decline after peaking at 3.0 percent in 2020.  

In other words, grocer profit on $100 of sales is just $1.60. Profit margins contracted as overall food inflation totaled 20.6 percent in those three years. The biggest grocers have experienced this margin crunch. The Kroger Co. — the nation’s largest traditional supermarket — eked out an operating margin of 1.93 percent this past year, a margin lower now than it was pre-pandemic. These trends are the opposite of gouging.  

History provides endless proof that prices set by governments under the market price results in shortages. Demand expands as supply shrinks. What good is a lower price if the shelves become empty?  

Venezuela, Cuba, and the Soviet Union provide ample examples of the dangers of price controls. But the United States embarked on its own failed experiment just five decades ago. In August 1971, President Nixon ordered an initial 90-day freeze on prices and labor, with future price increases to be subject to federal approval. The proposal initially proved wildly popular, with 75 percent public support and a landslide re-election the following year. President Nixon even ordered an IRS audit on companies breaching the ceiling.  

Ultimately, the program ended in disaster. As explained by Daniel Yergin and Joseph Stanislaw, “Ranchers stopped shipping their cattle to the market, farmers drowned their chickens, and consumers emptied the shelves of supermarkets.” In April 1974, the administration dismantled most of the program.  

Importantly, the inflation of the early 1970s resulted largely from easy money. From the beginning of 1970 through the demise of the price-fixing program in April 1974, the M2 money supply expanded by 48 percent. In less than four years, prices rose by nearly 27 percent. In other words, prices jumped in fewer than five years by an amount equivalent to that of the entire prior decade!  

Does this sound familiar? It should. The inflationary surge of the post-COVID era is largely a direct result of the explosion of government spending beginning in 2020. The Federal Reserve financed much of this spending by ginning up its digital printing presses to purchase government bonds alongside a myriad of other assets — from mortgage-backed securities to corporate debt.  

The flood of new money coursed through the economy. The M2 money supply swelled by 40 percent in just two years. More dollars chasing goods and services ultimately resulted in dramatic price hikes.  

Harris appears to have forgotten the important lessons from this episode. Based on her insistence that price gouging is responsible for high grocery prices — when it clearly is not — the Vice President’s proposal would more likely function as a price freeze or command pricing. As such, the existence of state laws currently prohibiting dramatic price increases during emergencies should not assuage concerns about Harris’s proposal. Of course, even these state laws may result in the unintended consequence of shortages — but these temporary interventions in the market are rarely activated.  

With deficits looming even larger in the years ahead, the threat that the central bank will finance this spending with another bond purchasing spree only increases. The food production industry is not immune from the ravages of this reckless monetary policy: the spiral of rising labor costs, insurance, and equipment. In addition, the sector is particularly sensitive to the assault on affordable fuel vital to the cultivation and transportation of food.  

It’s time political leaders admit their own culpability in the shrinking purchasing power of the dollar at the grocery store. Blaming painful price increases on the very entities responsible for the most bountiful, readily accessible supply of sustenance in human history is woefully misleading. Imposing price controls is a demagogic solution harmful to farmers, processors, grocers, and families.  

Nothing signals a greater likelihood of intellectual confusion than does intellectual inconsistency. I’m not referring to changing one’s mind. Intellectual growth invariably brings about changes in mind. The person who once believed that minimum wages can in practice be implemented in ways that harm no workers might well come later to discover that her earlier belief is naïve. This person is not intellectually inconsistent; this person is intellectually open and honest. Ditto for the person who once believed that free trade is the best policy but who encounters arguments and data that push him to the opposite conclusion. One’s mind can change — correctly or incorrectly — without subjecting one to a legitimate charge of inconsistency.

By intellectual inconsistency I instead mean clinging to beliefs, offering arguments, or staking out — and sticking with — policy positions that are mutually contradictory. Intellectual consistency is no guarantee of being correct, but intellectual inconsistency is a sure sign of being incorrect.

How many are the conservatives today who support the child tax credit while also proudly proclaiming their rejection of “market fundamentalism” and accusing so-called “neoliberals” of being blind to human motives other than those that are transactional? Whatever are the child tax credit’s merits or demerits as a public policy — that question is one that I here don’t address — that policy is a means of persuading adults to have more children by promising to put more money into adults’ pockets.

Why, for example, should we give credence to Oren Cass’s many proposals for the government to override the market on the grounds that (as he once put it) “markets reduce people to their material interests, and reduce relationships to transactions” given that he also supports the child tax credit? The child tax credit works to increase birth rates only insofar as it appeals to people’s material interests. If it’s appropriate to appeal to people’s material interests on a matter as personal as decisions regarding family size, Cass is surely inconsistent to criticize classical liberals and libertarians for focusing on people’s material interests when these scholars make the case for free trade.

My point here isn’t that Cass is wrong to insinuate that most classical liberals and libertarians worship a fictional homo economicus (although in this matter  he certainly is wrong). My point instead is that Cass and many of his National Conservative brethren conveniently but unwittingly appeal to the homo economicus in us when they plead for the child tax credit. (They do also, by the way, in their endorsement of tariffs, which work their restrictive effects largely by appealing to the homo economicus within each consumer.)

These conservatives will respond by pointing out that they don’t deny that many considerations other than purely economic ones are at play when couples decide whether or not to have more children. They see the child tax credit as working only at the margin. This response is both believable and correct. Yet these same conservatives fail to recognize that when the liberals and libertarians who they attempt to slur with the label “market fundamentalists” argue for free trade and free markets, these liberals and libertarians also recognize that many considerations other than purely economic ones are at play when individuals engage in market exchange.

The case for free trade is not purely one of maximizing material consumption. Nearly all free traders also value economic freedom as an end in itself — economic freedom that would be worthwhile to possess even if its possessors were thereby made materially poorer. Is this non-material value — is this treasuring, for its own sake, the freedom to spend one’s income as one wishes — less worthy or less human than are any of the non-material values that motivate today’s national conservatives? I think not.

Free traders also understand that the growth in material output fueled by the freedom to trade enables individuals and families to better pursue more of their non-material goals. Are these non-material goals less important than are the particular non-material goals that protectionists claim can be met only by putting more customs agents at the nation’s ports? I think not.

Oren Cass and other NatCon protectionists will respond by insisting that the particular non-material goals they focus on are inherently at odds with the freedom to trade. Chief among these non-material goals is the dignity that comes from steady employment.

Overlook the implicit (and mistaken) insinuation that free traders are oblivious to the non-material value of steady employment. Focus instead on this NatCon inconsistency: The very protectionism for which the NatCons clamor destroys particular jobs no less than does the free trade that they oppose. Every import kept out of America by protectionist obstacles might well correspond to some particular American job not being destroyed. But every such import kept out of America also corresponds to fewer dollars going abroad — dollars that would, but now cannot, return to America as demand for American exports or as investment in America’s economy. This reduced spending and investing in America by non-Americans destroys particular jobs.

Is the non-economic value of the jobs destroyed by protectionism less than is the non-economic value of the jobs preserved by protectionism? It must be so for the NatCon case to hold together. Yet I’ve never encountered a protectionist of any stripe who explains why the jobs preserved by protectionism have a higher non-material or ethical importance than do the jobs destroyed by protectionism.

The NatCon perhaps believes that he can escape this criticism by insisting that his interest is simply to slow the overall pace of economic change. The particular jobs protected and destroyed are less important than is simply achieving greater economic stability. Greater economic stability — slower economic change and reduced job churn — is, it is perhaps supposed, a worthy non-material outcome that must be promoted with protectionist interventions.

Fair enough. But if this goal of greater economic stability is really what motivates the protectionist, he should turn his attention away from international trade and toward internal economic changes. In a country as large as the United States, most economic change comes from within the country. Labor-saving technologies that are the brain-children of innovative people in Silicon Valley and Austin and Boston, dietary and fashion changes that sweep the country repeatedly, improvements in health that increase — and improvements in wealth that decrease — participation in the labor force. These and other purely internal-to-America economic changes destroy (and create) far more jobs than does international trade. It’s inconsistent for the NatCon protectionist to rail against international trade while being mostly silent about domestic economic changes. 

One virtue of the free-trade position is its intellectual and ethical consistency. Endorsing individuals’ freedom to trade with foreigners is simply of a piece with the more general endorsement of individuals’ freedom to trade with whomever they please, whether fellow citizens or not. The protectionist position, in contrast, invariably relies upon arbitrary distinctions that ensnare protectionists in intellectual and ethical inconsistencies.

To a man with an antitrust hammer, everything looks like a monopoly nail. In a recent Substack, antimonopoly campaigner Matt Stoller blames the rise in rents and anemic housing supply growth since 2007 on growing concentration in the home-building industry, rather than local land-use regulations, an explanation he attributes to “noisy” YIMBYs. Is he right?

Let’s start with what he is right about. A number of markets have seen growing concentration in the home-building industry since 2007. But this trend is a result of conscious government policy in the wake of the financial crisis to regulate mortgage lending more tightly, as Kevin Erdmann at the Mercatus Center has ably documented. These policies drove many builders out of business. Erdmann’s work, which is fully consistent with the work done in the 1990s and early 2000s by Ed Glaeser at Harvard, Raven Saks Molloy at the Fed, Joseph Gyourko at Penn, and Bill Fischel at Dartmouth, among many others, shows that the housing shortage predates 2007, at least in many markets. Indeed, tight zoning rules have been fingered as a cause of costly, scarce housing since at least 1972.

The rise in builder concentration is a more recent phenomenon, which is not good news for the thesis that builder concentration has driven growth in rents. But Stoller has one other piece of evidence: builders’ use of “land banks” to acquire lots and hold them for later development. He calls this evidence of cartel behavior:

Interestingly, I suspect there’s a cartelization effect going on as well. Here’s Toll Brothers CEO Doug Yearley a few years ago:

‘We’re doing significantly more third-party land banking where we assign a contract to a professional land banker, who then feeds us land back on an as-needed basis,” Yearley said. “And then, we’re doing joint ventures with either Wall Street private equity or with our friends in the home building industry, the other builders.’ (emphasis original)

What exactly does that quote mean? I don’t know, but it seems kind of crazy that large homebuilders would be doing joint ventures with each other on land acquisition, when that could very easily lead to holding supply off the market and preventing smaller developers from competing to build cheaper homes.

But neither “land banking” nor joint ventures are evidence of cartel behavior (intentionally withholding lots from development in order to drive up new housing prices and profits). Land development is an incredibly risky business. You have to try to gauge what market conditions will be in a couple of years once your permit approvals have come through and the new units are move-in ready, but meanwhile you’re taking on large debts that you have to start paying back immediately. It makes sense not to develop every plot of land you own instantly, while you observe the vicissitudes of the real-estate market and, if necessary, ride out a bad patch. For the same reason, it can make sense to spread risk across multiple financial partners who all share a long-term view.

Stoller cites a working paper by Johns Hopkins University economist Luis Quintero as evidence that market concentration in home-building is driving up housing costs. It’s a serious paper, but it also has some methodological limitations, which may explain why it has apparently kicked around for seven years without yet passing peer review. (It focuses on just a few East Coast markets, it defines housing markets in an unusually narrow way, and the instrument seems to be valid only under the condition that it mostly just captures time trends, not cross-section variation, but then there could be many omitted factors that share a similar time trend.) Quintero may well be right that home-builder concentration does reduce housing supply and raise costs, but it hasn’t been proven yet, and it’s at best a minor factor compared to the zoning restrictions YIMBYs talk about.

As a way to visualize the debate, I looked at the source Stoller uses for builder concentration data (the share of the market controlled by the top 10). Then for each of these markets, I plotted the relationship with the most recent housing costs measure (“regional price parities”) produced by the Bureau of Economic Analysis. The result is below.

The relationship between builder concentration and housing costs in these 50 markets is zero, completely flat. Now, maybe you can construct a fancy causal model in which you can tease out some small positive effect once you control for X, Y, and Z or net out some kind of reverse causation, but this plot should give us a strong suspicion that builder concentration cannot be more than a distant secondary or tertiary explanation for why some markets are more costly than others.

As an example, the Cincinnati metro area is one of the most highly concentrated markets (97.2 percent market share for the top 10 builders!), but one of the cheapest places for housing (83.7 percent of the national average!). Seattle is not concentrated at all (59.4 percent top 10 share), but is quite expensive (154.8 percent of the US average).

Now what happens when we plot housing costs in 2022 against the most commonly used measure of local residential land-use regulation? You get this:

Now that’s a strong correlation! You can quibble with the causal story here: maybe high-demand markets tend to see housing costs rise and also try to adopt more regulation, but even these alternative stories still end up affirming an effect of regulation on housing costs. High-demand areas regulate supply to protect values for incumbent homeowners.

Not every problem in the American economy is about lack of competition, and not every policy “solution” aimed at this non-problem will make things better. Stoller’s proposal to equalize credit costs between big and small builders will probably just cause everyone’s credit costs to go up. Big builders are better risks, so financiers will reduce lending if forced to lend at the same rates to big and small builders. More costly financing means… less building and more costly housing. Instead, let’s listen to the YIMBYs and legalize building in high-demand areas.

Three decades ago, few economists would speak against free trade or automation. Those who raised concerns about job displacements were met by replies that price reductions would compensate in the short run while higher incomes elsewhere in the economy meant new (and better) opportunities for everyone in the medium-run.

This is no longer the case. Many economists, most notably Nobel laureate Angus Deaton, have soured on free trade and automation. They argue that “big shocks,” like the rapid expansion of China (and its significant role in international trade) or the arrival of industrial robots, have heavily affected a large subset of the population — a subset whose incomes were below or at the median. They further argue that the effect was so large that their children now face fewer opportunities, resulting in less income mobility across generations. Those born to parents in the bottom 10 percent or 20 percent of the population before these “shocks” are increasingly locked into their socio-economic status.

In other words, “big shocks” hurt income mobility. The extra fear is that, by making society appear unfair, the reduction of income mobility will cause democratic erosion and a withering of the liberal democratic order.

These concerns should not be swept aside carelessly. They are genuinely important.

The problem is that they always consider these “big shocks” in a form of institutional vacuum. Regulatory burdens, the security of property rights or tax rates are rarely discussed. Even less frequently mentioned is the possibility that the adverse effects from the “big shocks” like automation or trade liberalization may be conditional on having a particular set of institutions.

Consider an example involving automation which is expected to adversely impact workers who are a substitute to industrial robots. Imagine that there are two islands that experience automation. In the first, labor markets are heavily regulated with stringent hiring and firing laws, high minimum wages, widespread closed-shop unions, costly occupational licensing and there are high tax rates on labor income. The second island has none of these features. On which island would you expect it would be harder for people to adjust to the shock created by the arrival of industrial robots? The answer, obviously, is the first one. The heavy hand of the government can rigidify markets and make it harder for people to adjust to the unexpected. In that case, it would be unsurprising to see that workers displaced by robots will be left worse off for so long that their children will be affected as well.

In a recent working paper co-authored with Pradyot Sharma and Alicia Plemmons, I explored whether regions exposed to industrial automation, resembling the first hypothetical island described earlier, experienced greater challenges in income mobility compared to those resembling the second hypothetical island. We used a dataset of intergenerational income mobility for children born in the 1980s for 600 “commuting zones” in the United States that combined with another dataset that measured the degree of exposure of each of these zones to industrial automation during the period. Then, we focused on one particularly egregious labor market regulation: occupational licensing.

Occupational licensing — the costly requirement of a license to be engaged in a particular profession — has grown massively in recent decades. Many of the new regulations fall on low- and medium-income professions. 

If the “big shock” of industrial automation affected the poor more, it is reasonable to consider how occupational licensing blocked them from occupying jobs that were closer comparisons to their previous ones. If states are more aggressive in increasing occupational licensing on low- and medium-income professions, then they are more like the first imaginary island described above. Those that regulate less (or even move in favor of deregulation) are more like the second imaginary island.

Our findings reveal that states with less stringent occupational licensing regulations were able to mitigate 49 percent to 85 percent of the adverse effects associated with greater exposure to industrial automation. While these lesser-regulating states did experience some negative impacts, they were significantly less severe than those in states with heavier regulatory burdens.

It’s important to note that our focus here is on a single policy area — occupational licensing. This is a relatively narrow scope, and it’s plausible that incorporating policies that promote entrepreneurship, reduce taxes to boost labor demand, or deregulate in ways that lower the prices of goods disproportionately consumed by the poor would amplify these mitigating effects. Maybe even reverse them entirely!

While we must remain concerned about how major disruptions might affect our societies in the long term, particularly regarding intergenerational income mobility, it’s crucial to recognize that such concerns may be exacerbated by governments inadvertently turning these “big changes” into actual problems through prior policy missteps.

Even a cursory knowledge about modern China reveals the contradictory conditions of increased economic freedoms with continued repression of civil and political liberty. For example, forming political parties is viewed as an unacceptable challenge to the inviolable “dictatorship of the proletariat” overseen by China’s Communist Party.

However, Beijing uses heavy-handed methods to suppress non-political groups, including an “iron fist” approach to Falun Gong, a sect known for breathing exercises. It has also halted prayer meetings and closed Christian churches, while administering some “rough handling” of the Uighur minority.

As it is, China’s communist leaders have proven themselves to be adept masters of diplomatic maneuvering. They deflect external criticisms against internal repression of dissent or religious freedom by asserting sovereign rights to conduct domestic affairs and that foreigners have no right to comment or pass judgments.

Meanwhile, Beijing raises warning flags or sends diplomatic missiles to countries even if there are only rumors of a visit or interactions with politicians from Taiwan. Despite its persistent and harsh interference with religious and cultural freedoms against Tibetan Buddhists, after Taiwan, complaints or comments about this will invite very prickly responses from the Communist leadership.

As the 14th Dalai Lama celebrates the ninth decade of his mortal life, he and other Tibetan Buddhists worry about the identification of his reincarnate and that of the Panchen Lama, the top figures in Tibetan Buddhism. For its part, China’s State Administration for Religious Affairs (SARA) declared that all reincarnations of living Buddhas of Tibetan Buddhism will be considered “illegal or invalid” unless they have government approval.

Dalai Lamas, acting as spiritual and administrative leaders of Tibet since 1391, are considered manifestations of Avalokiteshvara, the patron saint of Tibet. When Lhamo Dhondup was two years old, (born as Tenzin Gyatso in 1935), he was recognized as the reincarnation of the preceding Lama.

A Living Buddha, known as tülku, is a reincarnated Tibetan Buddhist lama that consciously decides to be reborn many times to continue his religious pursuits. Among the most powerful tülku lineages are the Dalai Lamas and Panchen Lamas.

Regardless of Beijing’s preferences, the Dalai Lama is the undisputed spiritual leader of millions of Tibetans, including those forced into exile or living under the shadow of the People’s Liberation Army. In considering whether to accede to China’s demands, it might be useful to consider the basis of its claims over Tibet.

Considering history and communist ideology, one of the persistent demands and great triumphs of the twentieth century was ending imperial dominance of unwilling populations. It has become fatuous and disingenuous to make territorial claims and insist upon adherence to treaties imposed by defunct imperialists.

It is remarkable for an atheistic regime with ideological disdain of imperialism to pass judgment on religious affairs in a territory that it claims to rule based on an imperial past. As it is, Chinese law and political claims for “unity” are being allowed to trump Tibetan autonomy in pursuing a unique religious culture and heritage.

China’s insistence on sovereignty over Tibet or other areas of previous control is dubious on numerous grounds since this logic renders moot all its territorial disputes with India that was unified long before China in 321 BCE. While India’s centrally-controlled State included Afghanistan and controlled the entire Indian Subcontinent, it refrains from asserting claims on this line of historical reasoning.

China’s claims over Tibet are based upon imperial treaties or conquests, including the marriage of Tang Princess Wencheng to Tibetan king Songtsen Gambo in the seventh century. Chinese scholars ignore the fact that the Chinese emperor initially rebuffed Songtsen Gambo who then used military prowess to force his will in the matter.

While no indigenous Chinese force was able to subdue Tibet in ancient times, the great Mongol chieftains did conquer Tibet. A claim to Tibet based upon treaties with Genghis Khan and his great-grandson Kublai Khan, founder of the Yuan dynasty, involved agreements that included anyone of Han-Chinese origin.

In all events, political allegiance and religious blessings were exchanged for protection by the Mongols. Later, it was an administrative region under the Yuan Empire (1279 -1368), and then the Qing Dynasty (1644-1911) recognized the Dalai Lama and the Panchen Lama.

Eventually, Lhasa broke away from the Yuan emperor and regained independence from the Mongols. While the Han-Chinese Ming dynasty ruled China from I368 to I644, it had few ties to and no authority over Tibet, and then Tibet was largely free from foreign influences until the eighteenth century.

Interaction with the Manchus and the Qing dynasty began in the seventeenth century with its tight embrace of Tibetan Buddhism. But imperial troops sent to Tibet were for the protection of the Dalai Lama from foreign invasion or internal unrest rather than making it part of the Manchu empire or incorporating it into the territory of China.

Several pacts during the twentieth century relating to Tibet and European imperial powers were overseen by the Chinese imperial court. While Great Britain acknowledged Chinese suzerainty in Tibet with the 1904 Lhasa Treaty (Anglo-Tibetan Convention), it exacted financial indemnity and trade concessions in Tibet and Sikkim, but such a treaty has no moral authority. 

In 1906, an Anglo-Chinese Convention signed in Beijing reversed the right of Britain and Tibet to conduct direct negotiations as conducted earlier in Lhasa. But again, it was a matter between two outside imperial powers that decided that the Chinese government was the administrative master of Tibet.

Later, the imperial powers of Britain and Russia signed the Anglo-Russian Convention (1907) agreeing that future negotiations over Tibet would be conducted through the Chinese government. During the times of imperial domination, Tibetans were not consulted about the resulting conventions as most such treaties ignored local interests.

Apologists for Beijing’s dominance often suggest that the Chinese have helped preserve Tibetan ways. While it is claimed that China has more practitioners of Tibetan Buddhism, most are in a former Tibetan province (Amdo) that was incorporated into the Middle Kingdom and renamed Qinghai province in the 18th century.

It is also pointed out that the YongHe Gong Lamasery in Beijing has been the site of worship for nearly almost three centuries. Even so, Chinese forces have razed many of Tibet’s monasteries and temples, either as retaliation against resistance to Beijing’s rule or to dilute their influence.

In all events, Chinese physical presence or cultural influences in modern Tibet were negligible until after the Cultural Revolution. Indeed, it was only in the past 25 years or so that significant numbers of Han Chinese were resettled in Tibet.

Beijing has applied several new tactics to secure its control over Tibet. One of these was its “Go West” campaign that involved enlisting the support of businesses to develop the western region of China, including the so-called Tibet Autonomous Region and Qinghai province.

There was also an attempt to bring in the World Bank to extend a loan for $160 million to resettle about 60,000 farmers in traditional Tibetan lands as part of the China Western Poverty Reduction Project. This resettlement of farmers would involve several ethnic groups, notably the majority Han Chinese. Groups supporting preservation of Tibetan culture have denounced the moves by China to be tantamount to “cultural genocide”.

If according to legal custom, possession is nine-tenths of the law, China can use such logic to rationalize its continued occupation of Tibet. Whatever merit this dictum might reflect, judicial procedure and reasoning are normally applied to determine whether the basis for possession was reasonable or just. A dispassionate view of the matter indicates that China’s assertions for suzerainty over Tibet teeter on a weak and unconvincing foundation.

Considerable evidence indicates many Tibetans feel they would be better off without Beijing’s choking embrace, as there have been periodic uprisings during the five decades under Communist Party rule. Their expressions of discord were met with harsh retaliation by Chinese soldiers and police, leading to the death of thousands of Tibetans.

After the Dalai Lama fled Tibet for India in 1959 after a failed uprising against the Chinese invasion, authorities in Beijing have persistently demonized him. Even so, Tibetan Buddhists remain strongly loyal to him as their spiritual leader.

Of course, such meddling in religious affairs is not confined to Tibetan Buddhists. Uighur Muslims, Daoists, Falun Gong, “unregistered” Protestants and Vatican-loyal Catholics must bend their faith to fit the Procrustean demands of China’s secular law.

In 1982, the CCP Central Committee issued, “Concerning Our Country’s Basic Standpoint and Policy on Religious Questions During the Socialist Period” imposed “proper control” over religious affairs. As such, “patriotic” religious associations were to sacrifice the interests of their religious communities to promote the objectives of the Communist state.

Only a Beijing bureaucrat could see no humor in the requirements that reincarnation applications must be submitted in quadruplicate forms to secular authorities. Among the bodies tasked to “institutionalize management on reincarnation of living Buddhas” are the religious affairs department of the provincial-level government, the provincial-level government, SARA, and the State Council with approval granted according to the fame and influence of the living Buddhas.

SARA officials insist that selection of reincarnates must preserve national unity and solidarity of all ethnic groups. And they insist that this precludes the influence in the selection process by any group or individual from outside the country.

As it is, administrating religious affairs based on interests of the Chinese state or “public interest” interferes with Tibet’s internal religious affairs.  While regulations guarantee “normal religious activities” of Tibetan Buddhism and protect the religious belief of Tibetan Buddhism, temples that recognized reincarnation of a living Buddha must be legally registered.

It is easy to see why Beijing considers it necessary to keep them under tight control. Reincarnated lamas have considerable influence over life of native Tibetans since they lead religious communities and oversee training of monks.

And so it was that the eleventh incarnation of the Panchen Lama, identified as a six-year-old Tibetan Buddhist Gedhun Choekyi Nyima in 1995, was spirited away to Beijing. In turn, he was replaced with Gyaltsen Norbu by religious affairs officials in Beijing.

As it is, most Tibetans never felt the need to be “liberated” by an alien, outside power. For their part, they wish to preserve the dignity of indigenous people that wish to be free to choose their own destiny within their own culture.

But Chinese policy ignores the reality that Tibetans care more about their own distinctive culture, history, and identity than they care about expressing loyalty to Beijing. Perhaps this is what is most galling to China’s leaders.

Beijing’s insistence upon its beneficence in dealing with the local people is no more convincing than Japan’s rationale for “liberating” the rest of Asia from European domination during the 1930s and 1940s under the guise of a “Greater East Asia Co-prosperity Sphere.” Although the scale may be less, the degree of brutality used has not been much different than the Japanese during the Rape of Nanking.

In all events, the issue for Tibetans is more about preserving cultural and religious identity rather than geography or borders. While geographic territory is an important element of sovereignty for modern nation-states, it should not be used as an unconditional reason to overwhelm the aspiration of humans that engage in conflict with their governments.

For their part, political systems that aspire to peace should provide methods to resolve tensions relating to rights of self-determination so individual citizens or groups can undertake continuous expressions of their will. As the motivating force behind anti-colonial movements, collective self-determination allows diverse groups and individuals within political borders to act to shape their cultural and value systems.

But Chinese law and Beijing’s political claims for geographic “unity” are seen to override Tibetan’s desire for self-determination and to maintain their unique religious culture and heritage. While control of Tibet’s religious heritage has been usurped by an atheistic regime with ideological contempt for imperialism, it insists on controlling religious affairs based on territorial claims based on imperial treaties.

One cannot ignore the irony and hypocrisy behind Beijing’s insistence for recovering Hong Kong was the rejection of the legality of titles based on force and unequal treaties. Since neither military invasion nor continuing occupation change the legal basis of Tibetan sovereignty, it must be viewed to be an independent state under illegal occupation.

The publishing world is awash in books about how government has failed the people by shrinking. Ruchir Sharma has given us the rare book about how government failed by growing too large and doing too much. His proposed fix is compelling and persuasive, but his book’s most valuable contribution may be simply causing readers to rethink what has become a bafflingly popular narrative about neoliberalism, austerity, and the supposed triumph of free-market ideology. One of the most common theories about the last half-century of political and economic history rests on the weakest possible foundation.  

The argument Sharma takes on in What Went Wrong with Capitalism will be familiar to anyone who has read any current writing on political economy. Since the New Deal, enlightened government tax-and-spend priorities protected the poor and provided for economic mobility. The US economic expansion after World War II continued this virtuous, shared prosperity. Then, starting in the 1980s under Ronald Reagan (with parallel changes under Margaret Thatcher in the UK), market fundamentalism took hold, with government budgets for social services slashed, essential services privatized, and corporate greed turbo-charged. The result, critics charge, has been an increasingly unfair society. Income inequality has exploded and only the very rich have benefitted. 

This just-so story has become received wisdom among left-leaning academics. Entire shelves of books from economics, history, and political science professors in the past couple of decades have made this case, often locating its origin in the conservative legal movement. A long list of authors has pinned the germ of this supposed revolution on pre-1980 theorizing like the legendary (or infamous) policy memo written by prominent Republican attorney (and later Supreme Court Justice) Lewis Powell in 1971. Others look to associations like the Mont Pelerin Society (co-founded by Friedrich Hayek) or think tanks like the Heritage Foundation or Cato Institute as the locus of this supposedly antisocial ideology of greed. 

Journalist and Yale professor Steven Brill argues that the US has been in a “tailspin” for several decades because of these negative changes. Thomas O. McGarity of the University of Texas at Austin claims that this all has comprised a “laissez-faire revival” that has created a “freedom to harm” for corporations.     

There is a lot of mutually reinforcing theory from dozens of tenured experts and their downstream fans in the pundit-industrial complex. Yet evidence that governments of the developed world, led by the United States, have withered away in the interest of allowing corporate avarice to run amok is amazingly thin. 

One need only look at the budgets — and budget deficits — of the last 40-plus years. Even before the stunning explosion of deficit spending that occurred during the COVID-19 pandemic, Congress had hardly put itself on a diet. Federal outlays as a percentage of GDP were 15.9 percent in the supposed glory year of 1965, while they were 24.3 percent during the Great Recession year of 2009, before skyrocketing to almost 31 percent of the entire economy in 2020. Does that sound like miserly austerity? 

The size and scope of government aren’t entirely measured by dollars spent. There is also the degree to which it regulates the conduct of private parties. This is possibly the more compelling aspect of the thesis advanced by the critics of neoliberalism: that the US government and its peers around the world have given up on attempting to police corporate behavior and tame the beast of acquisitiveness. But that angle too falls resoundingly flat. Sharma cites my own Competitive Enterprise Institute colleague Wayne Crews on this, showing that, under just the first two years of Joe Biden’s presidency, the executive branch added an annual average of $160 billion in economic costs and 110 million hours of paperwork. 

Note that the Biden White House was just an acceleration of the dramatic increase in new rules and regulatory burdens that have occurred under every modern administration. Government, as Sharma writes, “has grown bigger under every president.”  

So, what is actually happening? The answer is bracingly simple and in direct contrast to the academic consensus: since the 1980s — but especially in the 21st century — the federal government has spent and intervened in the economy far too much, causing a long list of distortions and problems along the way. 

The technocratic meddling and stimulating and easing and soft-landing-ing has long gone unrecognized for what it is, because it has been labeled as an effort to protect the economy writ large from damage and dislocations, and thus a way to safeguard jobs and the savings of middle- and working-class households. But flooding financial markets with cheap debt has actually empowered the rich to get richer at near-zero risk while causing significant damage to the economy’s capacity for growth and innovation — the only route to actual shared prosperity.   

Sharma spends a lot of time castigating the Federal Reserve for keeping interest rates artificially low for such a long period of time, from roughly the Great Recession until long-term inflation fears inspired a significant rise in the Fed funds rate starting in Spring 2022. This easy money has led to the softening of capitalism’s most important process, the cycle of underperforming companies going out of business and better competitors rising from their ashes that economist Joseph Schumpeter famously called creative destruction.  

With cheap debt able to prop up failing companies indefinitely, we have experienced a scenario familiar to horror movie fans — the zombie invasion. Once considered a problem of mostly Japanese economic malaise, Sharma points out that the zombie firm — one that is not generating enough revenue to cover its own debt servicing costs — has become a shambling, lurching menace across the economic landscape. If these zombies had gotten the clean shotgun blast to the head from financial reality that they deserved, their human and financial capital could have been more productively re-deployed. But instead, they hang on from year to year, lowering productivity growth and limiting credible competitive threats to the most entrenched incumbents.  

On top of suppressing interest rates for extended periods of times to goose stock values and asset appreciation in general, economic policy in the US has defaulted to something like a permanent bailout mindset. If it were possible, Congress would ensure sure no major employer or lender would ever have to shut down, no matter what its balance sheet looked like. 

That seems great when you, as a member of Congress or the Fed Board of Governors, assume you’re saving some specific number of jobs from vanishing in the next quarter. But it creates an obvious set of perverse incentives which simply stimulate more risk-taking by corporate management and investment firms in the future, resulting in even bigger future bailouts down the road. At a certain point this strategy of holding the wolf by the ear will become untenable. Every group of national policymakers, however, assumes that will only happen after they’ve handed the situation off to the next generation of business-cycle micromanagers.  

As Sharma explains, none of this is a battle between center-left interventionists and some imaginary laissez-faire libertarians lurking in the shadows. Both major parties and politicians across the political spectrum, with a few notable exceptions, have been culpable in the process of subsidizing debt and investment risk in hopes that major stock indices will rise forever, and thus not leave anyone in power with the blame for “ruining” the economy when the music finally stops. 

Back in the real world, recessions happen, and asset values sometimes fall. No economy based on reality can rise forever with zero declines along the way. Perpetual central government stimulation, even when it’s pitched as “protecting jobs,” is like a 19th century dentist giving laudanum to a patient with a toothache. The painkiller only puts off the moment of reckoning — at which time, the problem will likely be dramatically worse.     

While his basic message that endless deficits and bailouts are bad policy is not novel, Sharma’s resetting of the narrative on enfeebled government is a much-needed slap in the face to mainstream conventional wisdom on economic affairs. The neoliberal conspiracy narrative has even oozed into additional crevices in recent years. It wasn’t surprising when left-leaning professor Lawrence Glickman wrote a version of this thesis up in 2019’s Free Enterprise: An American History. Now that even ostensible conservatives like Sohrab Ahmari are repeating it — in 2023’s Tyranny, Inc. — an antidote like What Went Wrong with Capitalism is sorely needed.