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The Economic World We’ve Lost

Project Syndicate

June 10, 2024

Populism has infected both major parties in the United States, leading to policies that previous generations of economic policymakers would immediately recognized as foolhardy and counter-productive. But whether the country can escape its self-destructive pessimism is anyone’s guess.

WASHINGTON, DC – The past decade has brought a sea change in US economic policy, and not for the better. Fueled by illiberal populism, Democrats and Republicans alike have cast aside principles and commitments that guided policymakers for decades after World War II. Long-term prosperity is now in jeopardy.

Because populism treats people as helpless victims, it opens the door to large increases in the size and scope of government. US President Joe Biden wants the state to be so big that it can liberate you from your contractual obligation to pay off your student loan. By slashing student debt for millions of borrowers, his administration has taken a big step toward turning college into another middle-class entitlement. Nor does his latest proposed budget stop there. It would also expand the entitlement state to include subsidized childcare for families earning six-figure incomes and new subsidies for middle-class homeownership. How far we have fallen since Bill Clinton declared, in 1996, that the “era of big government is over.”

Treating people as victims denies them agency and absolves them of the responsibility to better their economic circumstances and contribute to society. But personal responsibility is a fundamental American value and a key driver of long-term prosperity. Presidents of both parties used to be comfortable talking about its importance. In his 1996 State of the Union address, for example, Clinton argued: “To improve the state of our Union, we must ask more of ourselves, we must expect more of each other, and we must face our challenges together.”

Similarly, in his 2001 inaugural address, George W. Bush said: “America, at its best, is a place where personal responsibility is valued and expected. Encouraging responsibility is not a search for scapegoats, it is a call to conscience. And though it requires sacrifice, it brings a deeper fulfillment.”

Populism is characterized by a pessimistic inward turn, and often by a suspicion of racial and religious minorities and immigrants. In Ronald Reagan’s final speech as president, he explained that: “We lead the world because, unique among nations, we draw our people – our strength – from every country and every corner of the world. And by doing so we continuously renew and enrich our nation.” But now Reagan’s party is beholden to Donald Trump, who recently accused immigrants of “poisoning the blood” of America. Trump has pledged to carry out the largest deportation operation in US history if re-elected, even though such an abrupt, intrusive, and massive effort would disrupt communities, leave businesses without key workers, and produce price spikes in sectors like food, leisure, and hospitality.

Similarly, US policymakers used to have cautious confidence in the face of economic disruption, but now populism has engendered fear in the face of change. In a 1998 speech underscoring the information-technology revolution’s contributions to economic growth, Clinton argued that the government should follow one guiding principle when it came to e-commerce: “First, do no harm.” Yet when it comes to the looming artificial-intelligence revolution, the Biden administration’s principles are quite different, and far more hands-on. Biden’s October 2023 executive order on AI set out “to advance and govern the development and use of AI” in accordance with several goals, including ensuring that it does not “worsen job quality,” cause “harmful labor-force disruptions,” or fall short of “advancing equity.” In prioritizing stasis above dynamism, Biden threatens innovation and the prosperity it creates.

Biden has not gone the full Bernie Sanders and declared that “billionaires should not exist.” But he does indulge the populist instinct to pit “the people” against “the elites.” Explicitly dividing Americans along class lines, he argues that the wealthy should be made to “pay their fair share,” and he has proposed a special tax on the wealthiest 0.01% of households.

By demonizing success, he is sending exactly the wrong message to young people. We should celebrate billionaires. They are good for society and create much more value for the rest of us than they keep for themselves. We should want more billionaires, not fewer.

From Win-Win to Lose-Lose

After decades of bipartisan consensus about the benefits of free trade, protectionism is becoming the new norm. It has gotten so bad that the leaders of both parties, Biden and Trump, recently objected to a staunch US ally investing in a US manufacturing company. Japan’s Nippon Steel wants to acquire US Steel in a transaction that would inject much-needed capital and technology into the iconic American manufacturer, increasing the productivity and wages of its workers and potentially increasing employment opportunities and steel output. Moreover, for every job in US steel manufacturing, there are around 14 jobs in steel-intensive industries. Those workers also could benefit, because higher productivity at US Steel would lower costs and could make steel-using domestic manufacturers more competitive.

Trump, not surprisingly, is proposing substantial increases in import tariffs to support domestic manufacturing, even though the trade war he launched in his first term hurt the US manufacturing sector. Though it protected some domestic producers from import competition, it also raised the cost of production for many domestic manufacturers, and the predictable retaliation from other countries hurt US exporters. At the end of the day, US manufacturing employment declined.

For his part, Biden kept Trump’s China tariffs despite four-decade-high inflation, and (as of this writing) his administration has signaled that it is preparing new tariffs to block electric vehicles and other clean energy imports from China. Senior officials from both the Biden and Trump administrations have explicitly argued for rejecting the openness and globalization that has characterized US economic policy since the end of WWII. The new consensus favors government planning and autarky.

Consider Biden’s signature legislation, the Inflation Reduction Act, which showered hundreds of billions of dollars on politically favored greentech and manufacturing sectors. As with Trump’s trade war, this led to retaliation, with South Korea and the European Union introducing their own subsidies. In late 2022, French President Emmanuel Macron warned that the IRA could “fragment the West.”

Tit-for-tat industrial policies distort relative prices, slow productivity growth, and reduce household incomes over the long term. As more countries adopt subsidies, any benefits from them become blunted. Taxpayer money may as well be lit on fire.

While the IRA has strained international alliances, Trump would do even more damage, especially if he were to pull the US out of NATO. More than just defense is at stake. International security alliances and global economic cooperation foster peace and provide a foundation for long-term prosperity.

It is no surprise that the rise of populism and economic nationalism has coincided with growing skepticism toward liberal democracy and growing comfort with political violence. The erosion of economic liberalism – free people, free markets, limited government, openness, global commerce – reflects a loss of respect for the choices people make in the marketplace. If we devalue choices made in markets, why wouldn’t we devalue choices made at the ballot box?

The economic-policy debate has become pessimistic and overly fearful. It is saturated by grievance and nostalgia for an imagined past. A better debate would focus on reviving and reinvigorating the principles and values that created decades of prosperity, both in America and abroad.