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The State of Democratic Capitalism: 2023

Georgetown University Law Center

December 18, 2023

How to assess the health of democratic capitalism in the United States? Fundamentally, it is very strong. The marriage of democratic politics and a free-market economy continues to strengthen each, with free markets generating the employment opportunities and prosperity that lead to widespread support for our political system and the rule of law, strengthen democratic legitimacy, and allow for relative social cohesion and harmony. And the U.S. political system has retained its fundamental commitment to free people and free markets, allowing the free enterprise system to allocate scarce resources and to foster an environment that allows for the creativity and innovation that drive long-term prosperity.

But there are dark clouds. The proper relationship between the state and the market has taken a few steps backward in recent years — and I am concerned about that trend accelerating, not reversing, given the similarities between the economic policies of the Biden and Trump administrations.

The dark clouds of populism and economic nationalism

The United States has been living through an era of populism since the 2008 global financial crisis and Great Recession. This trauma shook democratic politics, it shook the free market — and it shook the marriage between the two.

The Great Recession was so severe that it took until 2014 — six years after the financial crisis — for the median inflation-adjusted wages to return to its level in 2007 level. For six years, over half of workers lost ground.

It is no surprise that this experience led President Obama to declare that inequality is the defining issue of our time. It is no surprise that this experience led to Occupy Wall Street on the left and to a rise in hostility towards foreigners, immigrants, and racial and religious minorities on the right. It is no surprise that this experience led to a surge of populism in both parties, with Bernie Sanders and Donald Trump rising in prominence, influence, and power.

Populism is characterized by a pitting of “the people” against “the elites” — a lens for viewing society that fell on particularly fertile ground in the years following the global financial crisis. It is also characterized by pessimism about current and future economic outcomes for “the people.” Populism indulges a narrative of victimhood and grievance, telling workers and households that they are not responsible for their economic circumstances. In the populist view, the elite is conspiring to keep its foot on the back of the people and the elite is so powerful that it cannot be stopped without, in the most extreme case, an authoritarian strongman or, at a minimum, a qualitatively more powerful and interventionist government.

This populist view is incorrect: I demonstrate in my book, The American Dream Is Not Dead: (But Populism Could Kill It), that over the longer term our economic system is not rigged against workers and households, hard work does pay off, that a rising tide does lift all boats, that wages and incomes have not been stagnant for decades, that the middle of the labor market has not been permanently hollowed out, and that America is still an upwardly mobile society. But the Great Recession was so severe and long-lasting and affected so many that the populist message took root.

Against this backdrop, Donald Trump took office as president in 2017 with a more interventionist and less responsible approach to economic policy than would have been imaginable for a Republican president just a few years before. Mr. Trump abandoned the Republican Party’s traditional commitment to free trade, launching a trade war against China. He imposed tariffs on allied nations. He abandoned the Republican Party’s traditional commitment to reducing future spending on Medicare and Social Security, declaring those programs off limits to budget cuts. He demonized immigrants and attempted to slash immigration levels.

Disappointingly — and perhaps surprisingly — President Biden has followed his predecessor’s lead on some (but not all) of those issues. The China tariffs remain in place despite four-decade-high consumer price inflation. President Biden’s March 2021 Covid relief bill — named the American Rescue Plan — was multiple times the size that was needed to support the economy. By stimulating consumer demand for goods and services to such a large degree when the economy was already in reasonable shape, the American Rescue Plan was one of the main factors behind the historic inflation that has been eroding the purchasing power of workers’ wages and sentiment about the health of the economy. Its enactment was the most reckless fiscal policy decision in decades.

Just as Mr. Trump moved the Republican Party to adopt the Democratic Party’s traditional opposition to cutting future spending on Medicare and Social Security, President Biden has adopted much of the Republican Party’s opposition to tax increases. The President has made clear that he will not increase taxes on households earning less than $400,000 per year. So we now have bipartisan agreement in the U.S. not to increase taxes on the bottom 98 percent of households.

The President has surprised supporters by the degree to which he has been unwilling to embrace a return to normal immigration levels. And President Biden is an unabashed champion of industrial policy, signing into law hundreds of billions of dollars of subsidies and incentives for domestic clean-energy and semiconductor manufacturing.

All of this represents bad economic policy that will dampen gains in long-term prosperity. Protectionism and industrial policy fail to achieve their goals in part because the government lacks the scope and scale of authority needed to make them succeeded. Trade policy designed to protect U.S. workers from import competition might work if the U.S. government could prevent other nations from retaliating. But it can’t. Because Mr. Trump’s trade war spurred retaliatory actions by other nations — and because it make it more expensive for U.S. businesses to import goods — it cost the U.S. manufacturing jobs while raising consumer prices.

President Biden’s industrial policy will suffer a similar fate. The President can authorize subsidies for semiconductor manufacturing, but he can’t quickly create a U.S. workforce capable of actually manufacturing semiconductors. At the time of this writing, that industry is unable to find enough workers to take full advantage of the government’s subsidies. As with the Trump trade war, President Biden’s clean-energy subsidy scheme threatens to launch a subsidy war, with South Korea and European nations responding with their own subsidies. Tit-for-tat industrial policy blunts the impact of any one nation’s subsidies, leading the policy to fail on its own terms. Moreover, it reduces economic efficiency by having the government allocate scarce economic resources according to political whims and not based on the best use of those resources. Over the longer term, productivity growth will suffer, along with wage and income growth.

Similarly, failing to address the nation’s long-term fiscal imbalance (through a combination of cuts to projected spending on Social Security and health programs and increases in tax revenue) threatens economic growth, wage growth, and higher living standards by reducing investment and dampening productivity growth. Higher debt levels must be serviced, and growing interest payments on the debt crowd out political space for investments in basic research and infrastructure, hurting the outlook for innovation.

Though neither President Biden nor President Trump are great champions of immigration, there is no equivalence between the two on this issue. The populism and nationalism of Mr. Trump effectively hung a sign on the Statue of Liberty saying: “Immigrants aren’t welcome here.” Sending that signal — to say nothing of demonizing immigrants, as Mr. Trump and his followers routinely do — is an act of economic self-sabotage. The United States should celebrate and jealously guard its role as a destination for some of the hardest working, most innovative, most risk tolerant, and most entrepreneurial people born abroad.

So all this is bad policy, yes. It is also marks an unhealthy turn for democratic capitalism in the United States. In the case of protectionism and industrial policy, it marks a willingness by leaders of both political parties to intervene in the market in order to advance political objectives much more aggressively than has been the case in recent decades. That these policies likely will not succeed as judged against their own goals is an important offense against the spirit of democratic capitalism: government intervention in markets should achieve the goals set out by the political system.

But the offense runs deeper. For democratic capitalism to be at its most healthy, government intervention should be motivated by a desire to address a market failure, correct an externality, advance economic opportunity for vulnerable members of society, or for a similarly important reason. But the reasons to prioritize domestic manufacturing given by elected leaders fall short of this basic standard. Even the oft-invoked national security rationale collapses under scrutiny: Yes, it does not make sense for components of critical weapons systems to be manufactured in China, an increasingly adversarial nation. But why does that manufacturing activity need to be located in a 2024 U.S. swing state? Why not, say, Mexico or Vietnam?

Similarly, the bipartisan agreement not to address the nation’s fiscal imbalance or to address the economic need for increases in immigration levels are a blight on the compact between democratic politics and free-market capitalism. In that deal, markets generate jobs and incomes sufficient for democracy’s continued legitimacy. Absent increased in immigration levels, longer-term economic growth is at risk due to a tepid outlook for labor force growth. The national debt is a general threat to long-term prosperity and a specific threat to the most vulnerable members of society who rely on Social Security and government health programs, whose benefits could be cut abruptly unless deliberate, foresighted policy is enacted to curb their overall future expenditures.

On a fundamental level, populism disempowers people by telling them that they are helpless victims of a powerful elite. Because populism tells people that they don’t have agency — they aren’t empowered to better their circumstances — it undermines the success of free-market capitalism, which depends on people working hard, aspiring, innovating, and taking risks. Populism opens the door to a larger role for government intervention in markets, both because it weakens political support for markets and because it makes people think that they need intervention to better their outcomes to a greater extent than is empirically supported.

In this way, economic nationalism flows directly from populism. And populism becomes not just a threat to economic liberty, but to political liberty as well: As the role of the state in economic affairs grows, the ability of free markets to serve as a check on politics erodes. And the larger the role of the state in economic affairs, the smaller the role for voluntary cooperation among society as a whole. The voluntary nature of participation in free markets is itself a bulwark against political tyranny and authoritarianism. Populism and nationalism aren’t just a threat to free markets, they are a threat to democracy as well. To ensure that our voluntary choices in the ballot box are respected, we must ensure that our voluntary choices in the marketplace are respected.

The state of market competition

The rise of populism has led to increasing suspicion of big business. In many quarters — including, on the political left, the White House and leaders at the Federal Trade Commission  and Department of Justice; and, on the political right, economic nationalists and social conservatives — large corporations are increasing looked at with suspicion simply because of their size. In an economic context, “bigness” is considered potentially problematic because it might snuff out competitors, disadvantaging smaller firms and new firms. In the context of democratic capitalism, “bigness” is looked upon with suspicion because political power is assumed to flow from political power.

These concerns are not wholly unreasonable. The government should be ensuring that markets are competitive, and it can reasonably be argued that in recent decades enforcement has been too lax.

But the approach of current government leaders is completely off base and would set competition policy back half a century if successful. It would switch the baseline standard against which the level of competition in a market is measured. The “big is bad” standard judges competition by the size of the most dominant firms. The consumer welfare standard, in contrast, focuses on whether a market is producing low-cost, high-quality goods and services and is characterized by innovation and dynamism.

To put it another way, here are two possible questions regulators could ask: (1) “Are firms in a market competing to deliver goods and services to consumers at the lowest cost possible, with sufficient quality and variety?” (2) “Are firms in a market ‘too big and too powerful’?” For the past half century, the United States government has asked the first question, not the second. In my view, the first question is clearly the right question regulators should be asking.

Big firms can offer benefits to consumers that small firms can’t. For some firms, the cost of production decreases as the quantity of output it produces increases. Producing higher quantities of output — what happens when a firm gets bigger, or is “big” — can allow for workers to be increasingly specialized in the tasks they perform. Because of its relatively large size, workers at the firm are more productive and the firm is more efficient. Similarly, a firm can produce higher quantities of output by increasing the variety or types of goods or services it offers, which can create similar productivity and efficiency gains. Among social media companies, larger networks can bring substantial consumer benefits. At the same time, firms can clearly be “too big.” For example, increasing size can bring with it coordination problems among workers and monitoring problems among managers that reduces productivity and lead to less efficient production.

This ambiguity — sometimes bigger is better, sometimes bigger is worse — implies that market concentration in and of itself should not be used as a standard against which to judge whether a market is competitive. Breaking up a company that is big could hurt, not help, consumers. It could make a market less, not more, competitive. Moreover, because this standard is so ambiguous, it invites regulatory mischief and unduly politicizes anti-trust enforcement.

Instead, the consumer welfare standard judges whether firms are competing with sufficient intensity by focusing on outcomes for consumers: If firms are competing, then prices should be low, quality should be high, variety should be plentiful, and innovative activity should be present.

A more subtle concern is whether today’s large companies are stifling tomorrow’s market competition. This concern has been raised about tech companies acquiring startups which might otherwise grow into competitors. It is reasonable to be concerned that these types of acquisitions could stifle competition. But if they stifled future competition, then they would run afoul of the consumer welfare standard. This concern is no reason to abandon the consumer welfare standard for a “big is bad” standard.

Moreover, some of the companies attracting the most attention from regulators plow money into research and development — behavior you wouldn’t expect if they viewed themselves entrenched monopolies safe from competitors. In addition, many of those startups have the goal of being acquired — the presence of large tech firms that are interested in acquiring startups could increase, rather than decrease, the type of innovation that benefits consumers and makes markets more competitive.

And the concern that some tech companies are entrenched is refuted by history. Netscape was once viewed this way, but it fell to Internet Explorer, which in turn fell to Google Chrome. America Online’s Instant Messenger service was once considered entrenched. Hotmail was displaced by Gmail. MySpace was considered by many to be entrenched because of its network effects, but it fell and Facebook ascended. Today, Facebook is losing market share among younger Americans. In 2007, Forbes magazine declared that “no mobile company will ever know more about how people use phones than Nokia.” On June 29th of that year Apple released the iPhone. Many of the same concerns voiced today about Amazon’s dominance in consumer product markets were voiced about Walmart in the recent past. And despite the impression given by the public debate, Walmart is still a larger company than Amazon.

With respect to democratic capitalism, many are asking whether today’s social media companies are a threat to democracy by controlling access to information. Hardly. It was not long ago that the typical American’s access to news was limited to three nightly news broadcast, the morning newspaper, and some weekly magazines. In part because of tech companies, Americans today have access to an avalanche of information. This is not to say that additional regulation about speech on these platforms should not be considered. But using antitrust powers to break them up over concerns about their role in the public square is absurd. A more reasonable concern is that the massive increase in information sources has led to viewpoint specialization, allowing Americans to find echo chambers and limiting their exposure to other views. This is certainly a problem for the health of democracy, but it is not a problem that antitrust regulators should attempt to solve.

Indeed, breaking up these companies out of concern for the health of democracy would represent a dramatic imbalance in the appropriate relationship between the market and the state. And changing the standard by which market competition is judged from the welfare of consumers to a “big is bad” standard would be a threat to the health of democratic capitalism by allowing political goals to inappropriate infringe on market outcomes — an infringement that would leave consumers worse off.

Democratic capitalism and the economic outlook

The economy is still suffering from the fiscal policy mistakes of 2021. That year, the American Rescue Plan stimulated consumer’s demand for goods and services well in excess of the economy’s productive capacity. When too much demand met inadequate supply, prices increased. Price inflation has been so severe that despite an extremely strong labor market the inflation-adjusted average worker’s wage is below its pre-pandemic trend. Inflation-adjusted average personal income was lower in 2022 than in 2019, 2020, or 2021. Inflation-adjusted median household income was also lower in 2022 than in 2019, 2020, or 2021.

In addition to eroding the purchasing power of workers’ wages and household income, at the time of this writing I still expect that putting price inflation on a path to the Federal Reserve’s inflation target will require a mild recession. In that event, many of the positive effects of the President’s stimulus — including an extremely strong labor market — will have been partially undone, adding higher unemployment to the costs of the stimulus.

Given high inflation and its effect on the purchasing power of wages and incomes, it should be no surprise that President Biden’s approval rating on the economy is very low. With the 2021 stimulus law, the President prioritized his political and policy goals ahead of economic fundamentals. This was not the only reason the U.S. economy has experienced four-decade-high inflation, of course. But it was a major contributing factor to this inflationary episode. It juiced prices and represented an unhealthy imbalance in the proper relationship between the economy and politics.


Fundamentally, the state of democratic capitalism in 2023 is strong. But it has weakened considerably in the past seven years. Populism and nationalism have made substantial inroads in both political parties. And it is more likely than not that President Trump or President Biden will be sworn into office for another term after the 2024 election, potentially prolonging this harmful turn in economic policy. Neither president seems to understand the proper relationship between democratic politics and free markets — or the proper balance between the two that will ensure the best outcomes in both spheres over the long run.

Still, I am a long-term optimist about democratic capitalism in the United States. The populist storm clouds will scatter as the economy — which is fundamentally strong and well balanced  — moves past this business cycle and can enjoy a few years of solid, real wage growth. Ultimately, enduring political success must rest on a foundation of policy success. The populist and nationalist diagnosis of America’s economic problems is wrong. Their solutions won’t work. That economic reality will lead to a political course correction. The future for democratic capitalism is bright.

Michael R. Strain holds the Arthur F. Burns Chair in Political Economy at the American Enterprise Institute. This article was published by the Denny Center for Democratic Capitalism at Georgetown Law in its 2023 Report on the Health of Democratic Capitalism.