Balancing Market Freedom and Government Policy

For four decades the American Economic Association (AEA) has presented economists with a number of economic propositions and asked if they agreed or disagreed with each proposition. Compared to previous surveys, the 2021 survey found increased consensus on many propositions.

Over 60% of the 1,442 respondents agreed with the following propositions:

– The distribution of income in the U.S. should be more equal

–  Redistribution of income is a legitimate role for the U.S. Government

–  Universal health insurance coverage will increase economic welfare in the U.S.

–  Addressing biases in individuals and institutions can improve both equity and efficiency

–  Antitrust laws should be enforced vigorously

–  Corporate economic power has become too concentrated

Over 70% of respondents agreed with these two propositions:

–  Immigration generally has a net positive economic effect for the U.S. economy

–  Climate change poses a major risk to the U.S. economy

Over 60% of respondents disagreed with other propositions:

–  The distribution of income and wealth has little, if any, impact on economic stability and growth

–  Easing restrictions on immigration will depress the average wage rate in the U.S.

–  Reducing the regulatory power of the Environmental Protection Agency would improve the efficiency of the U.S. economy

Results of the new AEA survey would please President Harry Truman. He is famous for saying he wanted a “one-armed” economist because his economic advisors would say, “on the one hand, this, but on the other hand, that.” These economists have finally come together, and the consensus is, more government involvement is needed to tame corporate power, reverse climate change, reduce inequality, and support immigration.

But there is a problem. Some prominent voices are saying the government should not enact legislation in support of the activist positions recommended by these economists. In mid-January 2022 articles in both The Economist and the Washington Post presented arguments against government policies that interfere in free markets.

According to Fareed Zakaria, a Washington Post journalist, political commentator, and author, use of tariffs, subsidies, and relief packages  “allows politicians to engage in patronage policies, protectionism and short-term gimmicks to prevent ordinary people from feeling the pain of a crisis.” Jan Piotrowski, business editor of The Economist, argues “greater state involvement in business is unlikely to lead to better outcomes than in the old days, when similarly interventionist tools were deployed. They may well be worse.”

Both authors perceive the same threats in countries around the world. According to Zakaria, “The old obsession with economics over politics was overdone. It achieved great successes [post 1945] but created other problems, such as wage stagnation. But the current emphasis on politics over economics seems more dangerous…. from China to Turkey to the United States, politics is trumping economics.”

During the pandemic trillions of dollars were distributed to revive the U.S. economy. Piotrowski accepts some government intervention, for example in semiconductors and pharmaceuticals, as legitimate on security grounds. But favoring some companies over others through subsidies leads to inefficiencies, and “companies’ focus tends to shift from satisfying consumers towards currying favour with political leaders. Preferred firms grow flabbier and less innovative.” He is also critical of excessive government regulation of how businesses treat employees and what information they must disclose.

The economists’ propositions track closely with hot button issues of a polarized population. As an asset manager told Piotrowski, the world is entering “a political cycle where government has to be responsive to an increasingly fickle and opinionated electorate.”