Sometimes, in wars and revolutions, fundamental changes come with a bang. More often, they come creeping in surreptitiously. This is what happens with what we call “patriotic economy”, a protectionist ideology, with high subsidies and very interventionist, administered by an ambitious State. Fragile supply chains, growing national security threats, the energy transition and the cost of living crisis have demanded public intervention, and rightly so. However, when all these factors are put together, it becomes clear how systematically the assumption of open markets and a limited state has been marginalized.
From our point of view, this is an alarming trend. The Economist was founded in 1843 to advocate, among other things, free trade and a reduced role for the state. Today, these classical liberal values ??not only do not enjoy popularity, but are increasingly absent from political debate. Less than eight years ago, President Barack Obama tried to get the United States to sign a giant Pacific trade pact. Today, anyone who defends free trade in Washington will be branded as hopelessly naive. In the emerging world, it will be branded a neocolonial relic from the time when the West knew it all.
Our perception is that the patriotic economy will end up being a source of disappointment. It fails to diagnose what has gone wrong, it overloads the State with unaffordable responsibilities and it will do wrong in a period of rapid social and technological changes. The good news is that it will eventually cause its own demise.
At the center of the new regime is the idea that protectionism is the way to deal with the turbulence of open markets. China’s success convinced the Western working class that it had much to lose from the free cross-border movement of goods. The Covid-19 pandemic led elites to believe that global supply chains needed to be de-risked, often by moving production closer to home. China’s rise under “state capitalism,” with its disdain for rules-based trade and its challenge to American power, was seized upon by rich, emerging economies as justification for intervention.
This protectionism is accompanied by an increase in public spending. The industry absorbs subsidies to promote the energy transition and guarantee the supply of strategic goods. The considerable aid to families during the pandemic has increased expectations of the State as a bulwark against life’s misfortunes. The Spanish and Italian governments are even bailing out borrowers unable to meet the rising cost of mortgages.
And, inevitably, state aid is accompanied by additional regulations. Antitrust has become activist. Regulators keep an eye on nascent markets, from cloud gaming to artificial intelligence. As carbon prices remain too low, governments end up micromanaging the energy transition by decree.
This mix of protection, spending and regulation has a high cost. To begin with, it constitutes a diagnostic error. Indeed, the mutualization of risks is an essential function of States. However, not all risks: for markets to work, actions must have consequences.
In contrast to accepted wisdom, Covid and the Ukraine war have shown that markets deal with shocks better than planners. Globalized trade has faced huge swings in consumer demand. In 2011, traffic in US ports was 11% higher than in 2019. In 2022, the German economy repeated the move and suffered no calamity by rapidly switching from Russian gas to other energy sources. By contrast, state-dominated markets, such as the supply of projectiles to Ukraine, continue to struggle. Like old complaints about trade with China (which has boosted Americans’ real incomes), complaints about the supposed fragility of globalization have built a cathedral of fear on a grain of truth.
Another defect of the patriotic economy is overloading the State. Governments are losing all restraint just when they need to cut social spending. Aging populations weigh down budgets with new bills related to pensions and healthcare. The
Rising interest rates make everything worse. Following the bond market crisis in 2022, the right-wing British government is raising taxes, as a percentage of GDP, more than in any other term in the country’s history. As long-term bond yields rise, debt-ridden Italy looks unstable again. America’s ballooning debt service bill is likely to reach an all-time high before the end of the decade, a sign of the fiscal fragility of the new era.
The less visible, but potentially more costly, flaw is that patriotic economics is an inadequate instrument in an age of rapid change. The energy and artificial intelligence transitions are too large for any government to be able to plan. No one knows the cheapest ways to decarbonize or the best uses of new technologies. Ideas should be tested and channeled through markets, not controlled with checklists from the center. Excessive regulation will inhibit innovation and, by increasing costs, make change slower and more painful.
Despite its flaws, the patriotic economy will be difficult to contain. People like to spend other people’s money. As state budgets increase, the special interests that feed off them will grow in size and influence. It is more difficult to withdraw protection and aid than to grant them; above all, with a greater number of older voters, who have less interest in economic growth. And anyone who thinks that the arc of history leans towards progress should remember that a century ago Argentina was as rich as Switzerland.
Now, disappointment will eventually set in. Fiscal extravagance may end up taking its toll on indebted governments. Perhaps the greed of rent-seekers is too difficult to hide. Or perhaps a stagnant and repressive China will no longer hold the promise of state-led prosperity.
When it comes, change can be surprisingly rapid, at least in democracies. In the 1970s, the tables turned in favor of free markets almost as quickly as they have turned against them today, leading to the election of Margaret Thatcher and Ronald Reagan. The task of classical liberals is to prepare for that moment by defining a new consensus that adapts their ideas to a more dangerous, interconnected and fractious world. It will not be easy; especially given the rivalry between the United States and China. However, it has been done in the past. And you have to think about the prize.
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Translation: Juan Gabriel López Guix
