Free Markets Will Cure the Economy

COMMENTARY Trade

Free Markets Will Cure the Economy

Jun 26th, 2020 3 min read
COMMENTARY BY
Nicolas Loris

Deputy Director, Thomas A. Roe Institute

Nick is an economist who focuses on energy, environmental, and regulatory issues as the Herbert and Joyce Morgan fellow.
Government directives to restrict exports of food, masks, and ventilators will reduce global supplies and drive prices higher. Kittikorn Nimitpara / Getty Images

Key Takeaways

The current shortages are not a foreign dependency problem, as any unexpected spike in demand for something will create a shortage, no matter where it is made.

Crony capitalism thrives on subsidies and protectionist policies, which stunt innovation by shielding the politically connected firms from competition.

Closed markets inevitably create many problems. We are simply better off when we have open markets.

The coronavirus pandemic has led to the rise of two different camps after shredding economies around the world. One clamors for governments to open markets back up. The other one urges our leaders to close them off. Temporary restrictions on travel and activity are necessary to flatten the curve, but a deeper resistance to open markets is taking root.

Some argue that we are dangerously dependent on foreign countries for essential goods. They say a shift from manufacturing to services has left us vulnerable, and that we are short on necessities like medical supplies because foreign producers are keeping them for themselves.

This has led some to conclude that what the United States needs is firm industrial policy led by the government to decouple our economy from international supply chains. They are pushing for federal subsidies, tax breaks for manufacturers, and some restrictions on imports and foreign investment to ensure that we can make the products we need.

This thinking, however, is flawed. The current shortages are not a foreign dependency problem, as any unexpected spike in demand for something will create a shortage, no matter where it is made. Around 90 percent of the toilet paper we buy is made in the United States, but that still did not keep the shelves stocked. Policymakers can get ready for emergencies without attempting to manage major sectors of the economy.

Closed markets will only make matters worse, both during and after this pandemic. Government directives to restrict exports of food, masks, and ventilators will reduce global supplies and drive prices higher. Exporters miss out on swaths of customers. Protectionism begets protectionism, leaving Americans with fewer supplies at even higher prices.

World Bank economists Aaditya Mattoo and Michele Ruta think we should have learned this lesson by now. Writing in the Financial Times, they note that when consumer prices increased from 2008 to 2011, “governments worldwide imposed 85 new export restrictions on food products.” These new export restrictions of course then “pushed world food prices up by another 13 percent on average and by 45 percent for rice.”

Other countries may restrict exports or engage in massive state funded production, but we should not respond in kind. Doing so would sacrifice some of the gains we accrue from specialization, which gives Americans access to better goods at lower prices. With central planning, bureaucrats and lobbyists control labor, capital, and taxpayer dollars, instead of letting them flow to where we can most productively use them. Crony capitalism thrives on subsidies and protectionist policies, which stunt innovation by shielding the politically connected firms from competition.

Several destructive forms of protectionism already handicap the domestic economy. Such measures are often done in the name of national security. While there are many defense commodities for which the United States should not be dependent on adversaries, national security is sometimes invoked illegitimately, as an excuse for preferential treatment.

Consider the century old Jones Act requiring goods shipped between two domestic ports to be carried on vessels that are built, manned, and owned by Americans. It was enacted to support the Merchant Marine. The Jones Act fleet today, however, is not able to meet all the needs of the military, which charters foreign built ships to fulfill additional sealift needs. Why? Because by shielding Jones Act ships from foreign competition, the law fostered stagnation in the domestic maritime shipping industry.

Further, because the Jones Act ships are considerably more expensive to build and maintain, the transportation costs are higher for all of the goods that they carry. This collectively costs Americans tens of billions of dollars every year. The Jones Act is widely recognized as economically senseless and providing no meaningful national security value. However, it remains in place because it benefits a select politically connected few companies while inefficiently dispersing the higher costs to the rest of us.

An industrial policy that is led by the government would give us more of the same. Increasing the power of Washington to bestow special benefits and protections to more “essential” businesses and industries is a recipe for raising the influence of our policymakers, lobbyists, and connected companies. Central planning starts a slippery slope. It is far easier for a lawmaker to make the case that a manufacturing plant is “essential” for the United States if the plant will be built in his or her district.

History has not been kind to the viability of central planning both here and abroad. Free markets allowed our innovators to outperform the command and control Soviet Union approach to the economy. As Veronique De Rugy of the Mercatus Center says, the “failed United States industrial policies of the 1980s” were those responses to the Japanese government attempting “to dominate key consumer electronics technologies,” and that ultimately “these efforts worked neither in Japan nor in the United States.”

If the past is prologue, any similar attempts at a state sponsored industrial policy in the United States will incur the same fate. So whether in normal times or in national emergencies, closed markets inevitably create many problems. We are simply better off when we have open markets.

This piece originally appeared in The Hill on 4/27/20