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The Free Market is Dead: What Will Replace It?

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Chris Hughes, co-chair of the Economic Security Project and a senior advisor at the Roosevelt Institute, is the author of Fair Shot: Rethinking Inequality and How We Earn and was a co-founder of Facebook. He writes in TIME magazine:

Big meetings in the Oval Office in the time of Covid-19 are rare, but two weeks into his presidency, President Joe Biden decided to make an exception. It was only a few days after the nation’s coronavirus case count peaked in late January, and Biden sat on a stately beige chair, double masked and flanked by Vice President Kamala Harris and newly confirmed Treasury Secretary, Janet Yellen.

The leaders of some of the nation’s largest businesses like Wal-Mart and J.P. Morgan Chase had come to the White House that day to talk economic stimulus. But the real surprise attendee was the head of America’s largest business advocacy group, the Chamber of Commerce, Tom Donohue. Under Donohue’s leadership over the past two decades, the Chamber had effectively become an organ of the Republican party, handsomely rewarding conservatives who worked to dismantle public programs and the regulatory state with campaign donations and support.

Donohue said little, but he didn’t have to. His presence was enough to rock the political landscape. “Washington’s most powerful trade group is having a political identity crisis,” wrote Politico. Two weeks later, a group of 150 CEOs, unaffiliated with the Chamber, followed suit, throwing their weight behind Biden’s COVID relief bill, which sailed through Congress. They have been similarly supportive of the additional $2 trillion the administration has now proposed for infrastructure spending – but they unsurprisingly don’t want corporate tax rates to be the means for paying for it.

But corporate America’s newfound support for more public investment is not a temporary phenomenon. We are witnessing the most profound realignment in American political economy in nearly forty years. President Ronald Reagan summed up the conventional wisdom that reigned from the mid-1970s onward in the United States: “Government is not the solution to our problem, government is the problem.” Economists, policymakers, and everyday Americans alike generally accepted that markets, unfettered and free, are the best way to create economic growth.

That ideology began to crack after the Great Recession, and in the wake of the coronavirus pandemic, it has collapsed. The rise of ethno-nationalism on the right and democratic socialism on the left testify to the growing disillusionment with the conventional wisdom of how government and economics are supposed to work.

It’s not just the fringes questioning free market orthodoxy in a time of disease. Cross-partisan supermajorities of Americans want some of the biggest companies of America to be broken up, significantly higher minimum wages, a wealth tax on billionaires, and believe significantly more public investment is required to create economic growth.

We have had regulations, public investment, and macroeconomic management to varying degrees throughout American history. What makes this moment different is that Americans across parties, class, and educational background are using a new framework to think about how we create prosperity.

The new managed market paradigm is bigger than Bidenomics or any particular economic agenda—it is a story about how the economy works.

We went from living in a country where markets couldn’t be touched to one where Americans believe the state has an important role in managing them to create prosperity. What killed off free market mythology, and what will come next?

***

A crisis in confidence in government triggered the last paradigm shift, making way for the rise of free market thinking. In the 1970s,

Continue reading. There’s much more, and it’s worth reading.

Later in the article:

In the years after the [2008 financial] crisis, scholars and policymakers came to realize that free markets had failed empirically to live up to their promise.

Reduced taxes on capital and fewer regulations were supposed to create more growth by making it easier for investors to invest and entrepreneurs to hire, the orthodoxy said. Yet the economy grew by 3.9 percent on average between 1950 and 1980, the era before free market orthodoxy took hold, and only at 2.6 percent on average in the 40 years since.

Similarly, aggregate growth, fueled by deregulation and free trade, should have boosted incomes for American workers if free market orthodoxy was to be believed. The rich would do well with lower taxes, they promised, but so too would the middle class and poor because of all the additional economic activity. In reality, wages have not meaningfully increased over the past 40 years after accounting for inflation, while income inequality has soared.

This list goes on. Relaxed antitrust enforcement was supposed to enable monolith companies to benefit from economies of scale, reducing costs for Americans. But the cost of living in America has skyrocketed, with housing, healthcare, and education eating up a greater proportion of Americans’ budgets than ever before. Expected investments in productivity-enhancing technologies by such large companies have not materialized.

We were told that policies developed to combat inequality like progressive taxation or public investment were supposed to constrict growth. Studies now show the opposite is true. The work of economists like Raj Chetty and Janet Currie has shown that poorer children lack access to good nutrition, stable neighborhoods, and quality schools and are not able to climb a meritocratic ladder. That hurts them individually and starves the economy of skilled workers that boost growth. The lack of public investment in public programs like affordable childcare means parents are more likely to drop out of the labor force, depriving the economy of workers and growth, as Heather Boushey has shown. And because the wealthy save for more than the poor, growing wealth inequality has muted the largest driver of economic growth, consumer spending, as documented by the economist Karen Dynan. . .

Written by LeisureGuy

29 April 2021 at 12:11 pm

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