US economic policy and a great march backwardsAug 25, 2023
There is a spectre haunting the world. It is the spectre of economic crisis. How the world responds will shape all of our futures. To borrow from Carl Clausewitz; war is the continuation of politics by other means. The famous military theorist might have added that economics is politics which is war by other means.
The US, in order to resist the rise of China is making economics another front in a developing battle against Beijing and in doing so is taking the world back to economic nationalism and with it the insecurity that led the world to two world wars. The economics of globalisation were adopted to save capitalism. Today the US is seeking to save its economic hegemony by a return to failed economic politics.
Paul Kelly, in The Australian, recently turned his thoughts to what he calls ‘Joe Biden’s dramatic economic revolution.’ Kelly speaks of how the global economy is being transformed by a new ‘epoch’ that is being built around government intervention, clean energy subsidies, tax breaks for industry, trade restrictions, protectionism and a return to economic nationalism.
This is the very antithesis of a ‘revolution.’ It hurls the global economy back to the dangerous days that preceded wars, when trade barriers were erected, where economic measures were used to crush opposition and where economies actually shrank.
At the centre of the much-vaunted Biden ‘revolution’ is the Inflation Reduction Act (IRA).
The IRA is ostensibly about pouring $370 billion in grants, subsidies and tax breaks to boost a clean-energy future for the USA. In as much as it effects the USA alone, the deal offers funding to the private sector. Private capitalism creates the problem and is given billions to possibly fix the problem! More than a few sceptics and observers question this logic.
The second big budget item in this ‘revolution’ is the CHIPS Act. This sees $280 billion being spent, with the express purpose of making America a prominent player in the semi-conductor industry, and thereby squeezing its main economic rival, China.
The pro-USA lobby promote these measures as positives, or at worst as re-setting the economic agenda. They do acknowledge that there are significant risks attached. The biggest risk here is that the end-result may well be a fractured global economy and a quick shift into trade blocs and trade wars. The words of the 19th century French economist Frederic Bastiat that ‘when goods don’t cross borders, soldiers will’ evoke an uneasy echo. History has proven Bastiat correct and yet nothing is being learned.
A recent article in the Financial Times commented that ‘billion-dollar packages including subsidies and investment incentives such as the US’s Inflation Reduction Act and Chips Act are already shaping business decisions and threatening a global subsidies race.’ The World Economic Forum has described the US approach as a ‘paradigm shift’ that will shape economic policy into the future
Adam Posen, the president of the Peterson Institute for International Economics, writing in Foreign Policy magazine was highly critical of the blatant attack being launched by the US on the basis of international trade. He made the point that the new line coming from Washington was dangerously bi-partisan and that its aim was to limit production from other states. He was blunt in his assessment that China was the main target but that it would also have a direct impact on other major economies.
While the big economies will be impacted, smaller ones whose manufacturing industries are already a thing of the past will be even more vulnerable. Australia, as an example, will be forced into a protracted era of status quo economics. Holes will be dug and raw materials shipped away to a market that might pay a reasonable price.
What the ‘revolutionary’ economic strategy describes as a shift to subsidies, is protectionism by another name. Environmental advantages are spoken of, but it must be borne in mind that earlier this year, the Biden administration gave the nod to the ConocoPhillips Willow project in Alaska. It will be the biggest oil and gas drilling operation ever undertaken on US soil. So much for the IRA.
The drive by the US, to maintain economic hegemony at any cost, will be a drive to restrict all opposition from free and fair trade. Conditions of trade war, economic nationalism and the new variant, a race for global ‘subsidies’ is being sold to the American people as a means of accelerating US economic growth. There will be growth. Riches will come, but to increasingly small numbers of investors and the blessed recipients of government largesse. As Adam Posen argues, there will be probably be a short-lived bump but inequality will grow in the US and global competitors will be driven into a downward spiral that can only make any economic growth stall in the mid to long term.
What is increasingly clear is that the America First logic of former president Trump is now a Biden policy. Any pretence of real difference in economic policy is just that; pretence.
This economic policy, this ‘revolution’, can only drag the US and the world back generations. The implementation of this domestic agenda, will lead, sooner rather than later, to increased taxation of its people and particularly to those least able to pay and least likely to benefit. Rival economies will have to respond. Martin Wolf, free market advocate and economics commentator with the Financial Times has cynically observed that ‘when the US talks, the world listens. Whether we like it or not, we all live in the world the US has made.’ This is especially the case when foreign policy is involved. Economically it has held the whip hand for a long time, but China’s irresistible rise has made life for the hegemon increasingly difficult.
A return to economic nationalism is in nobody’s best interests and least of all China’s. Free and open markets certainly work in their favour, but so too for smaller dependent economies like Australia’s. Trade blocs and trade wars are too synonymous with the periods that immediately preceded the two world wars. US foreign policy is transparently belligerent. Its new push toward an economic world order can only invoke the words of Bastiat and his warning, about goods and soldiers.