What happened to FREE markets in London?

Thanks to Reuters’ MacroScope blog for noticing:

Keith Hennessey, a former top economic adviser to President George W. Bush, saw this one coming. He rightly predicted that the Group of 20 would drop a key word from its communique at the conclusion of the London Summit: Free.

Here is my original post from Wednesday: A quick guide to the G-20 summit.

Unfortunately the problem is even bigger than just dropping the word “free” before “markets.” Let’s compare the text of the November G-20 leaders’ declaration and the April G-20 leaders’ declaration.

Here is the key paragraph from the November summit, hosted in Washington by President Bush. Thanks to President Bush’s negotiators, led by his “Sherpa,” Dan Price, and Treasury Under Secretary for International Affairs Dave McCormick, the following text is incredible. Last November, I wrote about this paragraph: Let’s look at some important wins in the actual text of the declaration. Formerly Communist China and Russia (along with all the other participating nations) agreed to the following text.

12. We recognize that these reforms will only be successful if grounded in a commitment to free market principles, including the rule of law, respect for private property, open trade and investment, competitive markets, and efficient, effectively regulated financial systems. These principles are essential to economic growth and prosperity and have lifted millions out of poverty, and have significantly raised the global standard of living. Recognizing the necessity to improve financial sector regulation, we must avoid over-regulation that would hamper economic growth and exacerbate the contraction of capital flows, including to developing countries.

Let’s parse it a bit:

  1. “a commitment to free market principles”
  2. rule of law”
  3. respect for private property”
  4. open trade and investment”
  5. competitive markets”
  6. “and efficient, effectively regulated financial systems.”
  7. we must avoid over-regulation that would hamper economic growth and exacerbate the contraction of capital flows”

Now let’s examine yesterday’s text:

3. We start from the belief that prosperity is indivisible; that growth, to be sustained, has to be shared; and that our global plan for recovery must have at its heart the needs and jobs of hard-working families, not just in developed countries but in emerging markets and the poorest countries of the world too; and must reflect the interests, not just of today’s population, but of future generations too. We believe that the only sure foundation for sustainable globalisation and rising prosperity for all is an open world economy based on market principles, effective regulation, and strong global institutions.

Parsing this new language:

  1. “a commitment to free market principles” has been replaced by “based on market principles.” Note that the word “free” is nowhere in the document.
  2. “rule of law” is nowhere in the document
  3. “private property” is nowhere in the document
  4. “open trade and investment” has been replaced by “open world economy” (This one is fine, I think.)
  5. competitive markets” and the word “competitive” are nowhere in the document
  6. efficient, effectively regulated financial systems” has been replaced by “effective regulation, and strong global institutions.”
  7. The over-regulation caution is gone.

What makes this so disappointing is that all G-20 nations agreed to the November text. It should have been an extremely easy lift for negotiators from capitalist countries to insist that this leaders’ declaration merely repeat what the leaders agreed to last November.

Wednesday I wrote, In the short run, it is easy to see how a negotiator might give this up for a more concrete immediate objective. In the long run, few things are as important.

25 responses

  1. Pingback: Alex C.

  2. Keith, I found the post of interest. I have been following the TARP since the beginning as well as TALF and some of the other programs. It is not clear to me anyone knows what the true "cost" or in business "the burn rate". Why, because of the many the assumptions that lie behind some of the numbers. Also, now we have some banks paying back TARP monies.

    But the main point is that Obama and team (Larry, Christy, Austan, Geithner, etc) can simply go to well (Congress) since Democrats can pass pretty much what they want. The recovery plan was not named the "Great Bailout:" but the "American Reconstruction and Recovery Plan" or some such nonsense for a reason.

    Why not another funding program called "The Better Banking Plan for the 21th Century" to provide more cash for technically insolvent banks? Or those that posed a systemic risk? So does it really matter that we have 30B left of TARP or 100B left for TARP?

    Thanks again. I like your blog

  3. So, free and unfettered market terminology is dropped in favor of more regulatory language? Seems appropriate given current events. No market is every completely free, and the statement is far from supporting command-style economics.

    "In the long run, few things are as important"… as the exact words used last Wednesday. Really?

    • Words matter and this represents a defeat for advocates of economic liberty. We don't need to abandon our principles when when the system faces a challenge. It's troubling to see "private property" dropped. What "current event" can justify that? And the fact that the statement doesn't support command-style economics is not very comforting. The risk really isn't that we leap into a command type system but rather that we slouch our way into an over-regulated, bureaucratized quasi market system of the kind advocated by social-democrat types.

  4. So, free and unfettered market terminology is dropped in favor of more regulatory language? Seems appropriate given current events. No market is every completely free, and the statement is far from supporting command-style economics.

    "In the long run, few things are as important"… as the exact words used last Wednesday. Really?

    • Although I am far from knowledgeable in the intersection of international politics and economics, I have to tell you, Scott, my gut feeling is aligned with yours. I am so sad for the children because I, too, do believe that we are hurtling, pell mell, led by our young and relatively inexperienced President, towards that world of hurt you mention.

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  7. It doesn't seem terribly appropriate, considering that finance is one of the most heavily-regulated sectors in the United States (and, so far as I know, elsewhere in the G20).

    When you expressly take out the words "free" and "efficient", you are saying that neither one is particularly important. That seems to me an important statement.

  8. I don't think we've had free markets in a long time. We subsidize home buying with mortgage interest deductions, capital gains rollover, one time capital gains exclusion, and now a new home buying credit. We subsidize professional entertainment sports stadiums. We massively subsidize the banking industry – we basically own AIG, Fannie Mae and Freddie Mac – and now GM and Chrysler. We enact all kinds of rules and regulations designed to benefit either entrenched firms or favored firms that are "too big to fail". My state is now subsidizing failed print-based newspapers by giving them a huge tax credit break not available to most other businesses. A good part of agriculture has guaranteed price supports and other subsidies. Paper manufacturers are benefiting from a biofuels tax credit that was never intended for them. Tax credits and government loans are also a form of "protectionism". During the stimulus package enactment, CEOs from coast to coast lined up with reasons why their firm or industry should be a chosen one for stimulus money. The CEO of AutoNation said he favored a huge tax on gasoline – not bothering to mention he had probably 34,000 unsold hybrid cars in inventory. The real question is: did we ever really have a free market and did anyone truly believe in it? The latter referring to the CEOs that, as best I can tell, have never actually believed in free markets but sure talk a good line as if they did – except when they don't. And then there is Ha Joon Chang's book "Bad Samaritans" – he lays down a good case that free trade may not deliver what we claim – noting that all rich developed nations got there through protectionism and only supported free trade after developing market dominance in key industries. I read one economist (Dr Mike Mandel) saying that we must innovate more and embrace globalization more to get out of this mess – which seems odd as we've just gone through a period of the most innovation and globalization ever – and look where it got us? The only fields that have added actual new head count in ten years, that same economist says in separate writings are health care, government and education. And that's after the greatest period of innovation, free trade, and easy credit ever.

  9. Are we surprised? No, we are not. BO got rolled. Get used to it. It is amateur night in foreign policy.

  10. It would have been hard enough for the free market system, with the self adjusting input of hundreds of millions of participants, to adjust quickly enough to the massive changes on the horizon. Nuclear armed terrorist states, the coming oil shortages and lower standards of living that will entail, the exponential population increase that is already pushing at other resource limits, and so on. For control to be placed in bureaucratic hands that are not directly affected by the decisions, and worse are politically rather than economically motivated … as Scott said, a world of hurt.

  11. Considering that the current situation was caused by government intervention? Very bad news indeed.

  12. Pingback: Not So Subtle Differences In G-20’s Recent Statements | But Then What

  13. There seems to be an inability to grasp the evolution in the world. America's fine rhetoric now trades at a deep discount. China is now the one to watch. The Chinese never signed on to your vocabulary. The Russians did – in the 1990s – it didnt work out too well for them, and since 2000 Mr.Putin has used a rather different lexicon. The words count for little, but the thinking behind them is evolving and NOT towards the Washington consensus

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  15. Pingback: Someone stole the 'free' from free markets - News and Opinion Blog of Blogs

  16. Why is this so shocking? Y'all messed up. Everyone sees it clearly now. Your platitudes ring hollow, time to face the music.

  17. Pingback: The Financial Crisis Inquiry Commission | KeithHennessey.com

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