What happened to FREE markets in London?
3 April
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:
- “… a commitment to free market principles …”
- “… rule of law …”
- “… respect for private property …”
- “… open trade and investment …”
- “… competitive markets …”
- “… and efficient, effectively regulated financial systems.”
- “… 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:
- “… a commitment to free market principles …” has been replaced by “… based on market principles …”. Note that the word “free” is nowhere in the document.
- “… rule of law …” is nowhere in the document
- “… private property …” is nowhere in the document
- “… open trade and investment …” has been replaced by “… open world economy …” (This one is fine, I think.)
- “… competitive markets …” and the word “competitive” are nowhere in the document
- “… efficient, effectively regulated financial systems” has been replaced by “effective regulation, and strong global institutions.”
- 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.”
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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?
It's hard to imagine the long-term ramifications of such a statement beyond the phrase…a world of hurt.
Even more troubling, it seems to me, is the Financial Stability Board's potential power over the US economy. The draft communique indicates that markets and major hedge funds and financial institutions will be regulated internationally and that their executive compensation and bonues will be subject to limitation. Does that mean that the head of the Board (probably a European) will be able to dictate regulations to our financial institutions that will subordinate the SEC, FDIC, etc.? Will he/she also have final say over what our financial institutions can pay their executives? That seems like a massive giveaway of US sovereignty. Even if those measures don't result from this G-20, the language lays the groundwork for future such measures by creating a climate of acceptance of the ideas. I have not seen the final communique (is it out yet?) IMHO, it would be good if these two powers were not vested in the Financial Stability Board.
This is the culmination of Soros' life's work – a global economy with global institutions. He has been pushing for this for a long time. Obama is his hand-picked puppet.
Notice "strong GLOBAL institutions"
Maybe they dropped the word free because they've realized that there is not such thing as a free market anymore, and don't want to be blamed for the failure of the markets they distorted so egregiously. Self-preservation, you know. They want to be the market distorters of tomorrow.
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.
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.
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.
Are we surprised? No, we are not. BO got rolled. Get used to it. It is amateur night in foreign policy.
Socialism is not "sustainable" for the simple reason that the more government intervention in the market, the more that essential price signals are drowned in noise, distortion and bias. This destroys the ability of the myriad of players in the economy to be able to plan, so that they can make sufficient profit to survive.
In Q4 of 2007, Wal-Mart made 3.30% profit. This means that for every $1.00 in revenue, the company was able to receive $1.033 in benefit. It does not take much change in regulations or laws, or even much of a change in the quality of internal decision making to degrade this slim profit to the point where the company would start to have a problem selling more stock or getting bank loans. Indeed, there is a fine line between being 'sustainable" and going the way of K-Mart.
Socialism is the path to the destruction of prosperity and liberty.
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.
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.
Considering that the current situation was caused by government intervention? Very bad news indeed.
Hi there,
How important is the wording in a statement of intent? Doesn't your constitution have somewhere that it's ok to shoot your neighbor — do you shoot your neighbor? Wasn't eastern Europe supposed to be "popular democracies" — what matters more: words or actions?
Do you know how to translate "free markets" into Chinese? is it "unfettered"? is it "unregulated"? is it "wild"? Some markets are more "free" in China than they are in the US, does that make China the model to follow?
The Bush administration repeatedly stated that it cared about deficits and debt, but they didn't do a great job with that, did they? Obama at least is telling the truth about this particular aspect of his policy.
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
Pat,
i think you are misguided about the content of our constitution.
And, you are right about the importance of actions vs words when it comes to sustaining free market principles. I think that in any case, removing text that upholds the right to private property and the rule of law is worrisome in any context, crisis or otherwise.