Washington Post, August 1, 2008: Opinion: Wave Goodbye to the Invisible Hand

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Steven Pearlstein
Friday, August 1, 2008

Not so many years ago, respectable people seemed to agree where theworld was headed. Communism had fallen to capitalism, and a particularstrain of capitalism — the entrepreneurial, market-driven capitalismfound in the United States and Britain — had proven itself superior tothe more corporate and statist variety practiced in Japan and WesternEurope. Free trade and the free flow of capital had lifted billions ofpeople out of poverty, and further globalization seemed not onlydesirable but also inevitable. Here at home, there was talk of apermanent Republican majority dedicated to smaller government, lowertaxes, freer trade and more deregulation.

It’s always risky tocall turns in history, but my guess is that this consensus isunraveling. Just as the Gilded Age gave way to the Progressive Era andthe New Deal gave way to the post-war era of big government, bigbusiness and big labor, the current era of free-market capitalism seemsto be giving way to something else.

To say that it is endingis not to suggest that it was misguided or illegitimate. It is merelyto acknowledge that these eras tend to last a generation but notlonger. Like the others, this one achieved what it could before takingthings too far.

That is certainly the lesson that should bedrawn from the final collapse this week of the latest round of globaltrade talks in Geneva. The internationalist community is alreadysputtering contemptuously about the triumph of mindless protectionism,and certainly there was some of that. But the larger truth may be thatthe social and economic costs of the next increment of globalizationprobably outweigh the benefits for many people, and that reality hasnow been reflected in the political marketplace.

For developingcountries, there is still plenty more economic gain to be had from morefully exploiting existing trade treaties without having to open uptheir own uncompetitive industries to destabilizing competition. Ifanything, these countries have been growing too fast in recent yearsand need time to consolidate their gains and rebalance their economies.

Herein the United States, consumers have already realized most of thepossible gains from importing different and cheaper goods — anyfurther liberalization won’t help them much. But because the governmenthas refused to deal, in any serious way, with the dislocation andeconomic insecurity that increased trade has spawned, too manylower-skilled workers have concluded, with reason, that they are theinevitable losers from globalization.

Let’s be clear: It isnot the protectionists of the AFL-CIO or CNN who are primarily to blamefor the erosion of public support for trade in the United States, asbone-headed as they may be. The blame lies squarely with a businesscommunity that continues to support Republican politicians who refuseto raise the taxes and spend the money necessary to provide theeconomic safety net for American workers that a free-market economy hasnot, and will not, provide.

Trade is hardly the only area inwhich open, unregulated and lightly-taxed markets have failed todeliver economic and social outcomes that Americans consideracceptable.

Despite the fact that the U.S. health-care systemis the most privatized and market-driven of any in the industrializedworld, it has become one of least efficient and effective, withextraordinarily high costs, mediocre results and a large and growingpool of working families with little or no insurance and inadequatecare.

Deregulated energy markets have, for the most part,failed to provide a steady supply of affordable electricity tobusinesses and households due in large part to imperfect competitionthat has allowed the industry to manipulate prices and earnabove-market returns. These same energy markets failed to anticipatethe increased global demand for oil and natural gas and to make thenecessary long-term investments in new supply and alternative sourcesof energy. More recently, they produced a speculative price bubble thathas brought the auto and airline industries to their knees.

Asmarket failures go, however, few have been more spectacular than themassive misallocation of credit and mispricing that led to the gianthousing and credit bubble of recent years.

These bubbles hadtheir roots in deregulated credit markets that were hailed as models ofinnovation and market-driven efficiency. Now that the bubbles haveburst, it is more than a bit ironic that government has had to step into rescue the markets from their excesses and prevent a meltdown of thefinancial system. And it is simply outrageous that in the past fewdays, free-market apologists have tried to divert attention from thecolossal screw-ups by builders, bankers and hedge fund managers bytrying to shift the blame to two government-sponsored enterprises,Fannie Mae and Freddie Mac, which had only a minor role in the subprimedebacle.

For the past 25 years, the United States has put itsfaith in open, unregulated and lightly taxed markets, and there’slittle doubt that, over time, that model has expanded economic outputand improved economic efficiency. But what Americans have also come torealize is that the same model is less adept at providing other thingsthat we value highly — things like safety, fairness, economic securityand environmental sustainability. And more often than not, these are”goods” that can be had only by giving up some of that output and someof that efficiency.

Over the next decade, the central challengeof economic policy will be to rebalance those goals and recalibratethose trade-offs. It’s too early to say what the new model will be orwhat the new era will be called. But it’s a good bet that the task willfall not to the ideologues of the left and right who continue to denythat no trade-offs are necessary, but to those leaders like Rooseveltand Roosevelt and Reagan who are willing to embrace and articulate thechallenge and address it with creativity, tough-mindedness and hope.

Steven Pearlstein can be reached at

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