Economic intervention vs. deregulation: empirical comparisons

This is the first in a series of postings about political economy.

Over the past year I have been teaching about globalization. So I have had to clarify my own understanding of where we got ideas about macroeconomics and the debate between those who want to continue regulating national economies and those who want to deregulate.

I advocate maintaining the regulations that prevent monopolies, and regulations that prevent fraud and other unethical activities. So I advocate more regulation than we had under George W. Bush. I don’t think Exxon and Mobil should have been allowed to merge. I don’t think the Glass-Steagall Act should have been repealed. I oppose the de-funding of regulatory enforcement under Reagan and Bush. I don’t think we should “get the government out of business.” Why?

A quick glance at the world over the past 100 years shows that countries with more government regulation and intervention have had greater economic growth, or maintained much higher wealth. I will start with two examples:

1. Sweden went from a feudal country with extreme poverty and starvation in the 1890s to one of the wealthiest per-capita societies in the world by the 1970s under the leadership of the Swedish Social Democratic Party. This began under the leadership of Hjalmar Branting, 1907-1925, and continued under Hansson, Erlander, Palme, Carlsson, and Persson.

2. Korea went from utter devastation in 1954 to joining the Organization for Economic Cooperation and Development in 1996. OECD membership means you are one of the top “developed” countries in the world. Much of this development occurred under autocrats: Syngman Rhee (1948-1960) and General Park Chung-hee (1962-1979).

Why did I pick Sweden and Korea as examples? First of all, many people dismiss Scandinavian countries as some sort of weird paradises where ‘small population and high social cohesion’ supposedly explain why they can be highly-regulated and still be rich. There is also some sort of myth that they were always rich. Bullshit. My great-great grandparents fled Sweden because they were destitute and faced starvation. You are on the internet now: go look it up. Within our family, the story is that the Swedish parliamentary reforms of the early 20th century only happened because the King and his nobles were humiliated by the mass-emigration of Swedes to the United States.

As for ‘cultural homogeneity,’ Sweden (and Norway) have allowed so many Muslims to immigrate that conservative Americans now criticize them for their humanitarian ‘leniency.’ So now Sweden is a multicultural paradise that cannot be used as a model?

In contrast to Sweden’s very democratic path to development, South Korea’s path was a sort of ‘dictatorial interventionism.’ By choosing these two examples, I am arguing that there are multiple paths toward ‘development,’ but what they share is strong interventionism by the government in the economy. In general terms, Japan’s path resembled Sweden’s after WWII, with active democracy and strong land-reforms. Likewise with Taiwan. So the idea that ‘east Asians accept autocrat-led development’ is another piece of malarkey.

In fact among 21st century countries the United States is on the interventionist end of the spectrum. The notion that we have a “free” market economy is political vapor. The bailouts, buyouts, subsidies, and protections we have enacted on everything from farming to urban mass transit to banks to manufacturing is hard to overstate. Here is the least-known example: most mass-transit systems in American cities were developed by private companies in the early 20th century. Many went bankrupt in the 1940s and 1950s as Americans bought into an automobile-centered lifestyle. Yes, GM’s National City Lines did dismantle many of the streetcar systems, but cities also took over many networks to create public mass-transit systems–from the New York subways to San Francisco’s Muni. GM suppressed mass-transit in Detroit. So compare: how is Detroit doing compared to NYC and San Francisco?

Only two options? A false choice

The false dichotomy that is used in American political rhetoric today is that the only two options are “free” markets or “socialism.” And by socialism, de-regulation advocates seem to be referring only to the late-Soviet command-economies, not Scandinavia. In the real world, existing political economies in the 21st century range from low to high levels of intervention, but they are all some sort of market economy (one significant and disturbing exception: North Korea). The People’s Republic of China is the quintessential example: they “broke the iron rice bowl” in 1978 and dismantled the Maoist command-economy system. Provinces, districts, and cities now need to figure out their own ways to generate wealth. Is it interventionist? Oh yes, aggressively so. Has it yielded economic growth? Yes, about 9% per year on average since 1978. At the beginning, this was not so remarkable, because the growth began from a low starting point. But by the end of the 20th century, when the PRC was buying up a large portion of the U.S. debt and it still maintained an average 9% growth rate? How about since 2007, when Western economies shrank and China’s growth rate has not yet dropped below 7%?

Empirically, all these examples show that it would be absurd to argue that ‘the only path to economic growth is through deregulation.’ At the very least, Sweden, South Korea, Taiwan, Japan, the US itself, and the PRC show that very active government intervention can lead to economic growth. If we compare these very interventionist economies to the laissez-faire economies of sub-Saharan Africa, or Russia in the decade after the fall of the USSR, there is a lot of empirical evidence that sustained high economic growth can only happen through interventionist policies.

Here is the only partial counter-example I can think of over the last 60 years: the United Kingdom in the 1980s and 1990s. Deregulation under Thatcher and Major did seem to restore London’s role as a global financial capital. But even that seems to have hit its limit: the deregulatory “austerity” program under the Cameron government now seems to be hurting economic growth. Don’t ask me; look at Paul Krugman’s research on this.

The limitations of generalization

The problem with this set of empirical comparisons is that we have to resort to gross generalizations when quickly comparing multiple countries over a span of 100 years. What gets lost in all this broad-brush gesticulation is a finer examination of how the government-economy relationship can foster or hinder economic growth. Some negative examples can be explained pretty quickly: unregulated markets in the U.S., 1870-1929, led from one disastrous crash to another. Weak governments can also be commandeered by brutal rent-seekers at the mid-level and at the top, leading to predatory regimes like in Haiti and the Democratic Republic of Congo.

The opposite argument is harder to explain: how do interventionist political-economies yield long-run growth and sustained high wealth? It is easy to explain why Qatar, Saudi, and Brunei are wealthy: oil. Oil also plays a major factor in the wealth of the U.A.E. and Norway, but both of those countries are also actively engaged in more diversified development. However Singapore, South Korea, Japan, Sweden, Denmark, and Finland are all countries with relatively poor natural resources, high interventionism, and very high wealth. It works, but how?

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