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Business

More government interventions hamper capitalism

Published

6 months ago

6 minute read

From the Fraser Institute

By Philip Cross

In his fourth book, What Went Wrong With Capitalism, investor and author Ruchir Sharma eloquently details how advanced market economies for decades have increasingly strayed from the basic principles of market-based competition and pricing, resulting in persistently slow growth which causes many to question whether capitalism works anymore. However, what is often attributed to market failure is often a failure of government.

Collectivists have successfully installed the narrative that the Reagan and Thatcher era in the 1980s ushered in an era of neoliberalism and government austerity. Nothing could be further from the truth. Keynesian counter-cyclical government spending was supposed to support the economy during a recession; instead, it is used to support the economy at every point of the business cycle. At most, the Reagan and Thatcher regimes only slowed the rate of increase of government spending. Combined with a growing public resistance to paying higher taxes, this created permanent budget deficits. Policymakers remain stuck on the stimulus treadmill: former European Central Bank head Mario Draghi recently recommended the EU spend an inconceivable US$900 billion a year to revive its flagging economy.

Moreover, the slowdown in the growth of government spending did little to stop a tidal wave of government rules and regulations, many of which favour entrenched interests and firms. Sharma’s observation that being “pro-business is not the same as pro-capitalism, and the distinction continues to elude us” is especially true for Canada. He documents the increasing use of government subsidies and bail-outs, which helps fuel the growth of so-called zombie firms—unprofitable companies that stay in business thanks to support from governments or lending institutions (who know problems caused by bad loans will be bailed out by government), which prevent labour and capital from moving to areas with better long-term growth potential. Most recently, we have seen governments embrace higher tariffs and industrial policy, notably for green energy projects in Canada and the United States.

Increased government meddling in the marketplace reduces competition and slows the process of creative destruction that is the lifeblood of capitalism by allowing “new firms to rise up and destroy the complacent ones, making the economy ever more productive over time,” according to Sharma. This was most evident during the pandemic, when business failures declined as government hand-outs outweighed the impact of unprecedented shutdown of large parts of the economy. But the decline in business startups and failures has persisted for decades.

Steadily rising government intervention in the economy results in lower productivity and slower growth. This pushes policymakers to resort to higher fiscal deficits and easy money policies in a forlorn attempt to boost long-term potential growth.

It is often said that the recent slowdown of productivity reflects a lack of business investment. That is certainly part of the problem outside of the U.S., especially for Canada over the past decade. However, Sharma notes it is the efficiency and not just the level of investment that is the problem. Pervasive government interventions in the economy distort prices and the allocation of capital, resulting in what the libertarian economist Friedrich Hayek called “malinvestments.” This is especially true for Canada, which for over a decade has shunned clearly profitable investment opportunities in the resource sector while pouring tens of billions into expensive public transit systems, which nevertheless failed to persuade commuters to leave their vehicles at home.

One theme Sharma does not develop is that this growing inability of governments to efficiently deliver results is not due to a lack of resources. Governments have expanded their workforce, their spending, and their regulatory power. Nevertheless, government programs falter because of bad management, chronic political meddling for short-term electoral gains, and a workforce which increasingly serves its own interests and not public’s.

Sharma concludes on both an optimistic and pessimistic note. He examines the ability of capitalism to thrive in countries such as Switzerland and Taiwan by balancing “a business-friendly environment alongside social equality.” Nevertheless, he’s concerned with the “supreme irony: modern voters, particularly the young, now demand that leaders show respect for the fragility of natural ecosystems… [but] at the same time, leaders are riding a popular wave when they propose to intervene in the economy—the global ecosystem in which 8 billion people do business.”

As disillusionment with capitalism spreads due to slow growth, the temptation is to increase government interventions, which only worse the economic outcome.

Author:

Philip Cross
Senior Fellow, Fraser Institute

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“California is the entertainment capital of the world – and we’re committed to ensuring we stay that way,” said Newsom. “Fashion and film go hand in hand, helping to express characters, capture eras in time and reflect cultural movements.”

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“A recent study from the Los Angeles County Economic Development Corporation found that each $1 of Program 2.0 credit results in $1.07 in new state and local government revenue. This finding, however, is significantly overstated due to the study’s use of implausible assumptions,” wrote the state’s analysts in a 2023 report. “Most importantly, the study assumes that no productions receiving tax credits would have filmed here in the absence of the credit.”

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“Our country and its taxpayers have been ripped off for more than 50 years,” Trump said. “But it is not going to happen anymore.”

Trump’s supporters praised the trade overhaul. U.S. Rep. Marjorie Taylor Greene said it was time for foreign nations to pay up.

“If you want to do business in America, you need to play by our rules,” she said. “For too long, American businesses, big and small, have been ripped off by bad trade deals and unfair competition. President Trump is putting a stop to it. He’s standing up for our workers, our companies and our consumers.”

Critics slammed Trump’s trade plans.

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“But Europe has everything to protect our people and our prosperity,” she wrote on X. “We will always promote & defend our interests and values. And we will always stand up for Europe.”

China, the world’s second-largest economy, said Monday that it was planning to coordinate its response to U.S. tariffs with Japan and South Korea.

Japan’s Prime Minister Shigeru Ishiba said Tuesday that he was willing to fly to the U.S. to meet with Trump to get an exemption for Japanese vehicle makers. He also said the government will take steps to minimize the impact of U.S. tariffs on Japanese industries and jobs.

Trump will impose a 10% tariff on all countries that will take effect April 5, 2025 at 12:01 a.m. EDT. Trump will impose an individualized reciprocal tariff on the countries with which the United States has the largest trade deficits, including China, India and Vietnam, among others. All other countries will continue to be subject to the 10% tariff baseline, according to the White House.

“These tariffs will remain in effect until such a time as President Trump determines that the threat posed by the trade deficit and underlying nonreciprocal treatment is satisfied, resolved, or mitigated,” according to a White House fact sheet.

Trump’s executive order also gives him authority to increase the tariffs

“if trading partners retaliate” or “decrease the tariffs if trading partners take significant steps to remedy non-reciprocal trade arrangements and align with the United States on economic and national security matters,” according to the White House.

“Foreign cheaters have stolen our jobs, ransacked our factories and foreign scavengers have torn apart our once beautiful American dream,” Trump said in the Rose Garden.

For China, the tariff rate will be about 34% on imports from the world’s most populous nation. For European Union countries, it will be 20%. For Japan, the duty will be 24%. Imports from India will get a 26% tariff. Cambodia will get hit with a 49% tariff, among the highest Trump outlined on Wednesday.

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