Look who's not listening - U.S. move away from free markets

National Review, August 20, 1990 by James B. Burnham

WHO WAS listening, in September 1981, when Ronald Reagan exhorted the finance ministers and bankers assembled for the World Bank/IMF annual meeting "to believe in the magic of the marketplace"? Although Ronald Reagan received no applause during his speech, it appears that many were listening. Certainly the British were receptive, having already embarked on an extraordinary program to transfer more than six hundred thousand jobs from nationalized industries to the private sector. The Canadians likewise have had a successful program for several years. The French must have been listening, even if it took them several years to start deregulating financial markets and selling state enterprises.

The developing countries-initially, Chile and Bangladesh-heard the call and began to dismantle a myriad of government businesses. Even some who weren't at that 1981 meeting-including most of Central Europe and the Soviet Union-appear to have grasped that something is going on.

In short, most governments around the world have moved sharply in the direction of freer markets and less government intervention. There is an important exception, however: the United States.

Granted, in 1981 the United States already had freer and more open markets than nearly every other country. (Hong Kong's markets were probably freer.) But the fact remains that since Ronald Reagan spoke about the "magic of the marketplace" the United States has, with important exceptions (e.g., telecommunications and some financial services), moved away from the market system. The broadest measure of the role of the Federal Government in the economy is the percentage of national output and income funneled through Washington. Here the evidence is neutral: Over the past four years, real government expenditures-including "off-budget" outlays, such as for the S&L bailout-as a percentage of GNP have been essentially the same as the 1980 level of around 22 per cent. But the evidelnce of specific sectors of the economy is more revealing.

TAKE, for example, the growth of barriers to imports. Between 1981 and 1986 the share of U. S. imports from other industrialized countries subject to "hardcore" nontariff barriers rose from 9 per cent to 15 per cent; the share of imports from developing countries subject to such barriers rose from 14 per cent to 17 per cent. The U.S. performance was significantly worse than that of Japan or the European Economic Community. Consider the provision of public subsidies to private corporations and state sponsored enterprises, which distort trade patterns and can lead to gross inefficiencies. While the level of such subsidies in the U.S. remains lower than that in most other countries, it more than doubled between 1980 and 1986. During this same period it remained essentially steady or declined in most of the other key industrialized countries.

In the area of U. S. barriers to our own exports, nothing significant has been done to reduce them since 1981. For example, prohibitions on the export of North Slope oil and restrictions on log exports from the Pacific Northwest remain in place. In addition, the U.S. Treasury has intervened occasionally in the foreign-exchange markets to prevent the U.S. dollar from falling "too low," thus short-circuiting the market's effort to make U.S. exports cheaper for foreigners.

To be fair, there is one expensive program designed to make US. exports more competitive, the "targeted export assistance program." This program throws taxpayer money (at least $265 million to date) into trade-subsidy battles with other countries.

Then there is the extent to which the Feds are still in business. Remember the high hopes at the beginning of the Reagan years? We were going to reduce the role of the Federal Government significantly in such areas as residential-mortgage insurance, farm credit, passenger rail service, airports, and a host of other areas.

Of these aims, almost none has been accomplished. True, National and Dulles airports serving Washington, D.C., and the federally owned Alaska Railroad have been spun off to state governments, and private satellite-launch services are now a reality. But compared to the extensive operations of the Federal Housing Administration, the Tennessee Valley Authority, Amtrak, and others, the small symbols of genuine privatization are lost among the giants of federally sponsored corporations and agencies.

As Murray Weidenbaum, who served as President Reagan's first chairman of the Council of Economic Advisors, has put it, the Administration did not make any significant cutbacks in the structure of regulation," though it did "virtually stop the growth in the issuance of new rules" under existing legislation. Yet Ronald Reagan completed the process of regulating dealers in government securities when he signed into law the Government Securities Act of 1986. This showed how weak the belief in "the magic of the marketplace" was in the President's own house.

In no area has the retreat from the market been more sweeping-and less understood-than in the provision of financial credit. At the end of 1989, 41 per cent of all outstanding home mortgages were directly or indirectly guaranteed by federal agencies or corporations. Another 47 per cent were supported by indirect government funding or insurance. In 1989, 73 per cent of all farm debt had federal support. Nearly all student loans today are federally guaranteed.