Welcome to Biden's Tale of WOE
By Bob Zoellick - June 8 2023
President
Biden may practice old-style Democratic coalition politics, but his
party's progressives have gotten a sweet deal. Look no further than the
White House's embrace of national economic planning. The younger
generation wants a sharp break with the past, and the president is
listening. Mr. Biden's new model is the Washington Ordered Economy: a
tale of WOE.
National security adviser Jake Sullivan recently
laid out the theory, explaining the link between U.S. international and
industrial policies. In a speech at the Brookings Institution, Mr.
Sullivan rejected Clinton and Obama-era orthodoxies as contributing to
50 years of American economic decay. The "new Washington consensus," as
Mr. Sullivan labeled it, yearns for the national and global economies of
a century ago, though now augmented by Washington planning, mandates
and financing.
The new economic and social order incorporates six
connected elements. The first is an aversion to trade. The new planners
in Washington need trade barriers to limit competition with their
protected national economy and reward special interests. But
protectionist tariffs add to everyone's bills. The U.S. has given up
negotiating open markets abroad and lowering prices at home. U.S. Trade
Representative Katherine Tai told a union panel in Detroit that trade
policy had focused too much on liberalization, efficiencies and lower
costs.
In the past, U.S. trade leadership established rules for
topics such as services, technology, fair agricultural standards,
anticorruption, and even basic environmental and labor protections.
Today's trade agenda should advocate enhancing digital and data
connectivity while respecting different approaches to privacy. The U.S.
can't compete with China's economic model if it won't sit at the table
of trade liberalizers.
Second, the administration's industrial
policy requires huge subsidies for favored causes. Such policies are
notoriously difficult to implement and require not-so-fine tuning. Chad
Bown of the Peterson Institute for International Economics has pointed
out that the U.S., once the leading exporter of electric vehicles,
provoked tariff escalations that pushed Tesla in 2018 to announce a
manufacturing shift to China. Beijing is now the principal exporter of
electric vehicles. Mr. Biden responded by subsidizing U.S. production.
When the European Union threatened retaliation, the administration
created a loophole for imports of leased vehicles, which escape even the
restrictions that apply to U.S. production. Electric-vehicle imports,
especially from the EU, continued to grow this year.
In another
industry, the Commerce Department now has to decide which semiconductor
producers to subsidize, for what types of chips, for how long and with
what restrictions. If Washington orders companies not to sell any chips
to China, American producers will lose earnings for research and
development and expansion. Washington also has to decide what inputs
must be produced at home -- if feasible -- and to expect retaliation.
A
third element contributing to WOE: Antitrust authorities are blocking
acquisitions on the theory that "big is bad," regardless of consumer
interests and price effects. As former Federal Trade Commission Chairman
Timothy Muris observed in these pages, the new policy reverses 40 years
of bipartisan, principled economic standards and opens the door to
political favoritism. The FTC, led by Lina Khan, wants to dismantle
business models of entrepreneurs selling innovations to larger
enterprises with more capital and marketing reach. That comes right as
the advent of artificial intelligence and cloud services has intensified
competition and probably will create opportunities for invention within
more open-source systems.
Fourth, under Washington's new theory,
regulations must prohibit or discourage disfavored sectors and business
models while also controlling consumer and business behavior.
Securities and Exchange Commission reporting requirements on detailed
carbon emissions by suppliers or customers will invite litigation to
challenge corporate compliance. The administration wants to expand solar
energy as part of its green economy, but Congress demands high tariffs
on solar panels, increasing costs for U.S. investors and consumers.
As
America's productivity slows, and Washington constrains foreign
competition, planners will demand more restrictions. Some states want to
ban gasoline cars and gas stoves, regardless of users' willingness to
pay carbon charges. Freedom of choice thus yields to failed theory.
American regulation is fracturing the advantage of a huge national
market.
Fifth, Washington uses investment reviews and reports to
steer capital, including foreign investment, toward approved causes.
Procedures for approval may also dictate preferred corporate practices,
ranging from hiring, training and unionization to child care.
Finally,
the Biden program assumes Washington can supplement its planning with
large spending packages or debt forgiveness to boost favorites and
offset slowdowns. This financial largesse will increase the federal debt
and increasingly squeeze out private investment. Yet that may prove
difficult to get past Republicans, who have begun to push back against
unrestrained spending and an ever-larger debt burden. People who paid
their college loans or didn't attend wonder why they should absorb
losses for canceled student loans.
The first cracks in Mr.
Biden's new economic order are already appearing. Sticky inflation
punishes all families, especially poorer ones, and the Federal Reserve
will need higher interest rates for longer. Tight monetary policies are
stressing regional banks, cutting asset values and increasing credit
losses. These banks can't lend, so medium-size businesses will struggle
to get financing at any price.
Higher costs, inefficient
businesses and bad experience will eventually bring a conclusion of Mr.
Biden's tale of WOE. But once government barriers, rules and subsidies
are embedded, they're hard to reverse. After the stagflation of the
1970s, America needed a bipartisan rethink to spur revival.
Clinton-Obama Democrats and Republicans who favor market discipline,
openness and freedom need to think again.
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Mr.
Zoellick served as U.S. trade representative (2001-05), deputy U.S.
secretary of state (2005-06) and World Bank president (2007-12). He is
the author of "America in the World."