Trust Our Market Institutions Because the Road From Budapest to Caracas Is a Short One

An Essay by Kenneth Hersh, President and CEO of the George W. Bush Presidential Center

Though well-intentioned, policy decisions that introduce interventions in how the marketplace functions often end up hurting those they are aimed to help — and erode trust.

Liberty has never come from the government. Liberty has always come from the subjects of it.

When Woodrow Wilson said those words in 1912, he understood that America was built on the concept of individual freedom, however flawed in its implementation at the time. From the outset, our founding documents have been clear that the concept of freedom emanates from us as individuals. Government’s authority is derived from the consent of the governed, not the other way around – a government of the people, by the people, and for the people.

One of our governing philosophies has been that human beings realize their fullest potential by maximizing political and economic freedom.  Market economies innovate and allocate resources better than any other system. When people are free to work and innovate, dignity rises along with productivity and income. Democratic capitalism has led to world-changing advances and has lifted billions out of poverty. Of course, no system is perfect, but empirical evidence supporting freedom, democracy, and capitalism is just too hard to ignore.

Today, though, these beliefs are being questioned from both the left and right at the risk of moving the country toward a belief that a central government is the proper channel to solve all social ills.

Flawed policy contributes to market inequities

Critics on the left put much of their attention on our market economy, arguing that unevenly or unfairly distributed spoils is evidence of a flawed system.

What they fail to notice is that many inequalities stem from policy decisions that fail to provide sufficient “on-ramps” for all to participate and the flaws that come from decades of policy mistakes.

…many inequalities stem from policy decisions that fail to provide sufficient “on-ramps” for all to participate and the flaws that come from decades of policy mistakes.

Consider these examples:

  • Our 70,000-page tax code, complete with its regulations and rulings, is a master example of a system that gets gamed by many who are able to convince the drafters of the code to direct benefits their way – even as the drafters piously talk about incentivizing positive social outcomes.
  • Coming out of the financial crisis of 2008-2009, the Federal Reserve Bank’s loose monetary policy massively favored owners of capital over those selling their hours. What started as the proper policy to maintain liquidity and keep markets functioning, continued way too long. The Fed kept market interest rates lower than they otherwise would have been to spur aggregate demand. By favoring capital over labor, the Fed inadvertently perpetuated conditions that exacerbated income inequality.

More recently, massive fiscal expansion in the name of COVID-19 relief and social engineering was coupled with loose monetary policy to keep borrowing costs low.  This led to rampant inflation that has exceeded income growth. Who is hurt the most by that policy decision? The same people who are negatively impacted the most by the inflation we’ve exported all over the world: those who reside at the bottom of the economic pyramid.

As a nation, we are quick to point out foreign central banks that manipulate their currencies to affect the import and export markets, but we fail to point a finger at ourselves. By its actions, the U.S. Federal Reserve Bank has been one of the largest currency manipulators in the world with its quantitative easing program that has kept rates low for longer than necessary. With the unthinkable federal deficits we have been running, had exchange rate markets been left to reflect accurately the massive deterioration in the nation’s balance sheet, our interest rates would be much higher, and the value of our currency would be lower.

Trade has not been free as countries around the world — the U.S. included — subsidize or protect certain industries while rejecting agreements like the Trans-Pacific Partnership that would enhance free and fair trade. Even when agreements are completed, like the U.S.-Mexico-Canada Agreement (USMCA) that replaced the unfairly maligned NAFTA last year, markets may be freer, but they are hardly free.

Both sides negotiate to open markets where they expect to be the low-cost producer, while keeping markets closed where they think they will be less competitive. As a result, capital does not flow freely to the highest and best use, jobs in rising industries go unrealized while jobs in industries that need to retool are protected, thereby masking the long-term problems for the sake of preserving the status quo.

This is why dairy markets, for example, are such a contentious topic under USMCA: Canada, with its cold winters and short summers, could never compete in a free market with American dairy farmers.

The health care market is not a true market either. Any system in which the customer (i.e., the patient) is not the one paying the bills will lose the ability to control costs. Thus, pointing to rising health care costs as a market failure is simply wrong, especially when the federal government is both the largest regulator and the largest third-party payor.

Critics should be pointing fingers at the market manipulators, not the market itself.

Government does have a role in assisting in transitions, not picking winners

While adjustments are painful, they need to happen in a market economy. It is important to trust markets along with our individual ingenuity and entrepreneurial instincts. Creative destruction is a vital component of our market economy. We need to allow failure to happen so that our economy remains vibrant. Of course, there is a role for the government to provide training or other forms of assistance for those workers caught in various transitions. But those should be the exceptions and not the rule. When left to compete, it is amazing what happens.

For example, once upon a time, there was general outrage when Walmart expanded into Hometown, USA and took business from less competitive small business owners even though consumers in those markets benefited from Walmart’s lower prices. Some communities protected the incumbent merchants. Many did not. In those latter markets, less competitive businesses that could not compete on price had to find other ways of differentiating their products, generally by offering more attentive service – which benefited consumers and highlighted the resiliency of our economy.

Similarly, imagine the outrage today if Walmart was protected against Amazon’s e-commerce business that hit directly at the Walmart business model! Instead, Amazon’s entry into the marketplace has made Walmart more responsive to consumer needs, as Walmart has opened online, delivery, and pick-up options. In short, Amazon has forced Walmart to do better.

We cannot preserve buggy-whip industries. Labor markets will adjust in the long run. If we protect the uncompetitive, history proves that workers ultimately suffer because they get stuck in industries with uncertain futures.

We cannot preserve buggy-whip industries. Labor markets will adjust in the long run. If we protect the uncompetitive, history proves that workers ultimately suffer because they get stuck in industries with uncertain futures.

But rather than let markets work, well-meaning people often create policy externalities aimed at resolving short-term issues. These ultimately drive-up costs of doing business to protect underperforming business models or force labor-intensive industries overseas. These decisions eventually hurt the very people the policymakers want to help.

While the “creative destruction” process does create short-term transition costs, in the long run it is an essential part of the economic evolutionary process. If we try to assuage every business failure, our economic growth and innovation will suffer. Smart policy provides clear regulatory “guardrails” to ensure fair and open competition, rather than picking winners and losers. Yet, that is where we too often land. Our policymaking bodies are ill equipped to do this successfully. As writer PJ O’Rourke satirically pointed out, “When buying and selling are controlled by legislation, the first thing to get bought and sold are legislators.”

Criticism from the right

The essence of conservatism is that limited government unleashes human potential. By contrast, calcified bureaucracies crush opportunity and spirit. Bureaucracies only grow one way, and they are destined to become self-serving and to crowd out community resiliency, regardless of how benevolent the intention. In the end, this is a major risk to our representative democracy. As Justice Louis Brandeis wrote in a 1928 dissenting Supreme Court opinion:

“Experience should teach us to be most on our guard to protect liberty when the government’s purposes are beneficent. Men born to freedom are naturally alert to repel invasion of the liberty by evil-minded rulers. The greatest dangers to liberty lurk in the insidious encroachments by men of zeal, well-meaning but without understanding.”

Yet today, some American conservatives are moving in the opposite direction. They seem to be drifting toward a state-centric model to accomplish what they perceive as the common good, despite the warnings of Justice Brandeis. Clearly, the cult of personality dominated the prior administration, despite its confusing and inconsistent ideologies. This is precisely the “encroachments by men of zeal” that Justice Brandeis foreshadowed.

This emphasis by some American conservatives is perplexing since examples abound where popularly elected rulers, like those in Venezuela and Russia, have wreaked havoc on democratic institutions and trashed their economies in the process. Turkey is on the same path, only a few years behind them. European Union and NATO members Hungary and Poland are heading down a similar road. Those conservatives who laud the strongman tactics of Hungary’s Viktor Orban focus on his Christian nationalism and support restricting immigration to preserve Hungary’s cultural stability. They accept the fact that the government’s role is to step in when the marketplace fails to support the common good.

Hungarian Prime Minster Viktor Orban. (Alexandros Michailidis / Shutterstock)

This is where the far left and the far right begin to converge – on the short road between Budapest and Caracas. Witness the Conservative Political Action Conference (CPAC) hosting its annual meeting in Budapest in 2022 and the continued embrace of anti-immigration nativism rhetoric by many on the right side of the aisle.

The slope of this road is very slippery. Many may hope that a stronger state road will stop at the likes of Germany and Denmark, where capitalist democracies co-exist with a more aggressive social agenda. However, the track record of systems in which power is ceded to strongmen tactics is not encouraging. We need to remind ourselves that the sum of our nation’s parts is what makes America special, not a single individual that rises above the rest. Ceding power to an individual is a dangerous course of action considering future leaders who will assume that position may not be as benevolent.

This is where the far left and the far right begin to converge – on the short road between Budapest and Caracas. … The slope of this road is very slippery.

Expand the ownership society

In my life, aside from my family, the greatest satisfactions have come from building an industry-leading enterprise, providing a livelihood for thousands who have worked for or been capitalized by our firm, and the time and energy I have committed to the non-profit sector. I believe in the adage that those to whom much has been given, much is required. In giving, I routinely get back more than I give.

While I have enjoyed the benefits of an ownership society, I recognize that not all have enjoyed those benefits and that the marketplace is not perfect. The public sector does have a role to play in the marketplace. President George W. Bush said it best in 2003: “We believe in private markets humanized by compassionate government.” The compassionate role of government is to provide an equitable “on-ramp” for every citizen to participate in the economy and determine his and her own destiny.

The public sector has an obligation to provide quality education to all so that each can participate in the market economy and have the skills to adjust as market needs require. It has the obligation to keep its citizens safe from foreign actors as well as from malevolent people walking our own streets. It should find a way to provide those services which the “commons” require, such as protecting our collective health and safety and providing a compassionate safety net for those who are unable to participate in the market economy. It should provide the regulatory guardrails to ensure fair and open commerce. And, above all, it should protect and defend the Constitution.

While I have enjoyed the benefits of an ownership society, I recognize that not all have enjoyed those benefits and that the marketplace is not perfect. The public sector does have a role to play in the marketplace.

But rather than make the state a crutch to solve all ills, why don’t we work to increase participation in the ownership society itself? Rather than lean on spirit-crushing, inefficient bureaucracies to adjust outcomes we don’t like, why don’t we insist on outstanding education so that people have the tools to achieve their dreams, allow them to keep more of what they earn and pass it down to their children?

In the long run, voters will discipline those elected officials who are fiscally irresponsible, who close markets, who fail to educate our kids, and who fail to recognize that sound legal immigration policy is important for our country’s economy as well as our soul. If we trust it, the marketplace of ideas will produce the right result in the end, even if the path to get there isn’t a smooth line. History teaches us that.

Real progress comes by lifting the human spirit, not crushing it, or telling it what to do. A government that recognizes its own limitations and resists interceding to fix every outcome that is uneven will have more capacity to act when a true societal risk emerges, and the general population will be more trusting in the process.

Moreover, a government that focuses on providing real solutions to the nation’s most pressing problems will build trust.

President Barack Obama was famous for laying out a simple objective: “Don’t do stupid stuff.” Today, it is time to do the “smart stuff.” We are smarter and more capable than our collective behavior demonstrates. Our leaders must stop hurting the very people they are trying to help.

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