Bad Transitions after Free Elections
Too often a winning group attempts to capture the government so as to perpetuate itself in power indefinitely, that is, to abolish the democracy, defined here as an honest and open political competition, or what we usually call free elections. Such a competitions require, of course, extensive civil rights and a minimum of a rule of law so that the opposition is not intimidated or, worse, outright banned. Examples of bad transitions include Alexander Lukashenko in Belarus, Vladimir Putin in Russia, Hugo Chavez and Nicolás Maduro in Venezuela, Recep Tayyip Erdoğan in Turkey, Viktor Orbán in Hungary, and more recently Jarosław Kaczyński in Poland. They display a similar direction but differ in the extent of the state capture, due to a different intensity and mix of the use of three mechanisms:
- Clientelism, or the distribution of pecuniary benefits and jobs among the actual or potential supporters.
- Indoctrination by the captured mass media and the Internet.
- Intimidation of the opponents by the captured organizations of the state, especially secret services, police, prosecutors, tax administration, and — in the worst cases — the courts.
It is striking that the bad transitions that I have mentioned all include significant statist, antimarket policies, especially an increased politicization of the economy via an expended state sector and/or favors to politically connected businessmen or oligarchs. These transitions have not traded civil rights for more economic liberty — both kinds of freedom have been curtailed. The antimarket policies have been accompanied by antimarket propaganda: free markets have been presented as a source of crises and inequalities, and economic nationalism and industrial policy have been praised as the solutions. Much of this propaganda has been imported from collectivist groups and statist economists in the West.
The duration of a bad transition depends on the scope of clientelism, that is, on a country’s economic situation. Windfall gains favor bad transitions, as in Argentina under the Kirchners. If the economic situation gets worse, the question arises to what extent damage to the regime’s credibility can be neutralized by an increased use of indoctrination, which is doubtful, and whether the regime will try intimidation when it fails.
It is very important to try to stop a bad transition as early as possible. For the more it advances, the higher the danger that the state organizations of repression will be captured. To be sure, one could expect that the populist polices conducted by authoritarian rulers would damage the economy and thus produce protests motivated by economic reasons. However, such protests are a poor substitute for an organized defense of the institutions of a free society. This is for two reasons. First, economic damage has a high social price, one that the country would be better off not paying at all. Second, the worsening economy may not be sufficient for a long enough time to stop and reverse a bad transition if the forces of intimidation are already strong. For example, in Venezuela a Chavez-Maduro regime continues amidst an economic catastrophe, most likely because the armed forces and the police are shielded from it and thus protect the regime. We need to know more about bad transitions after free elections, and especially about the determinants of their duration, in order to be able to draw more precise conclusions how to stop and then reverse them.
Threats against Economic Freedom in Mature Democracies
The paradox of economic freedom is that it is both fundamentally important for the welfare of the people and the most attacked even in countries where the government is not lastingly captured by one political group, that is, in the developed West. It appears that in the West today civil liberties and the fundamentals of the rule of law are less under threat than economic liberty. It would be a very interesting to know more about why it is the case.
The present attacks against economic freedom have some familiar components:
- Regulatory interventionism, that is, anti-market or anticompetitive regulations, including protectionism;
- Allocative interventionism, also called “industrial policy”; and
- Fiscal interventionism, in the form of rising spending, and, as result, taxes and/or public debt.
What is new is a sharp increase in monetary statism in the form of the unprecedented unconventional monetary policy (UMP) of the major central banks. These banks have lowered official interest rates to zero or close to zero and have kept them at this level for a long time. They have overseen a massive creation of money which finances interventions in the financial markets — quantitative easing, as it is called — that amounts to financial markets’ nationalization.
All of these attacks against economic freedom, both new and old have two main sources: First, there are well known interest groups that obtain financial benefits from infringement on economic freedom (licensing, protectionism, and the like). And we should dedicate more attention to the influence of the ideological pressure groups whose members derive psychological benefits from activities which lead in the same direction, such as aggressive ecologism, or inequality fundamentalism. Second, contemporary attacks against economic freedom enjoy much support and legitimacy thanks to the statist orientation of mainstream economics, not to mention other social sciences. Its impact is strengthened by the moralistic messages spread by the proponents of statism. The task for the defenders of economic liberty is to unmask the logical and empirical deficiencies in interventionistic works as well as to show the poverty of their moralistic arguments.
Regarding regulatory interventionism, we should focus on labor market regulations, especially on excessive job protection, which protects insiders at the cost of outsiders, particularly young people. One should emphasize the examples of Greece, Spain, and France and contrast their high youth unemployment with that in the countries with less rigid labor markets. High unemployment among younger people is a drastic form of inequality that can destabilize even a mature democracy.
When speaking about inequalities, one should draw a sharp distinction between the inequality of opportunity and that of income and wealth. We all agree that the first should be reduced as much as possible; individuals with similar characteristics should have similar chances of realizing their professional plans in similar domains. This obviously cannot be said about inequality of income or wealth. Besides, it is never enough to stress that a just goal is reducing absolute poverty, which requires market reforms in the statist and corrupt regime, and not merely reducing income inequality. One should demand, however, the removal of policies and regimes that redistribute in favor of the rich, in the form of crony capitalism, restrictive zoning regulations that limit the supply of and thus increase prices of real estate, and unconventional monetary policy, which raises the prices of financial assets and protects the incumbent firms.
With respect to allocative interventionism it is worth unmasking these plans’ alleged success (e.g. South Korea, Japan) and remind the public that political decisionmakers have both poor information and perverse incentives regarding their choice of investment projects. Politicians bear no financial responsibility for their choices; they face only the prospect of political popularity thanks to choosing spectacular but loss-making projects. The losses are never theirs to bear. Fiscal interventionism is fueled by anti-austerity propaganda and by the recourse to an intellectually bankrupt crude Keynesianism. The best remedy against it is, I think, to stress the growth of the public debt to which much of the public is rightly sensitive.
There are two general biases in conventional macroeconomics that favor fiscal and monetary interventionism. According to the first, a free market economy (and especially a free financial market) is inherently unstable: left unattended it runs into deep crisis, and only an enlightened macroeconomic intervention can get it out of this situation. This claim has been empirically disputed by Selgin, Dowd, Calomiris, and other scholars, who have shown that at the bottom of the deep crises in the capitalistic economy lie various state policies that encourage excessive risk taking by private actors. This conventional view has been revived during the recent global financial crisis — despite the fact that similar state policies have been identified in this case as well, including too big to fail, procyclical monetary policy, and tax regulations that favor debt relative to equity. These policies are best thought of as half-measures on the way to more serious trouble; the deepest breakdowns in an economy tend to occur in societies with a heavy concentration of political power and little if any legal market activity, such as Maoist China, Stalin’s USSR, and Castro’s Cuba. The reason for that is simple: the lack of constraints on rulers means that they are free to purse disastrous policies. It is, therefore, limited government which limits the risks of serious crises.
The second — and related — bias in mainstream macroeconomics consists of its extensive focus on demand-side policy, both fiscal and monetary. If the free market economy is assumed to be inherently fragile, then a premium is given to these allegedly stabilizing policies. The supply side and the policies which strengthen it are largely ignored or assumed to be given. This omission is especially dangerous in models which serve as the basis for decisions in monetary policy, as this approach blinds decisionmakers to the possibility that their decision may negatively affect economic growth via increased uncertainty among investors in the real economy and reduced restructuring. What is left to the central bankers, if the economy suffers a slowdown, is to apply a monetary stimulus, and if it fails — to blame “secular stagnation.”
The crises caused by wrong policies and the accompanied anti-market propaganda may create an economic-political spiral: People who perceive themselves as the victims, including those who are unemployed because of rigid labor market regulations, may support even more interventionism. They will be supported by the intellectuals who win an increased popularity for themselves by presenting various anti-market stories and proposing statist recommendations.
Concluding comments
I have discussed two distinct cases of the attacks against liberty: 1) Attempts to capture the state by the winning group after free elections, which include an increase in economic statism; and 2. attacks against economic freedom in mature democracies. I have also tried to point out what are the best responses to these developments. They differ, of course, depending on the situation but also have some common elements. Necessary in both cases is a constant and well-organized effort to unmask the intellectual and moral fallacies of the attacks against a free society.
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