Bloomberg: A new World Economic Order is here – the Free Market system really did fail

The chaotic politics of the last 16 years masked the steady development of a new economic order, notes John Authers, a senior editor for markets and Bloomberg Opinion columnist.

When the global financial system suddenly collapsed in 2008, it seemed obvious that it had swept away an entire way of organizing the world. If capitalism were to survive, it would need to be turned upside down. And so it is proving. And yet 16 years and five presidential elections after Lehman Brothers collapsed, the alternative is still emerging.

The two key moments of economic crisis in the 20th century were the Great Crash of 1929, and Richard Nixon’s ending of the gold standard in 1971. It took years of turmoil for first the Keynesian New Deal version of capitalism, and then the Milton Friedman-inspired globalized free markets of Ronald Reagan and Margaret Thatcher to arise from these crises. Yet from the perspective of history, the building blocks for a new order were steadily falling into place throughout the chaos of the 1930s and the 1970s. History will probably perceive the same process at work in the even longer reaction to the Global Financial Crisis of 2008.

The version of capitalism that fueled the Gilded Age and the Roaring ‘20s perished suddenly in October 1929. It was replaced by a model which would be labeled Keynesianism — even if John Maynard Keynes, who died in 1946, might not have liked the policies enacted in his name. This process took time.

The financial system was brought to order and tightly regulated, most famously by the Glass-Steagall Act that forbade commercial banks from dabbling in investment banking. Massive spending to defeat Hitler led to a model of fixed exchange rates under the wartime Bretton Woods agreement, based on a dollar tied to gold, and spawned the Marshall Plan, the GI Bill, the International Monetary Fund and the World Bank. Governments blessed corporatism: Unions were powerful, companies were generous to their employees, and spending to fight the Cold War kept the whole system going. The crash-prone US banking system survived for several decades in a quiet period without any major crisis.

By 1944, FDR had come full circle, “True individual freedom cannot exist without economic security and independence. Necessitous men are not free men,” he said. Hunger and unemployment are the stuff of which dictatorships are made. For decades after the war, the western world proceeded on this basis; market forces were useful, but could be contained and were of secondary importance.

That consensus ended in 1971 when Richard Nixon suddenly abandoned the Bretton Woods gold standard, which was buckling under the spending needed to finance generous social programs and the war in Vietnam. This allowed Nixon to spend money in his successful push for reelection. It also pushed up the price of gold, which led to the 1973 Arab oil embargo, as producers forced up the oil price, in dollars, to restore the value in gold it had held in 1971. Gold had given way to an oil standard.

The miserable stagflationary 1970s ensued, but pieces of a new order steadily fell into place. In 1976, Britain’s high-tax Labour government (“one for you, nineteen for me” as the Beatles complained) asked for a loan from the IMF. The conditions included austerity. Three years before he was defeated by Margaret Thatcher, Labour Prime Minister James Callaghan admitted that the Keynesian game was up:

Thus the key decisions had already been made before the landmark elections of Margaret Thatcher in 1979 and Ronald Reagan in 1980 validated them. The full Thatcher-Reagan model involved financial deregulation, as well as globalization that was aided by the fall of the Communist bloc and the conversion of Deng Xiaoping to a Chinese version of capitalism. There were problems under the surface, of course, but the model was virtually unchallenged until 2008.

The collapse of the Thatcher-Reagan world in 2008 was absolute, but a response took a while to take shape. Rahm Emanuel, Barack Obama’s first chief of staff, said “you never want a serious crisis to go to waste.” But that is exactly what the Obama team allowed to happen.

Under pressure from the Tea Party revolt, thoughts of New Deal-style big fiscal spending were abandoned, but by printing money, the Federal Reserve turned what might have been a screeching conflagration into a slow-burning train wreck. A second Great Depression was averted, but growth remained painfully slow, and low interest rates rewarded those who already had assets, intensifying inequality.

The Obama team did broaden the social safety net with its huge health insurance reform — and easily defeated Mitt Romney in 2012 by painting him as the representative of Thatcher-Reagan capitalism. Trump’s election in 2016 left Obamacare in place (largely because Republicans found it politically impossible to change it for anything better), and he cheerfully allowed the deficit to balloon through an unfunded tax cut (the Tea Party qualms could be forgotten now) and made a big turn toward protectionism. During Covid-19, Trump spent money on a scale unseen in generations, as did many other governments around the world.

Joe Biden then intensified the Trump tariffs, bringing Chinese imports down as he embarked on the boldest industrial policy since the New Deal, investing in infrastructure and green technologies to create jobs. This keystone of Bidenomics was potentially transformative, and it was barely ever mentioned in the 2024 campaign.

The US is not alone in stepping back from globalization and allowing a greater role for the state. Xi Jinping reasserted the power of the Chinese state over the private sector, while European nations tried austerity and fostered a populist backlash. Much more populist and interventionist governments of different political stripes gained power in India, Turkey and Brazil. And now Trump is returning with a mandate for continued and intensifying economic nationalism.

The idea that governments can exert such influence over the private sector, as well as international trade, has been absent from the west (if not from China) for more than a century. Now, the notion has taken hold that the free market system really did fail in the Global Financial Crisis, and efforts to mend it from within haven’t worked.

read more in our Telegram-channel https://t.me/The_International_Affairs