For those who believe in the instrumental and moral value of free markets, these are not good times. Both major political parties routinely exhibit ever increasing departures from limited government and economic freedom. It is therefore unrealistic for free-market advocates to expect the next administration to do anything but further expand government’s reach into the economy. Nonetheless, one can wish for better. Below I identify some action items that would be on my wish list for producing a freer and more efficient economy. The list is far from exhaustive.
Balance the Budget and Address Unfunded Promises
According to some estimates, the present value of the cost of Social Security and Medicare’s unfunded promises now stands at more than $175 trillion. Add $34 trillion more in federal debt ($26 trillion held by the public) and the total is well over $200 trillion. Even with historical economic growth and productivity increases, there is no way that these obligations can ever be met out of real resources so long as they continue to increase. What’s worse is that the nation cannot count on growth and productivity maintaining historical trends, as growing debt service and entitlement payments increasingly crowd out private capital investment. This ever larger burden on the private economy threatens the entire free market system. Legislation is needed to replace Social Security and Medicare with free market oriented retirement and healthcare systems, and a balanced budget amendment to the Constitution is needed to begin addressing the federal debt.
Require the Federal Reserve to Follow a Monetary Rule
Sound money is critical to the efficient functioning of a free market economy. Under the Fed’s watch since its 1913 founding, the price level has increased by over 2,300% and the dollar’s value has fallen by over 95%. During the past two years, we have experienced the highest rate of price inflation in 40 years. Covid spending programs and massive accommodation by the Fed facilitated this inflation tax on Americans. Even before Covid, however, the Fed long pursued an easy money policy in the form of multiple episodes of quantitative easing designed to manipulate the term structure of interest rates. Free market interest rates guide the allocation of capital by coordinating future expectations with the present. Fed manipulation distorts that allocation. Given its record of failure, Congress should limit the Fed’s discretionary powers by requiring that it follow rules-based policy.
Make Revenue the Sole Purpose of Income Taxes
Ever since the ratification of the Constitution’s 16th Amendment, politicians have increasingly used the income tax code to advance social goals and industrial policies. These might include, for example, tax incentives to purchase and install solar panels in one’s home or tax credits and subsidies to certain industries that incentivize activities thought desirable by government. Using the tax code in these ways expands the size of big government and its reach into the economy, distorts resource allocation, and creates strong incentives for rent-seeking that benefits the few at the expense of the many. The tax system should be neutral and reformed to make its sole purpose the funding of legitimate federal government functions and services.
Abolish the Federal Minimum Wage
The current federal minimum wage is $7.25/hour, which is likely below market wages in nearly every American community, even for unskilled workers. Thus, it has little or no effect. Nonetheless, one cannot count on that benign status to be permanent. The existence of the minimum wage continues to pose risks that Congress will restore the rate to a level above market wage rates. When this occurs, minimum wage floors create short-term unemployment by making it illegal for employers to hire workers whose productivity does not generate sufficient revenue to pay the minimum wage and long-term unemployment by encouraging more substitution of capital for labor. Typically, younger low skilled workers bear the unemployment burden of these laws. Small businesses too, however, bear a significant share of the burden in the form of higher adjustment costs, and in worst cases, inability to survive.
Amend Federal Labor Laws and Reform National Labor Relations Board Rules
Last fall’s labor strike action in the U.S. automobile industry highlighted the significant economic and political power of big unions. The economic power was manifested by the ability to shut down much of the industry’s production, and the political power was evident in the United Auto Workers’s capture of key politicians, most particularly President Biden. Such economic power generates not only short-term production losses and lower current GDP, but also distorts employment opportunities. Like the minimum wage, union wage contracts that result in wages above the market wage foreclose employment to less productive workers and, over the longer term, encourage the substitution of capital for labor. Federal labor laws and NLRB rules that unduly privilege unions and harm the efficiency of the overall economy and the well-being of low income households should be amended so as to eliminate these harmful effects.
End Industrial Policies
The Biden administration has supercharged industrial policy with subsidies and tax breaks for favored industries and favored production activities, all in the cause of promoting a green economy that reduces human impact on the environment. Industrial policy inherently diverts resources from uses that would obtain in a free market. The result is poorer economic performance. There are free market oriented approaches better suited to achieve environmental objectives, and any free market wish list must include those approaches.
Adopt Full Free Trade
Adam Smith taught us that trade expands the benefits of the division of labor across national borders. In so doing, it increases the size of the consumption pie for all parties engaged in trade. Moreover, a nation benefits from free trade even when trading partners impose trade restrictions. In light of this teaching and setting aside limited export controls respecting goods with national security implications, a free market wish list must include the elimination of tariffs, quotas, and other programs that restrict voluntary trade between Americans and foreigners.
Undertake Major Regulatory Reform
According to one study, complying with federal regulations cost businesses over $3 trillion in 2022. Some of these regulations are surely necessary and generate sufficient positive benefits to justify their cost. Complying with many, however, just as certainly costs more than the benefits that they provide. In these cases, the economy is burdened with less real output and slower growth. Unnecessary regulations impose burdens on free markets and private productive activities and should be jettisoned.
End the Export/Import Bank
The Ex/Im Bank is primarily in the business of shifting credit risk from foreign buyers of American products to American taxpayers. In so doing, it also promotes the use of U.S. scarce resources for the benefit of foreign consumers. Also known sarcastically as the Bank of Boeing because Boeing’s foreign customers are some of the major beneficiaries of the Bank’s programs, the Ex/Im Bank is a clear example of corporate welfare, and its existence is a clear departure from free market principles.
Eliminate Ethanol Mandates
The 2005 Energy Policy Act mandated that a certain percentage of renewable fuel — namely corn-based ethanol — be added to the U.S. gasoline supply. It is doubtful that this blended product would exist in a free market. It thus distorts prices and resource allocation, diverting farm land to corn from other crops. Moreover, it is unclear what the mandate’s benefits are for the broader population. Owing to extra costs to refiners, ethanol blended gasoline increases pump prices and, as experiments have shown, mileage per gallon is reduced, a double whammy for drivers. Furthermore, a recent study published by the National Academy of Sciences concludes that the alleged reduction in greenhouse gas — namely carbon emissions — that ethanol blended gasoline generates is non-existent when one accounts for land-use conversions and ethanol processing, and on net may actually produce more greenhouse gases than refining and burning gasoline alone. There is no net social benefit resulting from this subversion of free markets.
Repeal the USDA’s Sugar Program
A Government Accounting Office report estimates that the U.S. sugar program administered by the Department of Agriculture costs American consumers somewhere between 2.5 and 3.5 billion dollars because of higher prices relative to the rest of the world. The principal beneficiaries of the program are the U.S. sugar growers and refiners, but the dollar amounts of their benefits are significantly less than the costs to consumers. Thus, the distortionary effects are a net loss to social welfare.
Summing Up
Of course, it is not realistic to expect either political party to consider this wish list, let alone act on it. The incentive for politicians to “buy” votes with special favors is too strong. Nonetheless, for those who share a belief in the instrumental as well as moral value of free markets, my wish list may at least provide grist for discussion and perhaps even future change.
Mr. Gebhard is a retired economist and attorney.
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