Farewell Middle Class Subsidies

CAMBRIDGE: The revolution underway in the world economy creates unprecedented competition and innovation, which benefits consumers. It also means that today’s status quo -- big government, the nation and welfare state, comfortable middle class subsidies -- is probably doomed.

Clearly, the 19th century belief that free trade and free markets create ever-expanding opportunities has been resurrected. It is instructive, however, to ask why that faith was lost, and later recovered, in this century. The answers may tell us how long today’s new world will last.

The rise of the nation state and the rise of government as economic actor shattered the old liberal world. The Great Wars and Great Depression induced deep disillusion about internationalism. Wartime introduction of income taxes and large public debt was followed by revolution, protectionism, hyperinflation, and competitive devaluations. Governments marched to the center of economic life.

At WWII’s close the beggar-thy-neighbor policies of the interwar years stood exposed as a cause of war. The liberal world order thus began a comeback. Reopening international commerce (see table) expanded trade faster than in the 19th century. In 35 years, Germany’s trade increased tenfold; Japan’s trade almost twenty times. With rare protectionist exceptions, liberalization of trade is recognized around the world as a boon.