Despite campaign talk, free markets no longer exist

Over the course of the interminable Republican presidential campaign, I think Mitt Romney has been at it since 2007. A theme of the candidates and Obama’s has been increasing competition in the American economy.

But the free market, while at its root a beautiful thing, is a messy place – full of successes and failures, massive booms and busts, price instability and uncertainty. This is not necessarily problematic in a huge, single marketplace, but when aggregated, these sort of dynamics can be problematic.

A brief look at the U.S. gross domestic product and prices from 1800 to 1900, when there was considerably more perfect competition, shows wild fluctuations in both inflation and economic growth. It frequently fluctuated between -25 percent and 25 percent. That’s unheard of today.

After the Great Depression, these fluctuations have largely disappeared. Is this because markets are more or less perfect?

As you might imagine, it depends on to whom you talk.

The free-market guys would argue that government-interventionist policies are wreaking havoc on markets. “The taxes are too high, regulations are too Draconian.”

However, these same guys ask for favorable tax schemes or payouts to “incentivize” (don’t you hate business talk?) investment.

Recently, Congress removed ethanol subsidies that would have cost American taxpayers $31 billion over the next five years. Yet oil subsidies, which cost about $41 billion per year, are still in place.

A huge George W. Bush administration intervention in free markets was the passage of the now infamous Troubled Asset Relief Program, i.e. the “bank bailout,” which authorized up to $700 billion to rescue banks that made bad decisions.

These impediments don’t allow markets to adjust. Instead, they often misallocate resources and create perverse incentives.

Nevertheless, despite all these programs, we call this market economics.

I recall a quote by Bush as financial markets collapsed. He said something like: “The market has quit working.” As if there were no downside to market economics.

Huh? That is precisely how markets work. The market rewards and punishes with little regard to whom or what or how it impacts.

Generally, it is large firms that enjoy these little gems of taxpayer munificence. They have become “too-big-to-fail.”

They have clout, and the ears of politicians who write and re-write favorable laws – complicating regulations, the tax code, the budget and expectations.

And yet while large firms enjoy largesse and charity, little is given to small firms that actually compete in a less imperfect marketplace.

About 30 percent of small firms are still operating after 10 years. And it is small firms that hire most U.S. workers: about 3-to-1 compared with large firms. And the ratio is increasing

But this is our situation. The playing field is not level, and there is no reason to apply a competitive-market mindset to something that isn’t.

sonora_t@fortlewis.edu Robert “Tino” Sonora is an associate professor of economics at Fort Lewis College and the director of the Office of Business and Economic Research at Fort Lewis College.