Defending the Free Market: An Interview with Guy Sorman
Which economic policies can defeat recessions? And which are doomed to prolong them?
July 25, 2009 - 12:30 am
Addressing events across five continents, former professor at the Paris Institute of Economics Guy Sorman has published over twenty books in the course of his career. Currently he is a contributing editor for City Journal and a writer for the Wall Street Journal and Le Figaro. His latest book is most topical and entitled Economics Does Not Lie: A Defense of the Free Market in a Time of Crisis.
BC: Congratulations on the release of your new book, Dr. Sorman. First off, for those unfamiliar with its themes, is economics truly a science? Moreover, why is its study inconceivable without algorithms?
Guy Sorman: Economists are moved by data, not their opinions. We start from the real world and try to understand why some people and nations grow out of poverty while others do not. Growth is our agenda, as it brings more opportunities to people and more freedom of choice. Based on our observations, we then make recommendations. The 25 years of growth that we had before the current slump were a triumph of sound economic policy grounded in robust science.
Now, in a time of crisis, we need that science more than ever, in order to understand the crisis and recover from it. Basically, we can say that the crisis has been provoked by a lax monetary policy, which led to a bubble. Milton Friedman was proven right. We should have sound money. Regarding mathematics, it is only a language, convenient for assembling data and understood globally. It does not exclude or replace common sense.
BC: You mention that the Europeans have come around to embracing the Laffer Curve. Why has America failed to do so? I ask this because, under the proposed health care measures, the maximum overall rates of taxation in New York and California will reach nearly 60 percent.
Guy Sorman: Economics is always a matter of trade-offs: higher taxes will slow growth, but they can increase equality through wealth redistribution. This has been the dominant European model. If the U.S. opts for more wealth redistribution, we will get less growth. We can’t have it both ways, because resources are scarce.
BC: Did Franklin Roosevelt’s policies in the 1930s prolong the Great Depression? Was there any merit to the New Deal?
Guy Sorman: The merit of the New Deal was that it helped the U.S. avoid political violence of the kind that took place in Europe. There were fascist and communist temptations in the U.S. in response to the Depression. FDR was able to keep democracy on track. The price for doing that was a prolonged crisis, because he interrupted the capitalist process of creative destruction.
BC: What’s your opinion of Keynesian economics? If undertaken correctly, can a stimulus plan work?
Guy Sorman: Keynes suggested that government accumulates surpluses during periods of growth in order to invest them during downturns. This has never been done, though. What we have is public spending financed by public debt, which leads to an increase in interest rates, which in turn freezes the recovery. Thus, in real life, no stimulus plan has ever worked. Those mavericks who still advocate stimulus plans argue that they haven’t worked in the past because not enough money was spent. But to spend more could lead only to bankruptcy or socialism, not to recovery.
BC: Thus far, in terms of the economy, what would you say are the main failings of the Obama administration? Do you see any successes?
Guy Sorman: Obama’s success has been not to follow the most radical suggestions of liberal economists like Paul Krugman: advocating even more public spending, more nationalization of industries, and more regulation. All of Obama’s decisions, though, are half-baked: as a consequence, the U.S. may not be turning socialist, but it is becoming unpredictable.
BC: The panoramic view provided of world economies is what I found most educational about your book. In regards to Russia, how much did economic incoherence and ignorance doom Gorbachev?
Guy Sorman: Gorbachev was doomed by the Soviet economic system as devised by his predecessors, starting with Stalin. The Soviet economy then was based on its gas and oil exports, just as it is today. When prices were high, the Soviets seemed powerful. Gorbachev came to power when prices had dropped: he had no more resources to buy food or build arms. Moreover, there was no innovation in the USSR: everything was copied or stolen from the West. At a certain stage, you cannot copy anymore what has become too sophisticated to be understood.
BC: There is a sentence in the Russian chapter that I really liked: “The Western intelligentsia believed and still believes that the capitalist system rewards them poorly for their talents.” How much is the intelligentsia of the U.S. to blame for the reemergence of socialism as a viable economic alternative?
Guy Sorman: The intelligentsia does not usually like the free market for two reasons. First, it is not an ideal system: intellectuals prefer utopia. Second: intellectuals are paid less than entrepreneurs. As a consequence, they see capitalism as unfair. In former socialist regimes, intellectuals were well treated when they toed the party line. If they didn’t, they were jailed.
BC: What is the truth about China? How economically stratified is it? You cite a source who maintains that there really is no middle class there.
Guy Sorman: In China, 20 percent of the population exploits the rest in the name of socialism. When you belong to this new bourgeoisie, you have a lot of opportunities. Another 20 percent draws some trickle-down benefits: migrants working in factories, for example. Everyone else lives in the countryside in a medieval kind of poverty. Because of this unjust system, many rebellions occur, but the party puts them down, often using extreme violence.
The only way to develop all of China would be to privatize the land. The exploited peasants could then become entrepreneurs. The party does not want that.
BC: In your chapter “Setting Sun,” you mention that Japan has gone from one extreme to another in terms of reputation. What can the United States learn from Japan’s experiences over the past four decades?
Guy Sorman: Japan has kept a remarkable edge in the world market in many high-tech industries. It’s still second to the U.S. in innovation, measured by the annual number of registered patents, ahead of Europe and far ahead of China. The strength of Japan comes from its strong educational system and a unique network of sophisticated, high-tech small businesses.
Unfortunately, the nation’s economic policy between 1990 and 2000 was disastrous. The government, with lots of corruption behind the scenes, invested huge sums in useless infrastructure. Private investment was crowded out by this public stimulus, which brought the country to a standstill. This so-called lost decade is the most illustrative demonstration of the adverse effect of public spending.
BC: What is the rationale behind your statement that “any country that instituted a carbon tax by itself … would be committing economic suicide?” Also, what’s your opinion of the recent cap-and-trade bill that passed the U.S. House of Representatives?
Guy Sorman: If global warming exists, if it is man-made, there can be only global solutions. A local solution, like cap and trade, reduces your own dynamism without benefiting the climate at large. Thus, a U.S. cap-and-trade system, if it goes into effect, could be useless and costly. More likely, probably, the U.S. will follow the European precedent. Europe has had a cap-and-trade system for five years, but it is not practically applied; it is only ecological posturing. What we should fear most in the U.S. is the creation of a costly and undemocratic green bureaucracy.
BC: You argue in your book that global warming seems certain, but is it? Hasn’t there been recent evidence of global cooling?
Guy Sorman: We’ll all be dead before we know for sure whether global warming exists. To escape this ideological controversy which has religious overtones, I have, like many free market economists, made a rational choice: since we do not know much about climate change, let’s implement a modest carbon tax. This tax will be an incentive for diversifying our energy resources. Such a tax should be small in order not to disrupt the economy. And it should replace other existing taxes on business, not be added to them.
BC: Thank you for your time, Dr. Sorman.