US interventionism is casting a shadow on its economic primacy

America's pre-eminence is partly due to its level playing field but that is now at risk of getting distorted by its ad hoc policies

- ANNE O. KRUEGER

It is said that if you put a frog in boiling water, it immediately jumps out; but if you put it in cold water and gradually turn up the heat, it does not react—and is eventually boiled to death. Something similar can happen to economies.

If inflation accelerates, the public demands that leaders rein in prices with tighter macroeconomic policies. But if the authorities start interfering in individual industries with ad hoc tariffs, price controls, subsidies, taxes and regulations, there is no such popular reaction, so the interventions are allowed to continue creating inefficiencies and undermining growth.

Both inflation and the ad hoc interventions—sometimes referred to as industrial policy—distort the economy and result in lower economic growth. But inflation triggers a quick response. An economy-wide phenomenon, it gains momentum as one group after another seeks to restore or increase its real returns. But at a certain point, people begin to object. From then on, as the rate of inflation rises, pressure on policymakers to reduce it intensifies. Once inflation is subdued, growth can resume.

By contrast, the impact of targeted tariffs and industry-specific measures at any point in time, or in any one sector of the economy, is usually relatively small. Though they contribute inflationary pressure, reduce the economy’s flexibility and weaken growth, they tend to be less noticed, so the public is unlikely to reject them. Moreover, the prospect of lowering a tariff or removing a subsidy is typically met with strong resistance by the affected industry. So, whereas curbing inflation is a political imperative, reversing distortionary ad hoc measures is politically difficult.