2023 will bring hard times around the world.
COVID-19 policy in China is a perpetual disaster. People are dying and supply chains are again being disrupted. Making matters worse, several emerging market economies are on the verge of collapse. COVID-19, inflation, rising interest rates, unsustainable debt burdens, corruption, and poor macroeconomic policies are wreaking havoc on the economies of the developing world. South Africa is the poster child for corruption and poor policy. International financial agencies such as the IMF and the World Bank are working feverishly on stabilization and debt restructuring programs. Wealthy countries are procrastinating on providing more financial and technical assistance. China is nowhere to be found.
FREE TRADE IS STILL GOOD FOR AMERICA
The first shots in a global trade war among Japan, South Korea, the countries of the European Union, and the United States are being fired. The “Buy America” green energy provisions of the Inflation Reduction Act are protectionist. The provisions are inconsistent with the rules of the World Trade Organization. Buy America is inflationary and reduces the standards of living for most Americans. Even prominent economists associated with the Democratic Party are critical of Buy America. Of course, policymakers in the European Union are not without sin in the self-defeating game of tit-for-tat protectionism. European Union parliamentarians are pushing ahead with a carbon border adjustment mechanism, or CBAM, to tax imports into the EU based on their carbon intensity. They are also pushing blatantly protectionist tech regulation and tax measures.
For industries that have high carbon energy inputs into the cost of production, European carbon taxes raise significantly the cost of doing business. The aluminum, iron, steel, cement, chemical, and fertilizer sectors will be hurt. Jobs will be sacrificed. Inflation will be higher. To compensate for the economic and social costs of the carbon taxes, more generous social welfare spending will be forthcoming. Fiscal deficits will be higher. A negative economic feedback loop is inevitable.
A cold economic winter is descending on America as well. A recession is coming. Interest rates are rising. Rates will stay high for a long time. Scarce capital is being destroyed in the rush to a green economy which is a fool’s journey for the next decade and almost certainly longer. President Joe Biden’s protectionism and favoritism for unions exacerbate inflationary pressures and destroy jobs. To cap off the looming bad economic news, this week, Congress will approve a deficit-financed omnibus appropriations bill that will be inflationary, structurally raise interest rates, reduce long-term investment, and lower long-run productivity growth. And if all that bad news were not sufficient, sometime in the summer of 2023, the United States will flirt with federal debt default when Congress takes up the debt ceiling.
The wealthy nations of the world should cooperate. But conflict, not compromise, will be the path chosen. Politicians will make other nations and peoples the bogey man. Policy elites in the U.S., Europe, and Asia prefer damaging populist policies to the hard work of forging consensus necessary to promote both national and global prosperity.
Hard times are coming.
