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Macroeconomic control regimes
15 May 2020
Everyone knows why the Soviet Union and the Eastern Bloc countries lost the Cold War: economics. US President Ronald Reagan’s escalation of the Arms Race may have been the catalyst, but it was the superior capacity of Western market economies to innovate and generate wealth that ultimately did in the Eastern Block. Their inefficient centrally planned economies collapsed from within.
Despite strong evidence that market economies are superior to centrally planned ones, many Western economies are today drifting towards far greater centralised control over key macroeconomic variables, such as interest rates, credit spreads, stock markets, even wages. The dramatic expansion of government involvement in key markets – call it macroeconomic control regimes – brings them closer in style to conventional central planning systems.
This should worry investors. The expansion of government control is at the expense of markets. Moreover, government controlled prices result in wedges between markets and fundamentals and undermines economic efficiency. Macroeconomic control regimes also introduce distortions in global asset allocation. The inefficiencies increase over time and become progressively more difficult to reverse. Unless Western countries find ways to break with the current trend of ever greater government encroachment into the erstwhile domain of markets, their fate could well be one of gradual ‘death by economy’, that is, a fate not dissimilar to that which befell the planned economies of the Eastern Bloc some thirty years ago.