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Boiling America’s Economy

The US has reached global pre-eminence partly because of its commitment to ensuring a level playing field for the private sector. As interventions in the economy – such as subsidies, tariffs, and regulations – proliferate and deepen, so, too, do the risks to America’s global economic position.

WASHINGTON, DC – 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.