The Coming Economic Competition

In the decades ahead, we will see an open competition between the different economic models of the United States, the EU, Russia, India and China. Should any country’s model produce markedly superior results leading to notable economic success, that success would inevitably lead to political domination over its less successful rivals. All the models followed by these countries are a long way from the policies this column would prefer, so it is difficult to analyze which will win the struggle between such imperfect strategies. All we can hope is that we will not get another episode like 1914, where Bronze Age ethical systems overwhelmed otherwise civilized polities and healthy economic competition.

The United States, first, is currently leading the world in economic policy. Under President Trump it has sharply deregulated, abandoning altogether the economic insanity of “net zero” climate change policies, which vastly increase energy costs and decapitalize much of the economy. It has also abandoned the Bernanke-era madness of artificially low interest rates, and Trump has appointed the best available candidate, Kevin Warsh, to lead the Federal Reserve. Warsh has in turn allowed the market to increase long-term interest rates to a more sustainable level, thereby beginning the job of liquidating the vast excess of unproductive, indeed idiotic, investment accumulated over the last 15 years of Bernankeist ultra-low interest rates.

The United States, however, has a great deal of political risk. That used not to be the case. In the 1990s a distinctly inferior Republican President, George H.W. Bush, was succeeded by an above average Democrat, Bill Clinton. Clinton initially indulged the leftist fantasies of his wife and staff, which resulted in a massive Republican victory in the midterm elections of 1994.

Following those elections, Clinton governed as a centrist, even after his 1996 re-election and together with the highly capable Republican Speaker Newt Gingrich pushed the Federal budget into surplus, something it had not achieved since 1969 and has never approached since. Unfortunately, Gingrich was forced out by the corrupt Republican establishment in favor of the inept big-spending pedophile Dennis Hastert. Then, Clinton’s successor George W. Bush grossly over-reacted to the 9/11 terrorist attack to undertake a series of unsuccessful military adventures in the Middle East, the costs and destabilizing effects of which the U.S. has been suffering ever since.

President Trump promised to end the nonsensical military adventures; in his first term he was as good as his word, but this time around, whether persuaded by Israel or by the inept big-government warmongers who infest the Republican party, he has allowed Bronze Age ethics to prevail by starting a war with Iran. This has put the US Budget even further out of balance and severely endangered the chances of good U.S. economic policy following the midterm elections, let alone after January 2029 when Trump steps down. The Democrats are not those of Bill Clinton’s era; they are today both unpleasantly anti-capitalist and unpleasantly authoritarian.

While individual countries within it still vary a little according to the political color of their governments, the European Union as a whole is at the opposite end of the spectrum from the current United States, with quite the worst economic policy of any significant nation or bloc. Its high taxes and regulations have stifled entrepreneurship, so that the EU has almost no presence in AI, the leading technology of the next decade. The EU has imposed draconian and irrational climate change regulations, forcing up energy prices to the highest in the world and making much of the EU’s manufacturing industry unviable, even if carried out in the lower-wage economies of Eastern Europe.

The EU has imposed a regime of arbitrary and draconian fines on foreign companies, so the EU Blob now makes more money from fining U.S. tech companies than it does from corporate taxes on European tech companies – needless to say, this behavior is both globally antisocial and in the long run self-destructive. Finally, it has imposed increasingly draconian restrictions on the speech of its own citizens, making it increasingly difficult for them to ascertain the truth about many current events. Effectively, the EU is now approaching the same level of control as in the old Soviet Union, albeit with much better and more sinister detection technology with which to oppress its dissident citizens.

Russia, conversely, has in principle an excellent economic policy; the problem is the practice. From 2001 until 2024, Russia had a 13% flat tax on income, the most pro-capitalist tax system in the world. Alas in 2024 fiscal pressures caused it to modify this to a sliding scale tax up to 22%, but even so Russia’s taxes on income are considerably lower than the United States, let alone the EU. As a result, Russia developed a highly successful capitalist economy, with a great deal of small-scale entrepreneurship; it also avoided the “climate change” regulatory nonsense, since Russia, controlling Siberia, would be a huge net beneficiary of any global warming.

Russia’s problem is that under President Putin property rights and indeed human rights are thoroughly insecure, with the draft for the Ukraine war also affecting every level of national life. The future for Russia depends on what regime succeeds Putin. If it is one that safeguards property rights, avoids foolish Bronze Age wars and improves human rights, Russia’s economic future could be very bright indeed, since its limited and well-educated population and huge natural resources give it considerable hidden strengths.

India is an enigma. Under Narendra Modi’s governments since 2014, it has abandoned much of the damaging socialist and over-regulating legacy of the Congress Party, with its corrupt “permit raj” that made entrepreneurship impossible and growth sluggish at best. Equally, the state remains corrupt and heavy-handed, and inclined to favor existing behemoth companies against entrepreneurial outsiders. Moreover, the country’s grossly excessive population and limited resources tend to ensure its living standards will remain the lowest of the five polities examined here, which itself brings added political risk of a relapse into left-authoritarianism.

Finally, China. Nominally a Communist country, it has not been fully Communist in practice since Deng Xiaoping’s reforms of the early 1980s. Equally, like Russia it remains an authoritarian state, and there is thus no security of property rights, nor of human rights if the political system decides it does not like you. However, economically it appears quite sensible. In particular, having attempted to rescue itself from the 2008 downturn by creating a real estate bubble, both in overpriced residential investment and underutilized offices for state bodies, it has in the last few years been liquidating the malinvestment in that bubble in a quite Austrian way.

As my former colleague Edward Chancellor has pointed out, the government is forcing the banks to write off loans against property malinvestment and allowing the construction sector to decline sharply from its overheated level. Thus, whereas the United States still has to enter its painful period of “liquidate everything” in the great Andrew Mellon’s famous phrase, which “everything” must surely include the massive recent overinvestment in data centers, in China the stage may soon be set for renewed growth.

China has three problems. As an authoritarian state, it lacks the protections for property and life that a true capitalist system demands. Its economic policy is also far too state-directed. Xi Jinping has been intelligent, albeit mercantilist in a way that Thomas Mun would appreciate, but his successor may be less intelligent, or may attempt to reimpose a form of Communism, under which the government owns property and picks winners and economic progress becomes impossible because of the lack of functioning price mechanisms. Finally, like India, China is grossly overpopulated and should its living standards approach Western norms, it will find its resources inadequate – its mercantilism may also prove unsustainable in the face of pushback by its trading partners.

Finally, the one factor that could make this brief comparative analysis moot: the possibility of a world war. I have recently been listening to Homer’s Iliad (in Alexander Pope’s translation) and have been struck by how alien is its ethos. Much of the classic resembles an account of the Battle of the Somme, casualty by casualty, but in the intervals of slaughtering each other, the characters aspire only to honor and glory, either of the individual or the state, and not to what we would consider rational self-interest. There is very little mention of the craftsmen who had made their swords and armor, nor of the legions of merchants who provided the supplies for the Greek army to remain for ten years outside a hostile city. The Bronze Age had already made considerable material progress from prehistory, but that progress had come from the merchants and entrepreneurs of Sumer and Phoenicia, not the economically sterile heroes of Greece or Troy.

Every generation in the West is exposed to the Iliad, generally at an early age, and inculcated with the Bronze Age ethos that made an entire nation camp for a decade trying to capture a city because the prince of that city had stolen a doubtless attractive bimbo. The Bronze Age ethos it typifies is very visible in the maneuverings of the highly civilized states that in 1914 plunged an unprecedentedly prosperous world into the worst of all wars. It is still with us today, notably in the political and military errors that led to the Ukraine and Iran wars.

If the Bronze Age ethos predominates, our future is grim indeed. If it does not, it depends on the political trajectories of the five world powers. Given the current political risk in the United States, my money would be marginally on China.