David Boaz

As US Treasury secretary Henry Paulson meets in Beijing with Chinese vice-premier Wu Yi to discuss the US-China trade balance, the US commerce department has just released its monthly report on the widening trade deficit. Journalists report this in hand-wringing terms that consistently reflect little understanding of real economics. "Oh no, imports from China are up," blares my radio. "The only solution is to increase American exports to China."

And that's supposed to be the free-trade position, a counter to the argument for tariffs or other coercive measures to prevent China from forcing its products on innocent American consumers. (I'm omitting the safety and health problems with Chinese products for now, as we heard the same economic complaints when Japan was the biggest non-white exporter to the US. Somehow we've never worried so much about imports from Canada, the UK and Germany.)

"Profound economic emergency," the president says. Failure to pass his spending plan could "turn a crisis into a catastrophe". Any delay will mean "paralysis" and "disaster". It's all out of the "shock doctrine" playbook: scare people to death and then demand that your agenda be enacted without delay.

Naomi Klein made waves two years ago with her book The Shock Doctrine, in which she claimed that conservative governments use crises to ram through free-market policies. As she put it in an interview: "The Shock Doctrine is a political strategy that the Republican right has been perfecting over the past 35 years to use for various different kinds of shocks. They could be wars, natural disasters, economic crises, anything that sends a society into a state of shock to push through what economists call 'economic shock therapy' rapid-fire, pro-corporate policies that they couldn't get through if people weren't in a state of fear and panic."

And that's just what we're seeing today only in reverse.

Last year the US economy was hit with one shock after another: the Bear Stearns bail-out, the Indymac collapse, the implosion of Fannie Mae and Freddie Mac, the AIG nationalisation, the biggest stock market drop ever, the $700bn Wall Street bail-out and more all accompanied by a steady drumbeat of apocalyptic language from political leaders.

And what happened? Did the Republican administration summon up the spirit of Milton Friedman and cut government spending? Did it deregulate and privatise?

No.

It did what governments actually do in a crisis it seized new powers over the economy. It dramatically expanded the regulatory powers of the Federal Reserve and injected a trillion dollars of inflationary credit into the banking system. It partially nationalised the biggest banks. It appropriated $700bn with which to intervene in the economy. It made General Motors and Chrysler wards of the federal government. It wrote a bail-out bill giving the secretary of the treasury extraordinary powers that could not be reviewed by courts or other government agencies.

Now the Obama administration is continuing this drive toward centralisation and government domination of the economy. And its key players are explicitly referring to heir own version of the shock doctrine. Rahm Emanuel, the White House chief of staff, said the economic crisis facing the country is "an opportunity for us". After all, he said: "You never want a serious crisis to go to waste. And this crisis provides the opportunity for us to do things that you could not do before" such as taking control of the financial, energy, information and healthcare industries.

That's just the sort of thing Naomi Klein would have us believe that free-marketers like Milton Friedman think. "Some people stockpile canned goods and water in preparation for major disasters," Klein wrote. "Friedmanites stockpile free-market ideas." But that is exactly what American left-liberals have been doing in anticipation of a Democratic administration coming to power at a time when the public might be frightened into accepting more government than it normally would. For instance, the Centre for American Progress, run by John Podesta, who was President Bill Clinton's chief of staff and President-elect Obama's transition director, has just released Change for America: A Progressive Blueprint for the 44th President.

Paul Krugman, the Bush-bashing New York Times columnist, endorsed Emanuel's enthusiasm: "Progressives hope that the Obama administration, like the New Deal, will respond to the current economic and financial crisis by creating institutions, especially a universal healthcare system, that will change the shape of American society for generations to come."

Arianna Huffington had called Klein's book "prophetic". As the Obama team began drawing up plans, she proved just how right she was, declaring: "A crisis is a terrible thing to waste. And it might be this particular crisis that will make it possible for the Obama administration to do some really innovative, bold things on healthcare, on energy independence, on all the areas that have been neglected."

None of this should surprise us. It's crazy to think that most governments will respond to a crisis by reducing their own powers and deregulating the economy, as Klein would have us believe. Political leaders naturally respond to crisis by riding in as the man on the white horse and taking control.

As Rick Perlstein, liberal historian, wrote: "The Oval Office's most effective inhabitants have always understood [that a crisis is the best opportunity to make radical change]. Franklin D Roosevelt hurled down executive orders and legislative proposals like thunderbolts during his first hundred days, hardly slowing down for another four years before his window slammed shut; Lyndon Johnson, aided by John F Kennedy's martyrdom and the landslide of 1964, legislated at such a breakneck pace his aides were in awe. Both presidents understood that there are too many choke points our minority-enabling constitutional system, our national tendency toward individualism and our concentration of vested interests to make change possible any other way."

Robert Higgs, the libertarian historian, is less enthusiastic. In Crisis and Leviathan, he demonstrated that government growth in the US has not been slow and steady, year in and year out. Rather, its scope and power tend to shoot up during wars and economic crises.

Occasionally, around the world, there have been instances where a crisis led to free-market reforms, such as the economic reforms in Britain and New Zealand in response to deteriorating economic conditions. Generally, though, governments seek to expand their power, and they take advantage of crises to do so. But they rarely spell their intentions out as clearly as Rahm Emanuel did.

On the economy, Obama is trying to scare the American people in order to ram through a progressive agenda

"Profound economic emergency," the president says. Failure to pass his spending plan could "turn a crisis into a catastrophe". Any delay will mean "paralysis" and "disaster". It's all out of the "shock doctrine" playbook: scare people to death and then demand that your agenda be enacted without delay.

Naomi Klein made waves two years ago with her book The Shock Doctrine, in which she claimed that conservative governments use crises to ram through free-market policies. As she put it in an interview: "The Shock Doctrine is a political strategy that the Republican right has been perfecting over the past 35 years to use for various different kinds of shocks. They could be wars, natural disasters, economic crises, anything that sends a society into a state of shock to push through what economists call 'economic shock therapy' – rapid-fire, pro-corporate policies that they couldn't get through if people weren't in a state of fear and panic."

And that's just what we're seeing today – only in reverse.

Last year the US economy was hit with one shock after another: the Bear Stearns bail-out, the Indymac collapse, the implosion of Fannie Mae and Freddie Mac, the AIG nationalisation, the biggest stock market drop ever, the $700bn Wall Street bail-out and more – all accompanied by a steady drumbeat of apocalyptic language from political leaders.

And what happened? Did the Republican administration summon up the spirit of Milton Friedman and cut government spending? Did it deregulate and privatise?

No.

It did what governments actually do in a crisis – it seized new powers over the economy. It dramatically expanded the regulatory powers of the Federal Reserve and injected a trillion dollars of inflationary credit into the banking system. It partially nationalised the biggest banks. It appropriated $700bn with which to intervene in the economy. It made General Motors and Chrysler wards of the federal government. It wrote a bail-out bill giving the secretary of the treasury extraordinary powers that could not be reviewed by courts or other government agencies.

Now the Obama administration is continuing this drive toward centralisation and government domination of the economy. And its key players are explicitly referring to heir own version of the shock doctrine. Rahm Emanuel, the White House chief of staff, said the economic crisis facing the country is "an opportunity for us". After all, he said: "You never want a serious crisis to go to waste. And this crisis provides the opportunity for us to do things that you could not do before" such as taking control of the financial, energy, information and healthcare industries.

That's just the sort of thing Naomi Klein would have us believe that free-marketers like Milton Friedman think. "Some people stockpile canned goods and water in preparation for major disasters," Klein wrote. "Friedmanites stockpile free-market ideas." But that is exactly what American left-liberals have been doing in anticipation of a Democratic administration coming to power at a time when the public might be frightened into accepting more government than it normally would. For instance, the Centre for American Progress, run by John Podesta, who was President Bill Clinton's chief of staff and President-elect Obama's transition director, has just released Change for America: A Progressive Blueprint for the 44th President.

Paul Krugman, the Bush-bashing New York Times columnist, endorsed Emanuel's enthusiasm: "Progressives hope that the Obama administration, like the New Deal, will respond to the current economic and financial crisis by creating institutions, especially a universal healthcare system, that will change the shape of American society for generations to come."

Arianna Huffington had called Klein's book "prophetic". As the Obama team began drawing up plans, she proved just how right she was, declaring: "A crisis is a terrible thing to waste. And it might be this particular crisis that will make it possible for the Obama administration to do some really innovative, bold things on healthcare, on energy independence, on all the areas that have been neglected."

None of this should surprise us. It's crazy to think that most governments will respond to a crisis by reducing their own powers and deregulating the economy, as Klein would have us believe. Political leaders naturally respond to crisis by riding in as the man on the white horse and taking control.

As Rick Perlstein, liberal historian, wrote: "The Oval Office's most effective inhabitants have always understood [that a crisis is the best opportunity to make radical change]. Franklin D Roosevelt hurled down executive orders and legislative proposals like thunderbolts during his first hundred days, hardly slowing down for another four years before his window slammed shut; Lyndon Johnson, aided by John F Kennedy's martyrdom and the landslide of 1964, legislated at such a breakneck pace his aides were in awe. Both presidents understood that there are too many choke points – our minority-enabling constitutional system, our national tendency toward individualism and our concentration of vested interests – to make change possible any other way."

Robert Higgs, the libertarian historian, is less enthusiastic. In Crisis and Leviathan, he demonstrated that government growth in the US has not been slow and steady, year in and year out. Rather, its scope and power tend to shoot up during wars and economic crises.

Occasionally, around the world, there have been instances where a crisis led to free-market reforms, such as the economic reforms in Britain and New Zealand in response to deteriorating economic conditions. Generally, though, governments seek to expand their power, and they take advantage of crises to do so. But they rarely spell their intentions out as clearly as Rahm Emanuel did.

America shouldn't try to correct its record-high trade imbalance with China by rushing to increase exports

As US Treasury secretary Henry Paulson meets in Beijing with Chinese vice-premier Wu Yi to discuss the US-China trade balance, the US commerce department has just released its monthly report on the widening trade deficit. Journalists report this in hand-wringing terms that consistently reflect little understanding of real economics. "Oh no, imports from China are up," blares my radio. "The only solution is to increase American exports to China."

And that's supposed to be the free-trade position, a counter to the argument for tariffs or other coercive measures to prevent China from forcing its products on innocent American consumers. (I'm omitting the safety and health problems with Chinese products for now, as we heard the same economic complaints when Japan was the biggest non-white exporter to the US. Somehow we've never worried so much about imports from Canada, the UK and Germany.)

But this whole framework is misguided. Twenty-four years ago in the Cato Journal, the economist Ronald Krieger explained (comment beginning on page 667) the difference between the economist's and the non-economist's views of trade. The economist believes that "The purpose of economic activity is to enhance the wellbeing of individual consumers and households." And, therefore, "Imports are the benefit for which exports are the cost." Imports are the things we want - clothing, televisions, cars, software, ideas - and exports are what we have to trade in order to get them. (I see that Tim Worstall made the same point just last month on Comment is Free in response to the German foreign minister.)

Adam Smith wrote in 1776: "Nothing can be more absurd than this whole doctrine of the balance of trade." When two parties trade, each expects to gain. It doesn't matter whether they live in different neighbourhoods, different states or different nations. Each of us seeks to give away as little of our own wealth as possible to get as much possible from others. And as consumers pursue their wellbeing, trade will inevitably balance, though monthly statistics will offer many "imbalances" to raise alarms about. Secretary Paulson shouldn't worry too much about increasing exports, and he definitely shouldn't pressure the Chinese to send American consumers fewer products.