Anti-neoliberalism is not enough

Bashing this bogeyman is no substitute for a new policy program that works.

World Economic Forum, CC BY-SA 2.0, via Wikimedia Commons

Matt Yglesias has been writing a series of posts on “neoliberalism and its enemies”, and I strongly recommend the whole series. In Part 1, he argues that the shift to “neoliberalism” in the 1980s was far less dramatic than popularly believed, and that a more consequential shift was the rise of anti-growth NIMBYism. In Part 2, he argues that trade protectionism can be useful for helping the U.S. preserve its military capabilities vis-a-vis China, but is generally harmful to people’s standards of living. In Part 3, he argues that income redistribution has been a lot more successful than anti-neoliberals believe, and shouldn’t be abandoned. And in Part 4, he argues that many of the problems people attribute to neoliberalism were actually just problems of deficient aggregate demand after the Great Recession.

There are many good points here. I strongly agree with some of Yglesias’ arguments (especially on the harms of NIMBYism and the usefulness of redistribution), and I disagree with some others, but they’re all worth reading. Today, though, instead of going through Matt’s points and responding to them one by one, I want to give some of my own thoughts on neoliberalism — and, more importantly, on the progressive economic paradigm that styles itself as a repudiation of neoliberalism.

Neoliberalism was more important as an organizing principle than as a set of policies

One thing I think Matt gets very right is that the shift to neoliberalism in actual U.S. policy wasn’t nearly as dramatic as our potted histories would have us believe. Pretty much every anti-neoliberal manifesto repeats a catechism about how the late 20th century saw America turn toward low taxes, deregulation, smaller government, and free markets in general, leading to increased inequality and generally worse conditions for the working class.

But is it true? Did that really happen? In some ways — lower tariffs, weaker unions, deregulation of the financial industry — the story fits the facts. In many ways, however, the potted history that we see hammered home ad infinitum is a caricature of what really happened. I wrote a post about this a couple of years ago:

Was there really a "neoliberal turn"?

For example, take taxes. Top tax rates were cut, but the actual amount of their income that the rich pay in taxes didn’t really fall much over the whole period:

Source: CBO

(And yes, it’s the same when you add in state and local taxes.)

Meanwhile, as Yglesias notes, the U.S. welfare state actually got bigger in the “neoliberal” age, even before the 2008 crisis:

Source: OWID

Poverty fell substantially as a result of this increased redistribution. Inequality did rise, but by somewhat less than the headline numbers would have us believe. Median incomes continued to grow, albeit a bit less slowly than in the postwar period.

And regulation continued to grow overall in the neoliberal era, despite some high-profile deregulations in industries like finance.

That said, I do think the shift in economic thinking and policymaking from the late 1970s through the 1990s was important. And although the word is exhaustingly overused and a little bit precious-sounding, I do think “neoliberalism” is probably the best way to describe this shift.

Basically, I think economic paradigms are more important as ways of thinking about policy, rather than as lists of actual policies. Policy ideas don’t just appear out of the blue — think-tankers and writers and academics have to generate ideas somehow. And paradigms like “neoliberalism” become sources for ideas. Once you accept the general thesis that government intervention in the economy is bad except in specific well-circumscribed exceptions, then you start thinking “Hmm, what are some ways we could help America by limiting the government?”. This will guide your brainstorming toward ideas like lowering tariffs, simplifying the welfare state, deregulating certain industries, or replacing pollution bans with cap-and-trade markets.

And even more importantly, it will guide your ideation away from things that seem like they would obviously increase the scope of government. For example, perhaps it would have been good for the U.S. to do more active industrial policy to promote solar power and electric vehicles back in 2002. But very few people were proposing that — not because the idea had been tried and rejected, and not even because it would be hard to make a theoretical case for it under basically “neoliberal” assumptions,¹ but because back in 2002, the notion that government had a central role to play in the growth of new industries didn’t fit with the popular paradigm of “How can we get government out of the way?”. Green industrial policy was too out-of-the-box in the neoliberal age.

This principle also applies not just to ideation but to gatekeeping of ideas as well. It’s common to think about policies not just in terms of their final results, but in terms of intermediate goals — “Will this strengthen workers?”, or “Will this simplify the tax code?”, or “Will this give more power to the states?”, etc. Neoliberalism told us that “Will this limit the scope of government?” was a good intermediate goal for policy.

This, I believe, pushed many thinkers to reframe big-government policies as government-limiting ones. A prime example is the Earned Income Tax Credit. The EITC is a welfare policy — it gives cash to poor people. Along with the similarly designed Child Tax Credit, the EITC is a big part of why redistributive welfare spending in America went up in the 90s and 00s. But by framing it both as a tax cut and as alternative to the traditional welfare program (AFDC/TANF), liberals were able to get it past quite a few intellectual gatekeepers.

Neoliberal gatekeeping also prevented quite a few interesting policy ideas from getting seriously considered. In the 2000s, China severely undervalued its currency — pushing back against this would have mitigated the First China Shock and probably led to a more balanced global economy and fewer disruptive effects on U.S. labor markets. Many manufacturers did actually call for the U.S. to label China as a currency manipulator, which would have allowed countervailing steps like conditional tariffs or currency market intervention. The idea was out there.

But the Bush administration chose not to do it. Part of that was geopolitical — Bush wanted China’s support in the War on Terror — but part of it was that things like tariffs and currency market intervention seem like big government mucking around in the economy, and in the 2000s that was seen as something to be afraid of. So even though a successful pushback against China’s currency manipulation would have actually reduced the overall distortion in global markets, the steps required to do that were considered unacceptable because they didn’t fit the image of neoliberalism.

So I think that to gauge the true impact of neoliberalism on policy, you have to look at the proverbial dog that didn’t bark — you have to think about what didn’t get done, rather than just what did get done. And I think that with the benefit of hindsight, we can identify some policy failures that resulted from having to squeeze economic thinking into a paradigm of limited government.