Was there really a "neoliberal turn"?

Yes, sort of, but it's much more complicated than you think.

I noticed that the think tank formerly known as the Neoliberal Project, and now known as the Center for New Liberalism, has changed its name:

Neoliberal 🌐🇺🇦 @ne0liberal

We have decided to retire the "Neoliberal Project" moniker. It has been a move years in the making, and the new website was the perfect opportunity to finalize that shift . Why? Because we believe CNL's mission is too important to be distracted by fights over nomenclature

This is not wholly unexpected. These folks, who are Clintonite center-left liberals, had adopted the moniker “neoliberal” as a sort of ironic stunt, after increasingly looney and strident Twitter socialists started calling Barack Obama, and any Democrat not aligned with the Bernie faction, “neoliberal”. Shortly after this, I was elected as Twitter’s “Chief Neoliberal Shill” for 2018, in a series of rigged online polls, before losing the title to Matt Yglesias by 2 percentage points the following year. It was always highly unlikely that a name that emerged from this sort of ironic Twitter inside-baseball would catch fire with anyone who isn’t terminally online.

As it happens, though, the word “neoliberal” is already in use by serious intellectuals (as well as some not-so-serious ones), to describe the spate of policies unleashed in the U.S. and UK under the Reagan and Thatcher administrations in the 1980s (and partially imitated in some form by most European and East Asian countries in the following decades). Brad DeLong, who as a Clinton Administration official in the 90s was personally involved in the policy change, discusses it here:

Unsatisfactory Musings on þe Rise of þe Neoliberal Order

I’m paraphrasing heavily from many sources here, but basically the “neoliberal turn” is supposed to have involved the following:

• Lower taxes

• Cuts to social welfare

• Deregulation

• Free trade

• Privatization

• Anti-union policy changes

This was certainly the policy package advocated by late-20th-century University of Chicago economists like Milton Friedman and George Stigler. And it’s more or less the policy package that Republican politicians campaigned on in the 80s and 90s. But as Brad and I discuss in the most recent episode of our podcast Hexapodia, from the very start the reality of the policies that got implemented during the “neoliberal turn” was far more nuanced and ambiguous than this simple story would suggest. Almost none of the above bullet points provides a good simple description of what actually got implemented in the U.S. Even as some forms of government intervention in the economy were being slashed, other forms were being built up. The result was an economy where the government does somewhat different things, but not necessarily less.

So let’s go through a list of the changes that were supposed to have happened to the U.S. in the neoliberal era.

Did taxes go down in the neoliberal era?

The U.S. came out of World War 2 with extremely high top marginal income tax rates. John F. Kennedy cut these substantially, and Reagan cut them again twice. Reagan and Clinton also cut capital gains tax rates somewhat, though these had traditionally not been that high:

There was also a significant cut in the top corporate income tax rate in 1986, from 46% to 34%.

But these cuts in tax rates didn’t result in a decrease in tax revenue as a share of GDP. Individual income tax receipts stayed steady at about 8% of GDP after 1981, and corporate tax receipts — which had fallen steadily in the supposedly social-democratic postwar decades — stabilized under Reagan and his successors at about 1.75% of GDP.

Source: Tax Policy Center

So in a very real sense, the neoliberal-era tax rate cuts didn’t actually cut taxes much at all.

But did the system become less progressive? Did those cuts in top marginal tax rates shift the tax burden more toward the middle and working classes and away from the rich? Well…no. The actual percent of income paid to the federal government by the top 1% held pretty steady under Reagan and Clinton, while the lowest quintile paid slightly less.

Source: CBO

The same holds true for the fraction of tax revenue paid by the various income groups. And the pattern looks the same when you add in state and local taxes.

How can top tax rates have been cut by so much, but federal tax revenue as a fraction of GDP, the actual tax rates paid by the rich, and the fraction of taxes paid by the rich all stayed pretty much the same?

Well, one factor is inequality. Tax rates became less progressive under Reagan, but they were still progressive, and the incomes of the rich increased by much more than the incomes of the middle and working classes during the neoliberal era. So the rich paid more because they earned more. (Some people think that this rise in inequality was itself caused by low tax rates — the idea being that rich people negotiated harder for higher salaries because they’d get to keep more of it. This doesn’t make a lot of sense, especially for capital gains taxes, but in any case it’s a bit tangential to the point.)

A second reason is “base broadening”. When tax rates were really high, there were a lot of loopholes you could use to dodge taxes if you were rich. But when Reagan cut taxes, he also closed a number of those loopholes. This helped sustain tax revenue.

A third reason is simply pushback from Democrats. Bill Clinton reversed some of Reagan’s tax cuts for the rich, causing taxes paid by the rich to jump upward before falling again later. This illustrates one of the most important reasons that the “neoliberal turn” was not as dramatic as people make it out to be — progressives simply managed to resist or reverse many of the neoliberal policies.

Did welfare get cut in the neoliberal era?

Bill Clinton passed a major welfare reform in 1996, famously declaring that “the age of big government is over”. But public social spending as a share of GDP stayed flat under Reagan and rose slightly under Clinton, before rising substantially under Bush and Obama:

Source: OWID

Reagan might have railed against “welfare queens” in the 70s, but his actual policies did little or nothing to cut them off. As for Clinton’s welfare reform, it focused mostly on one program, AFDC (later TANF), which did in fact wither and mostly die. But Reagan and (especially) Clinton increased spending on the Earned Income Tax Credit, and Clinton and Bush increased spending on the Child Tax Credit, in ways that ended up more than making up for the stagnation in AFDC/TANF spending:

Source: Tax Policy Center

And all this time, government spending on health care was increasing smoothly along with private spending as costs rose. The neoliberals never even tried to cut it:

Source: Peterson-KFF

As for the rise under Bush and Obama, this included things like food stamps, housing vouchers, and unemployment insurance.

Between rising social spending and generally constant tax progressivity, the overall progressivity of the U.S. fiscal system — taxes plus spending — rose during the “neoliberal turn”, even as it stagnated or fell in some European countries:

Source: Lindert (2017)

And the result of this, as measured by the Supplemental Poverty Measure, was a significant fall in poverty rates in the 90s that was not reversed in the Great Recession:

Source: CBPP

It’s easy to argue that we should have increased progressivity and welfare by more than we did. But it’s hard to argue that the neoliberal era was a time when the U.S. welfare state (such as it is) was actually being dismantled.

Did the economy get deregulated in the neoliberal era?

Regulation is a famously hard thing to measure, because regulations aren’t really comparable to each other. You can look at regulatory budgets and staffing, which did dip a bit under Carter and Reagan but then bounced back and rose steadily under Reagan’s successors:

Source: Regulatory Studies Center

You can also look at the number of pages of regulations in the Code of Federal Regulations (which has risen continuously over time) or the Federal Register (which dipped under Reagan and then bounced back), but I’m not sure how much this tells us.

We can also look at specific deregulations. The big deregulations in transportation and energy happened under Carter, with only a little under Reagan. But the main industry that got deregulated in the neoliberal era was finance. Major financial deregulations happened under Carter, Reagan, and (especially) Clinton. Many progressives now point the finger at the Gramm-Leach-Bliley Act of 1999 (which repealed Glass-Steagall) as the main culprit in the financial crisis of 2008, but they are wrong; the crisis happened not because of relationships between commercial banks and investment banks, but because of out-of-control use of over-the-counter financial derivatives. This was made possible by the most important financial deregulation of all, the Commodity Futures Modernization Act of 2000 (which Bernie Sanders voted for!). A series of financial market crashes and crises in the 2000s eventually led to the re-regulation of finance with the Sarbanes-Oxley Act under Bush and the Dodd-Frank Act under Obama.

But even as finance was getting deregulated and re-regulated, huge and important areas of the economy were getting more and more regulated. The most important of these was housing, which starting in the 1970s became ever more subject to a dense thicket of local regulations designed to freeze neighborhoods in their existing form. The federal government did nothing to allay this; in fact, the National Environmental Policy Act, passed in 1970, exacerbated the situation greatly by farming out environmental protection to local interests who can now challenge every development project in sight on faux-environmental grounds. As a result, less and less housing got built during the neoliberal era, contributing to our current housing crunch:

There were a number of important regulations in the health care industry during the neoliberal era as well, though I’m not sure how much these contributed to steadily rising costs.

In any case, it’s very difficult to describe the Reagan and Clinton eras, much less the total period of 1980-2016, as an era of uniform deregulation. Some parts of the economy got regulated more, and other parts got deregulated, and it’s not clear which of those was ultimately more important.

Did we embrace free trade in the neoliberal era?

During the neoliberal era, the U.S. led the establishment of the World Trade Organization, which allowed China to enter the world trading system. The U.S. also concluded some important bilateral free trade agreements like NAFTA in 1994. These were important free trade policies (although China didn’t really reciprocate by freeing up its own trade).

But at the same time, when we look at actual measures of trade openness like tariffs, there wasn’t much action; these had almost all been cut in the years before.

Source: Wikimedia

The U.S. did experience an increase in imports as a share of GDP during the Clinton and Bush years, though interestingly not under Reagan:

But there were other big factors at work here too, namely the rise of the internet, which massively facilitated international trade (like containerized shipping had done in earlier years).

And the first decade and a half of the neoliberal era involved some ferocious protectionism as well. The U.S. pressured Japan and Western Europe into appreciating their currencies against the dollar in 1985. And in the 80s and early 90s we engaged in tough trade negotiations with Japan, basically forcing them to buy some of our manufactured products. There was also a push for industrial policy in the late 80s and early 90s, most famously with the establishment of the SEMATECH consortium.

Overall, the neoliberal era did open up the U.S. to trade, but we were already pretty open by then. And Reagan basically wasn’t a free trader at all — the real ramping up of trade didn’t come until the 90s, and the internet and China’s own mercantilist policies played an important role.

Privatization and de-unionization

The other two policies generally associated with the neoliberal turn were privatization and de-unionization. Privatization is mostly a UK thing, where many industries had been nationalized by the post-WW2 socialist government. In the U.S., there simply wasn’t much to privatize. There have been scattered pseudo-privatizations in prisons, schools, and health care, where the government basically contracts out to privately owned companies, but this is very different than selling off government assets, and ultimately the government is still footing the bill.

As for de-unionization, this was very real in the private sector, but it also began in the late 50s. Public sector unions, meanwhile, became much more common in the late 70s, and remained about equally as prevalent in the neoliberal era, up until the Great Recession forced a small decline:

Source: unionstats.com via Dissent

Recall that Reagan’s most famous anti-union action, the breaking of the PATCO air traffic controller strike in 1981, involved a public sector union.

Much of the decline in private-sector unionization was caused by the advent of state-level right-to-work laws, made possible by the Taft-Hartley Act of 1947. These laws really do have a big effect on unionization rates, and on suppressing wages. But almost all of these laws were adopted in the 40s and 50s (or a few in the 2010s). Only Idaho (1985) created a right-to-work law during the Reagan and Clinton years, and only Oklahoma (2001) during the Bush years.

In terms of federal legislation, there was simply very little action on unions during the “neoliberal turn”. There was discretionary regulatory action — the Reagan NLRB was famously hostile to unions. But overall, the anti-union policy turn seems to have begun much earlier, during the hallowed postwar decades. (There were also the impacts of technology and globalization; remember that not everything is driven by policy.)

So was there actually a neoliberal turn at all?

It’s very hard to deny that U.S. economic policy changed substantially from the late 1970s through the 1990s. But when we look at the overall effect of these changes, it’s hard to characterize them as the kind of low-tax, deregulatory, welfare-cutting, free-trading, union-busting “neoliberal turn” that pundits and even many intellectuals typically assume. Inequality increased and unions declined, but much of this was the result of policy changes made decades earlier, during the postwar period we tend to think of as being our closest approximation of social democracy (while some additional fraction was due to external changes like globalization). Deregulation proceeded in some areas but other areas became more tightly regulated. Some kinds of welfare were cut, but others were added, and overall the system became more progressive. The government didn’t drown in a bathtub; it didn’t even shrink. It simply changed.

The neoliberal era was was thus more of a complex evolution than a well-defined revolution. We should expect something similar from the next era as well.

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