Posts Tagged Neoliberalism

The Questionable Record of Neoliberalism

Now, I suppose, is as appropriate a time as any to discuss the policies generally known as neoliberalism/free market economics: tax and spending cuts, union busting, deregulation, privatisation and free trade, and how they have fared in practice. Unsurprisingly, those on the right defend neoliberalism’s record. However, successes have been over exaggerated, while in cases of clear success, a closer look reveals policies which are anything but ‘neoliberal’. I’ll take a brief look at some countries or sets of countries which are commonly purported to show the success of these policies: the US & UK, Chile, Hong Kong & Singapore, and Scandinavia. I believe that in none of these instances do we get a clear example of neoliberal policies succeeding economically.

The USA/UK

The US and UK had similar narratives during their transition to neoliberal policies. After a period of stagflation, a ‘strong’ politician (Ronald Reagan and Margaret Thatcher, respectively) rose who was willing to enact drastic reforms. The narrative here can be exaggerated – pro market reforms (eg deregulation under Carter) and economy-wide trends (the decline of manufacturing) preceded these two governments. Nevetherless, utilities were privatised, unions were weakened, direct taxes (mostly top tax rates and corporation taxes) were slashed, and various regulations were either cut down or replaced with a more ‘neoliberal’ model. Obviously some ‘free market’ purists will always claim it was not enough, but it was a substantial move in the neoliberal direction, and as such we should have seen clear benefits.

Economic growth under these two governments was decidedly average. If we measure from peak to peak in the business cycle to average out fluctuations, per capita growth under Thatcher comes out at 2.44% (1978-88), while Reagan comes out at 2.3% (1979-90). If we just measure the years they were in office, the respective figures are 2.05% and 2.77%. Whichever way you paint it, growth was not far from its 2.5% trend.

In fact, in both countries the ups and downs of the economy surely had more to do with monetary policy than anything else. Interest rates went as high as 17% in the UK and 19% in the US; around 1983 they had more than halved, dropping down to about 8%; following this GDP started to recover. Insofar as policy goes, the conventional story that neoliberal policies rescued their respective countries is a half truth at best. Thatcher benefited from an oil boom which helped her to fund her various preferred programs (including the Falklands War, which helped buy off discontent). Reagan’s policy of cutting taxes but increasing military spending during a recession was effectively Keynesianism. Ultimately, there is little evidence that the headline reforms were responsible for the overall performance of the economy in either country.

Singapore & Hong Kong

These two countries have certainly had impressive peformances over the past few decades, overtaking most developed countries for GDP per capita. For this reason, they are often touted as free market success stories. This is misleading in a couple of ways.

The narrative about the success of any policy in Singapore and Hong Kong is complicated by the fact that they have some obvious advantages over everywhere else, no matter their policies (within reason). First, they are port cities, which means that unless there are serious political problems, they will be a conduit for a large degree of trade no matter their economic policies. Second, they are city states, which reduces administrative and transaction costs, both in the public and private sectors. Third, Hong Kong does not have to fund a military due to protection from China, which helps to explain its low tax rates.

In any case, the two countries are anything but a paragon of the ‘free market’ in action. In Hong Kong, the government owns all of the land. In Singapore, the government owns about 60% of the land, heavily regulating its usage, while government-linked corporations produce up to 60% of GDP. Both countries have public health care, transportation and education, public housing programs and safety nets, and Singapore owns public utilities while Hong Kong regulates them tightly.

Clearly, whatever the success of these countries is caused by, it is not simply ‘free markets’.

Chile

The story painted usually painted about Chile is that it went from a poor country to one of the richest in Latin America after ‘free market’ reforms were put in place by the dictator Augusto Pinochet following the 1973 coup d’etat. What actually happened (from a policy perspective) was much more of a mixed bag, combining both neoliberal programs with long-standing state directed ones.

Key industries remained either directly in the hands of the state (such as copper and oil) or in receipt of subsidies, advice and management, and training through the government organisation CORFO (such as forestry and fishing). These state-directed industries experienced massive growth and fueled an export boom, which drove the economy for decades to come. It is true that some industries, such as banking, were privatised and deregulated, but this was far from a success: it produced a financial bubble, which collapsed in 1982, reducing GDP by 14%, back down to where it was in 1970. Only 5 out of the 19 banks that had been privatised remained, (reluctantly) bailed out by the government, which also had to reinstate capital controls and other interventions. Furthermore, once democracy was reinstated in the 1990s, governments moved leftwards and embarked in significant, successful poverty reduction programs.

This is clearly at odds with the idea of Chile as a free market success story. In fact, I’d go so far as to say that in the case of Chile, success was clearly concentrated in areas with obvious state intervention, while failures were concentrated in those without.

Scandinavia

Scandinavian countries are a synonym for economic success, faring well in GDP per capita, but even better in overall standard of living indexes. So it is no surprises that both sides of the debate claim them as their own. The claim is more perplexing when coming from the right, however, since it requires them to effectively claim that countries which are clearly social democracies are not social democracies. It is generally asserted that beneath the high tax rates, these countries are ‘economically free’, which roughly translates as lightly regulated. So are they?

Disregarding such nonsensical indexes as Heritage and heading for the more credible OECD, we can see that Scandinavian countries have average to low strength regulatory frameworks by the standards of developed countries:


In case you were wondering, there is no clear correlation between this index and GDP growth.

While, with the exception of Sweden, the Scandinavian countries have below average regulation indexes, if this were causing their success then surely the US, UK and Spain would be doing well, too? Perhaps low regulation must be combined with a strong safety net and public services to work. More likely, the Scandinavian countries are unique and have specific institutions that cannot necessarily be emulated elsewhere, something I’ve argued before.

In fact, that last point is true of every country. The path to development and sustained growth  is different for every country, and the recipe for growth cannot be captured in vague platitudes about a ‘free market’, completely devoid of context. I expect that there exist countries where neoliberal reforms are appropriate, but these are far outweighed by one where they are not. The people best suited to decide which reforms are appropriate are those who live in and understand the country, not outsiders with a one size fits all model that they see as a neutral template. This was clear even in Chile, where the national military were reluctant to abandon the state-driven model on which they had always relied.

I expect those who support neoliberalism might look at this article and conclude that countries would do even better if only those last pesky statist policies were removed. But this is a superficial perspective. Why were the state-supported industries much more successful than the privatised ones in Chile? Why do Scandinavian countries do well with high tax rates and big welfare states, when many countries with similar strength regulatory frameworks and smaller welfare states do much worse? Why does every purported ‘free market’ success story collapse under close inspection, and why are there no clear real world examples of the ideal being implemented and working? Until I can see such a case I will remain unconvinced of the virtues of the elusive free market.

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‘Free Market’ Double Standards 6.0

It’s been a while since I did my last free market double standards post, which received some flak. To be honest, I think some of the criticisms were fair. Having said that, I don’t search for these contradictions just to wind up libertarians (though that can be a desirable side effect); generally they are quite obvious once you look past the way the right frame the debate.

I think the nature of many right wing arguments lends itself to contradiction: the shape shifting free market, which seems to mean something different to everyone; the nature of reactionary arguments, which causes people to make bizarre claims about proposed policies (see 5). Many right wingers also, despite themselves, end up supporting Republican candidates, which of course lends itself to all manner of contradiction (18).

I’ve also got some more economic theory ones in here. In particular, I’ve noticed economists ask some tough questions about new models, seemingly forgetting the various responses they have to the same criticisms of their own models (or if they don’t have responses, forgetting to apply these apparently pertinent criticisms to their own models). There are no links when I consider a point to be well established.

Anyway, enough preamble – let’s commence:

1. Libertarians emphasise that people didn’t consent to the state. They do not ask questions about whether people consented to the existing property distribution.

2. Mises and other libertarians thought socialism is about supposedly superior men running the world, which is wrong. Mises also said:

You have the courage to tell the masses what no politician told them: you are inferior and all the improvements in your conditions which you simply take for granted you owe to the effort of men who are better than you.

in a letter to Ayn Rand (p. 996).

3. NGDP targeting proponents will generally reference the Lucas Critique during discussions of modern macro. However, I have yet to see one apply the critique to NGDP targeting, when it is actually incredibly pertinent.

4. NGDP targeters defend supposed incidences of Central Bank’s inability to control NGDP (like 2008) by arguing that the CB must announce a policy rule for it to work, but simultaneously hold up Israel and Australia – where the CB has done no such thing – as examples of NGDP targeting working.

5. Stephen Williamson – and I’m sure he is not the only one – has at different times claimed QE will have no effect, and that it will produce runaway inflation.

6. Austrians generally present businesses as smart and forward looking, but their business cycle theory effectively asserts business decisions will be wildly thrown off by temporary short term interest rates changes.

7. Milton Friedman emphasised that regulatory capture would create a lot of problems, but also suggested looking at the amount of regulations, rather than their actual enforcement, as a guide to the ‘level’ of regulation. So he simultaneously endorsed the bizarre idea that regulation is a dial we can turn up and down, and the idea that it’s really more complicated than that.

8. Milton Friedman argued that businesses have no social responsibility, but should not engage in fraudulent behaviour, and “stay within the rules of the game.” Which is a form of social responsibility.

9. Milton Friedman endorsed both the Friedman Rule and the K-Percent Rule. They are contradictory.

10. Anarcho-capitalists are against the state, preferring insurance companies to provide what are commonly known as ‘public goods.’ They also have no trouble with monopolies. So if an insurance company that uses force is the only game in town (and owns all the land), how is that different from a state?

11. According to libertarians, if you can possibly leave a job, your freedom cannot be impinged during the job. Of course, many of us are free to leave our countries but libertarians still complain about coercive legislation.*

12. Libertarians are often resistant to the applicability of behavioural economics. Yet companies use behavioural insights in advertising and marketing to expand profits, something that’s usually a sign of efficacy in a libertarian world.

13. Libertarians generally oppose fraud in abstract, but many have the same knee-jerk reactions against prosecuting any specific instance as they have to most questioning of business practice.

14. David Smith (and other austerity defenders) tried to pin the decline in UK output on bank holidays. But this implies a day contributes a significant amount to output, so during every working day the economy must have boomed!

15. Again, austerians such as David Smith can’t decide whether to defend austerity by insisting it’s working (see 14) or whether it isn’t happening at all.

16. Economists complain a lot about sticky wages causing unemployment. But as of yet, I have yet to see one volunteer for a pay cut!

17. Economists love ceteris paribus. But apparently if preferences are held constant in a model, it must be worthless.

18. Greg Mankiw’s textbook analysis of the financial sector implies asset bubbles do not have a major effect on the real economy. But he also attributes Clinton’s boom to the internet stock bubble, implying the exact opposite.

19. Generally economists argue they shouldn’t be expected to make accurate predictions about the future. But when one of Steve Keen’s specific predictions did not come true, they took it as grounds to dismiss him (btw, bonus points for reading that entire thread and staying sane).

20. Economists, though few endorse a ‘hard’ version of Friedman’s methodology, will generally reference a derivative of it when pushed. However, when criticising alternative models, they raise questions about their internal mechanics.

21.

What is original in the book is not true; and what is true is not original.

Henry Hazlitt on Keynes’ General Theory, a quote originally attributed to Samuel Johnson.

Neither true nor original, then.

*Note also that Hayek roughly endorsed my position on this, but AFAIK he never drew attention to the workplace.

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‘Free Market’ Double Standards 5.0

The imaginary ‘free market‘, itself a highly contradictory concept, and one that causes its proponents to ignore anything inconvenient to their worldview, has helpfully offered up another 23 examples of its followers either flat out contradicting themselves, or holding a clear double standard in two similar situations.

To clarify the first two: John Bates Clark originated the theory of marginal productivity, which holds that labourers are paid pretty much exactly what their labour is worth. Yet he also endorsed the notion that labour is worthless unless it was combined with capital, and that the division of labour allowed groups to produce more than they could individually. The latter two imply that you cannot separate a single labourer’s productivity from other factors.

1. The division of labour is an amazing phenomenon that allows groups of labourers to cooperate to produce more than they could if they worked alone. But each labourer has their own discernible marginal value product (which they are, obviously, paid because free market).

2. Labour has nothing without capital; that entrepreneurs combine their capital with labour justifies their profits and benefits both sides. But labour, on its own, has a discernible MVP (which…see above).

3. Reports of stagnant median incomes since the 70s are exaggerated. Simultaneously, stagnant median incomes since the 70s refute the broken link between growth and happiness.

4. The mechanics of a theory don’t matter, all that matters are its predictions. But all theories need microfoundations.*

5. We shouldn’t use crude indicators to look at monetary policy, only NGDP. Even though fiscal stimulus is functionally similar, we shouldn’t apply the same logic to it.

6. We were upgraded – proof that austerity works. We were downgraded – this is why we need more austerity.

7. Sin taxes don’t discourage addicts because they need the products that much. High taxes on the rich, however, will discourage them, despite the fact that they are the most driven and innovative individuals in society.

8. We emphasise choice and market diversity, but model the economy as a single person with set preferences who responds robotically to incentives, and as such does not have any real choice.

9. The market is a democracy, and each dollar is a vote. Inequality is not a problem.

10. If rich people felt they were getting a good deal from taxes, they’d pay them. But benefits cause people to free ride.

11. Keynes hated jews, and was evil – this is an argument against his economics. Hayek is better.

12. If anything bad happens under capitalism, it’s not true capitalism. But ‘true socialism hasn’t been tried’ is a silly argument.

13. We will emphasise that all government spending creates crowding out, but remain silent when cuts do not crowd in.

14. Local knowledge is great for coordinating prices, despite the fact that market participants having disparate knowledge opens the door to fraud.

15. High pay doesn’t matter, you’re just jealous. But the pay of union bosses and members is ground for dissent.

16. Wages are too high, it’s increasing company’s costs. Profits are never too high.

17. Large firms benefit from economies of scale. Supply curves slope upwards, implying the opposite.

18. Force is bad, except if we’re forcing countries to accept ‘free trade’ agreements.

19. We must look at how economic systems and decisions affect all groups of people and across time, rather than just one and at the time it is implemented. But we adopt a Anglo-centric perspective on capitalism, ignoring its global impact.

20. The ‘Golden Age’ of Keynesian economics inevitably resulted in the stagflation of the 1970s. The crisis of 2008 was unrelated to the economic paradigm of the past few decades.

21. The market is highly accurate at rewarding merit: hands off, governments! But wages are always too high, the government should erode them.

22. Bankers cannot be blamed for the crisis; they were simply responding to incentives. Poor people, however, can be blamed for taking out mortgages.

23. Capitalists always seek to undermine competition and free enterprise. Capitalism is a great system.

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The Poverty of Mainstream Debate, Part III: On the Doubling Down of Neoliberalism

Neoliberal economics – otherwise known as ‘free market economics’ or ‘The Washington Consensus’, appears to have doubled down recently, despite clear empirical failings. Mainstream debate has no shortage of economists preaching the virtues of deregulation, austerity and trickle down, and governments across the world seem to be listening. How did this happen? Probably somewhere between people’s refusal to abandon an entrenched ideology, the influence of the rich and powerful, and the lack of a sufficient alternative. In any case,  here’s a series of facts that demonstrate quite how immune to evidence mainstream debate has become. I won’t offer much analysis here, just the neoliberal narrative of the crisis, contrasted with the facts, which I feel speak for themselves. This post is with a focus on the UK, but to some degree it applies to the US and Eurozone, too.

Firstly – the narrative goes – forget the ‘banking crisis’ – that’s over, now the real problem is the fiscal crisis:

Nevermind that debt is historically low, and that the market – which we praise for it’s ability to collect dispersed knowledge elsewhere – is saying that there isn’t a fiscal crisis:

In the UK, this invisible fiscal crisis is often pinned on the previous Labour government for spending too much in the boom years, long before the 2008 crash:

Note the fairly minimal deviations between taxes and spending prior to the crisis, during which, predictably, tax revenues fell and welfare spending shot up. Also note the refusal in the states to pin the deficit on Bush, whose pre-crisis policies actually did create a large chunk of the deficit. Anyway, I digress

Many on the right also claim that reported ‘debt’ is a red herring, and ‘off balance sheet’ obligations are far larger, for example future pensions:

I should note that this is with the Coalition’s pension reforms, but those reforms weren’t exactly revolutionary – just a bit of inflation reindexing and a few years of pay freezes. It’s pretty clear: at no point were pensions costs in any way a time bomb.

The right occasionally make a curtsy to the need for growth. But according to them, the best cure for that is supply-side reforms. Deregulation:

…despite the fact that the countries where it is often claimed we need deregulation, are lowest on the regulation index above. And no, there is no (inverse) correlation between regulation and growth.

They also claim we need to cut taxes, particularly on the rich or ‘job creators’:

The above is a graph from a study by Thomas Piketty, Emmanuel Saez & Stefanie Stantcheva, showing the lack of correlation between cuts in marginal tax rates and growth.

Finally, there’s the policy the right always have time for – austerity! Magically, they claim, it achieves all of our goals at once. Firstly, it helps us balance the budget:

The bottom line, fleshed out with a lot of evidence, is one that others — including me and Christy Romer — have been arguing for a while: expansionary fiscal policy under these conditions doesn’t just aid the economy in the short run, it may well even improve the long-run fiscal prospect. And austerity may be self-defeating even in fiscal terms.

and secondly, it boosts growth by allowing the private sector to fill the gap:

This paper investigates the short-term effects of fiscal consolidation on economic activity in OECD economies. We examine the historical record, including Budget Speeches and IMF documents, to identify changes in fiscal policy motivated by a desire to reduce the budget deficit and not by responding to prospective economic conditions. Using this new dataset, our estimates suggest fiscal consolidation has contractionary effects on private domestic demand and GDP.

Austerity for everyone!

This is part of the reason my blog is so abstract – the policy prescriptions of neoliberalism have survived despite being obviously wrong, so all that’s left is to attack the intellectual underpinnings. Whilst I’m aware that neoclassicism =/= neoliberalism, the latter relies on the former for a large part of its assertions about the effects of taxes, regulation and the labour market. If this intellectual justification disappears, neoliberalism will have little left to stand on.

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