David R. Henderson  

Sumner on World Economic Growth

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This morning, Scott Sumner has an excellent post on economic growth and the extent to which it is due to what he calls "neoliberal" reforms. He never defines "neoliberal," but it's clear from the context and the specific policies that he names that he means "liberal" in the original sense of the word: smaller government as a % of GDP, lower marginal tax rates, less regulation, etc.

I hadn't realized until reading his article just how strong the evidence is that those policies caused the countries that adopted them to have their per capita GDP grow relative to those that didn't. He provides evidence on the United States, Britain, France, Germany, Singapore, Chile, Argentina, Japan, and a few others.

One excerpt:

The few countries that continued to gain on us were either more aggressive reformers (Chile and Britain), or were developing countries that adopted the world's most capitalist model. (According to every survey I have seen HK and Singapore are the top two in economic freedom.)

Chile is the most famous Latin American example of neoliberal reforms. Note how in 1980 they were barely half as rich as their neighbor Argentina, and are now a bit richer. Almost every serious development economist attributes their relative success to their neoliberal reforms.

Scott sums up:
There are two kinds of economists. Those who read the Economist (or FT) every week, and have a pretty good sense of what is going on in the world, and who know why some countries are doing better than others. And those who are lost in their ivory tower doing arcane research. The latter group is often much more highly skilled than I am, and come up with more important new ideas than I ever will. But when talking to this group I often find they are totally oblivious to the neoliberal revolution of the past 30 years. (BTW, this isn't a jab at the left, most of the guys I am thinking of are right-wingers.)

I think this says it well, except for one thing: I wish Scott, who comes up with some of the best stuff out there, would stop putting himself down. Of course, this "latter group" comes up with "more important new ideas" than he ever will, but that's an unfair comparison: he's comparing one man, himself, with a "group" of undefined size. Assuming he has in mind roughly the group I think he has in mind, per person he's come up with more interesting ideas than they have.

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COMMENTS (3 to date)
Rebecca Burlingame writes:

All the more interesting, considering the bashing the Chicago school has taken lately. Perhaps we are just now gaining a historical perspective as to what happened in the early eighties. I still remember a phone conversation with a friend in finance back then, who said, the rich are about to get a lot richer. Of course at the time, I didn't have a clue as to why.

Doc Merlin writes:

@Rebecca: of course the poor also got a heck of a lot richer in the countries that had neoliberal reform.

fundamentalist writes:


"the rich are about to get a lot richer."

That's true, but the explanation is very simple. Almost all of the gains in income over the past two decades have happened in financial services and federal government work. Very few other professions enjoyed real gains in income over that period. The reason that financial services and federal government workers did do well is that they receive new money first. Contrary to mainstream econ, new money (created by expanding credit) does not arrive at every household in the US on the same day. It enters the economy at a specific place at a specific time and gradually spreads out over the country for about 4 years. Financial service firms and the federal government get the new money first, so they get to spend/invest it before prices rise. Workers in other industries receive the new money much later, usually after prices have risen.

So the inflationary policies of the Federal Reserve act to transfer wealth from the last people to receive new money to the first people to receive it.

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