Scott Sumner  

I wish you a very neoliberal Christmas

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The world is full of problems, and always will be. Thus there are almost an infinite number of causes that I might advocate. I've decided that my time is most effectively used if I focus on two goals, promoting market monetarism and advocating neoliberalism.

Over the past decade it has become intellectually trendy to argue that neoliberalism is passé, and that this policy regime was pushed too far. As far as I can tell, the backlash against neoliberalism is driven by two factors:

1. The Great Recession was blamed on the excesses of unfettered capitalism.

2. Since the late 1970s the world has moved in a neoliberal direction. During this period, some economic problems have gotten worse, such as economic inequality.

The first point is easy to dismiss, as we've seen that movie before. Recall that the Great Depression was initially seen as being caused by laissez-faire economic policies. There is little doubt in my mind that economists will eventually come to realize that the real problem in 2008 was tight money, just as the causes of the Great Depression were re-evaluated after the publication of the Monetary History.

The second complaint is more interesting. The basic error here is to focus on time series evidence rather than cross sectional evidence. Yes, the world has become more neoliberal, and at the same time certain problems have gotten worse. But that's only one observation. It's also true that the world is better off in many ways than was the case back in 1978. In contrast, cross sectional evidence provides over 100 observations. Here's a recent headline and subhead from the Financial Times:

Argentina takes steps to boost stature on world stage

Macri government is re-engaging with globalisation as others question its benefits


Voters in the US and the UK can dabble with socialists like Sanders and Corbyn because so little is at stake. The economic system is so firmly entrenched that no election is likely to move policy dramatically in one direction or another.

Developing countries do not have that luxury. Argentina was a mess when Macri took power. All he had to do is look around to understand that neoliberalism (i.e. Chile) offered a better option than socialism (i.e. Venezuela.)

One counterargument is that while a certain amount of neoliberalism is clearly appropriate, we went too far during the neoliberal era. Once again, however, there's no real evidence to support that claim. If that were true, then the countries at the top of the Economic Freedom rankings would be doing worse than the countries further down the list. But that's not the case. Which Western Hemisphere economies are doing better than Canada, the US and Chile? Which Asia/Pacific economies are doing better that Hong Kong, Singapore, Australia and New Zealand? Which European economies are doing better than Switzerland and Denmark? If neoliberalism is being overdone, then please tell me where I can find the cross sectional evidence for that claim? Who are the overdoers?

It seems plausible that neoliberalism could be overdone, but we are still quite far from reaching the point of diminishing returns. Neoliberalism is a policy mix that remains well worth advocating.

PS. I define neoliberalism as a combination of relatively open markets and borders, deregulation, sensible environmental policies (such as pollution taxes), and sensible (non-punitive) policies of redistribution. The details may vary from one country to another. Notably un-neoliberal countries include Greece, Russia, Venezuela, North Korea, and much of the developing world.

PPS. If neoliberalism caused the Great Recession, then why did the most neoliberal (developed) economies suffer the least, and the least neoliberal (i.e. Greece) suffer the most?

PPPS. Here is the top 15 in the Cato rankings:

Screen Shot 2017-12-24 at 3.34.50 PM.png


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COMMENTS (14 to date)
E. Harding writes:

"If that were true, then the countries at the top of the Economic Freedom rankings would be doing worse than the countries further down the list."

Sometimes they are (I know, I know, exceptions do not disprove rules, but they're instructive). Look at Georgia, for instance, which grew as fast as China (and at the same level) right up until reforms, when its economy stagnated while China's continued its rapid growth.

"Notably un-neoliberal countries include Greece, Russia, Venezuela, North Korea, and much of the developing world."
-Russia still has SoEs, but so do Norway, New Zealand, and Israel. It has a 13% flat tax. It ranks 35th on the World Bank Ease of Doing Business Index, just after Japan, making it by far the most business-friendly BRIC. Both its debt and deficit as a percentage of GDP are low. Its quality of bureaucracy is still substantially worse than in the developed West, but obviously better than Brazil's and India's, and nearly on par with China's. I don't see any reason to describe Russia as particularly neoliberal or antineoliberal, but if it has any lean at all, it's pro-neoliberal.

Greece (due to the 1980s PASOK legacy) is, indeed, particularly anti-neoliberal for the developed West (though not for the world as a whole), and is, for good reason, a famous horror story in that regard.

"Asia/Pacific economies are doing better that Hong Kong, Singapore, Australia and New Zealand?"

Hong Kong and Singapore are tax havens. Japan is richer than New Zealand, and Korea is basically equally rich. Australia is substantially richer than Japan and Korea due to a combination of more neoliberal institutions, more land per person, and mining wealth.

"Which European economies are doing better than Switzerland and Denmark?"
Switzerland is another tax haven. Sweden and the Netherlands are doing better than Denmark. Cyprus, for one, is now substantially poorer than Korea (though I suspect this was inevitable due to the country's perpetually low human capital).

Neoliberalism is one of the better policy mixes (and is certainly advisable for countries like India), but people's opinions may (for good reason) differ as to the benefits of its effects.

Mark writes:

Even if one accepts (which I don't) that a host of regulations are necessary to suppress periodic financial crises, it isn't obvious that the cost of such regulations in terms of long run economic growth isn't worse than the sickness it's meant to cure. How many trillions of dollars would we have needed to sacrifice over the decades in order to prevent the last economic crisis.

In any case, politics is inevitably always cyclical. Even if you have great policies, people will become jaded and want to shake things up. We, as a species, just seem habitually discontented with the status quo. Look at how fashionable it has become to bash the tech industry these days, despite how much private tech innovations have improved our lives in the last 20 years.


E.Harding, I'm not sure your dismissal of Hong Kong, Singapore, and Switzerland as tax havens is fair. First of all, in the last couple decades there has been (for better or worse) a lot of international reform in that department and international agreements that have reduced the usefulness of traditional tax havens like Switzerland and Luxembourg, hence why places like Panama have become more popular for that purpose.

And what fraction fraction of these countries' GDPs are actually attributable to the financial sector? I wouldn't take it for granted that they're the biggest factor in their success.

Russ Abbott writes:

If you define neoliberalism as broadly as "a combination of relatively open markets and borders, deregulation, sensible environmental policies (such as pollution taxes), and sensible (non-punitive) policies of redistribution" you leave a lot of room for most standard political/economic positions. Who would disagree with a system that can be described as you describe neoliberalism?

Colin writes:

I mean, neoliberalism makes the math work on continuous productivity, which once sustained launches countries to the top of lists. But neoliberalism must always, under every circumstance, reduce corruption meaningfully if people are going to support it.

Corruption and fairness are the dominant topics in Latin America today, regardless of the neoliberal bent of the country. Productivity gives you the surplus, but waste it and people will ask what the point is.

Scott Sumner writes:

Harding, When did Russia invade Georgia? And I don't see the point of your "tax haven" comment. Isn't having a sensible tax system one aspect of neoliberalism?

Mark, Good points. Let's reduce the regulations that are causing financial crises before we start adding more regulations.

Russ, It's a matter of degree. My point is that there doesn't seem to be any downside to becoming more neoliberal.

Colin, I agree on the importance of reducing corruption. Mexico is an example of a country held back due to high levels of corruption.

Garrett writes:

Aside from Georgia getting invaded and China not getting invaded, I would think the right countries to compare Georgia to are Armenia, Azerbaijan, etc.

E. Harding writes:

Sumner, it was during the financial crisis, and Georgia's 2007-09 experience was not that severe by international standards (and was much less severe than that of some similar countries, such as Ukraine and Armenia). The war was short and without real consequence, other than showing that Georgia's military was in no position to challenge anything. The stagnation was relative to China, not absolute. Georgia has at last surpassed its Soviet-level GDP per capita, but still remains poorer than such bastions of economic liberty as Albania and Kosovo, while China easily surpassed them over half a decade ago. Georgia's GDP per capita in the post-Soviet period has never substantially diverged from its neighbor, Armenia.
https://www.google.com/publicdata/explore?ds=d5bncppjof8f9_&met_y=ny_gdp_pcap_cd&hl=en&dl=en#!ctype=l&strail=false&bcs=d&nselm=h&met_y=ny_gdp_pcap_pp_kd&scale_y=lin&ind_y=false&rdim=region&idim=country:GEO:CHN:BRA:RUS:MUS:THA:DOM:UKR:UZB:ARM:XKX:ALB&ifdim=region&tstart=662101200000&tend=1482642000000&hl=en_US&dl=en&ind=false

It's impossible for every country to be a tax haven. And, in any case, if tax haven tax policy is to be defined as "a sensible tax system", tax havens today are still parasitical due to their wealth being reliant upon the lack of sense of other countries' tax systems.

At least admit your error on Russia's supposed lack of neoliberalism.

Rebes writes:

Harding,

Rather than debating subjective rankings, we can invoke an objective standard. Where do migrants go? Look at any list. They go exactly to the countries that Scott lists as neoliberal. They do not go to Russia.

E. Harding writes:

"They do not go to Russia."
Immigration into Russia has exceeded emigration by a margin of over 100,000 every year since 2005. Currently, it exceeds it by a margin of roughly 200,000 every year. Russia has about the same number of net migrants every year as the UK.
https://data.worldbank.org/indicator/SM.POP.NETM?year_high_desc=true
http://www.unz.com/wp-content/uploads/2016/01/russian-emigration-immigration-1997-2015.png
Check your numbers before pretending the opposite of them is the case.

Scott Sumner writes:

Harding. Of course everyone can be a "tax haven". Switzerland's taxes as a share of GDP are about the same as in the US and Australia. Why is that not sustainable?

Christian Bjørnskov writes:

Scott is absolutely right, and Greece is not an isolated coincidence. More 'neoliberal' countries do not have fewer crises, but suffer substantially less when they do:
https://www.sciencedirect.com/science/article/pii/S0176268016301082

Thaomas writes:

I doubt that there has been any great shift in the views of what caused the Great Depression.

As far as #2 goes in the US, I'd say that far from neo-liberalism being "overdone" there a was a lack of "a combination of relatively open markets and borders*, deregulation**, sensible environmental policies (such as pollution taxes), and sensible (non-punitive) policies of redistribution" combined with the failure of monetary policy to follow its mandate to maintain price level growth and low unemployment growth the public sector to invest according to an NPV rule, especially during the period of the recession. In particular, there was little effort to use sensible redistribution to offset perceptions of the costs of immigration of low skilled workers and the falling relative prices of manufactures imports on specific groups of workers.

* US immigration policy was hardly "open" to immigration by high skilled workers and open to low skilled workers mainly by those willing to come without visas.

**I think you should make it clear that
"deregulation" means regulation guided by cost benefit principles, not just regulation more favorable to incumbent business owners.

Tom DeMeo writes:

The biggest threat to neoliberalism is the erosion of economic and social friction. Most of the friction that was there when we all were born is gone, and we are heading towards a near zero friction equilibrium in the next couple of decades. We have seen some consequence so far, but as we approach zero, normal economic behaviors are going to get much more unstable until we learn how to deal with it.

Brian Donohue writes:

Good post Scott.

The most fair criticism of the neoliberal consensus, IMO, is our messianic foreign policy.

As China rises and the unipolar moment fades, perhaps this rotten consensus will unravel.

https://www.youtube.com/watch?v=ESwIVY2oimI

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