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Noah Smith: ‘Neoliberal’ isn’t a dirty word

March 12, 2019

Depending on who you ask, the term “neoliberal” can apply to anyone from Ronald Reagan to Barack Obama. Some on social media have turned the term into a running joke, holding ironic Twitter polls to see who is the “chief neoliberal shill” (the winner last year was none other than yours truly).

But at least one economist has articulated a coherent vision of neoliberalism — Brad DeLong, a professor at the University of California-Berkeley who worked at the Treasury Department during the Bill Clinton administration. In 1999, DeLong wrote that a combination of market liberalization in developing countries and trade opening by rich nations would allow the poor countries of the world to end centuries of poverty.

The plan seems to have worked. Market liberalization in countries such as India and China seems to have precipitated a shift to faster growth, while trade and investment links with rich countries have helped these and other developing countries tremendously:

These changes helped pull a billion people out of desperate poverty, and billions more are on the way to becoming middle class.

But there was a big hole in DeLong’s neoliberal plan. While the developing world surged forward, the U.S. began to encounter a host of economic problems. Wage stagnation, reduced mobility and rising inequality eroded the foundations of the New Deal society that had sustained the U.S.’s middle class during the second half of the 20th century. The U.S. resisted nationalizing its health-care system, resulting in a cumbersome public-private hybrid arrangement that allowed costs to mushroom while letting some people go uninsured. And financial deregulation led to a crisis and a huge, long recession throughout much of the developed world.

Now, DeLong is ready to throw in the towel. In a recent interview, he declared that left-leaning advocates of neoliberal policies in the U.S. were mistaken in thinking they would find a political partner on the center-right. The plan was always to cushion the blow of international trade and easing of regulations on business using government programs, such as universal health care and a robust social safety net, to make sure the working class wasn’t left behind. But, DeLong argues, Republicans rejected that compromise, insisting that any neoliberalism be of the free-market-fundamentalist variety:

Barack Obama rolls into office with Mitt Romney’s health care policy, with John McCain’s climate policy, with Bill Clinton’s tax policy…(but) John Boehner, Paul Ryan, and Mitch McConnell (were) the leaders of the Republican Party, and…decided on scorched earth(.)

As a result, DeLong declared that old-line neoliberals need to pass the baton to the political left.

Others aren’t ready to let DeLong off so easily. In the Boston Review, a panel of economists writes that neoliberalism got the policy wrong as well as the politics. Their various suggestions for post-neoliberal policies include increasing labor’s power with greater unionization and wage boards, tighter regulation of the finance industry and restriction on trade in order to protect U.S. workers. Mike Konczal of the Roosevelt Institute echoes their assessment.

Many of these are good ideas. But in rejecting neoliberalism as a concept, the critics go too far.

First, progress in the developing world has been impressive — something for which neoliberalism probably deserves a lot of credit — but it is far from complete; most of South Asia is still very poor, and much of Africa is just beginning to industrialize. To curb the flows of trade and investment with these countries would be a grave abdication of the U.S.’s international and humanitarian responsibilities.

Second, neoliberal policies might have led to faster productivity growth in the 1990s and early 2000s:

Contrary to popular belief, wages also increased during that period. The spurt of growth is commonly attributed to the information-technology boom, but that boom might not have been possible if the U.S. had more strictly regulated emerging industries in order to protect favored incumbents. It’s worth noting that West Europe and Japan, whose policies were somewhat less neoliberal than the U.S.’s, ended up producing relatively few big new tech companies, and have failed to catch up to U.S. levels of per capita income in the years since 1990.

Finally, although economic blunders have come from the political right in the U.S. in recent decades, it’s also possible for the left to make big mistakes — not just in poor countries, but in rich ones too. Germany suffered high unemployment in the 1980s and 1990s, thanks to its rigid labor market regulations; eventually, it eased those restrictions, which substantially lowered the unemployment rate. Sweden had a very progressive tax system, but scaled back redistribution in the 1990s in order to speed growth. France, too, has sometimes been forced to curb its ambitions for redistribution and regulation when these produced economic instability and slow growth. The U.S. needs a neoliberal contingent to help ensure against missteps like these.

So neoliberals’ ideas are still needed. A move toward social democracy should help correct much of the inequality that has arisen in the U.S., while fixing dysfunctional industries like health care and finance. But left-leaning neoliberals like DeLong will still be needed in order to restrain social democrats’ more ambitious impulses, to protect the U.S. economy’s entrepreneurial private sector, and to make sure that technological progress and international trade don’t get forgotten.

Noah Smith is a Bloomberg Opinion columnist. He was an assistant professor of finance at Stony Brook University, and he blogs at Noahpinion.