David Leonhardt has a NYT piece on the “new centrism”, which he calls neopopulism. Politicians in both parties increasingly embrace ideas like protectionism and subsidies for manufacturing. These policies are supposedly necessary because neoliberalism has failed:
The new centrism is a response to these developments. It is a recognition that neoliberalism failed to deliver. The notion that the old approach would bring prosperity, as Jake Sullivan, Biden’s national security adviser, has said, “was a promise made but not kept.” In its place has risen a new worldview. Call it neopopulism.
Both Democrats and Republicans have grown skeptical of free trade; on Tuesday, Biden announced increased tariffs on several Chinese-made goods, in response to Beijing’s subsidies. Democrats and a slice of Republicans have also come to support industrial policy, in which the government tries to address the market’s shortcomings. The infrastructure and semiconductor laws are examples.
But is that true? Did neoliberalism fail? And do industrial policies lead to stronger growth in manufacturing? Let’s look at the evidence:
Over the past 10 years, there has been precisely zero increase in manufacturing output. This is true of both the Trump and Biden administrations. Industrial policies do not seem to work.
In contrast, industrial output rose strongly during the so-called neoliberal era of the 1980s, 1990s and 2000s.
So why have industrial policies failed? Let’s begin with the most important component of neopopulism—protectionism. Protectionist policies are based on the myth that trade deficits are caused by “unfair trade policies”. In fact, deficits are caused by discrepancies between domestic saving and domestic investment. Because populist policies tend to result in large budget deficits, they reduce national savings rates. This often leads to even larger trade deficits, as the current account deficit is, by definition, equal to the gap between domestic saving and domestic investment.
NX = S – I
Not surprisingly, the Trump and Biden economic policies have also failed to reduce our trade deficit, even as a share of GDP.
None of this should come as a surprise. Latin America has many decades of experience with the failure of populist economic policies. The puzzle is why so many in Washington now believe that the solution to America’s problems is to emulate the policy approach that Argentina has pursued over the past 80 years—big fiscal deficits and protectionism.
PS. Here’s a photo of Juan and Eva Peron. Ask an Argentinian how their policies worked out for the working class.
READER COMMENTS
Thomas L Hutcheson
Jun 1 2024 at 8:32pm
Neo-Liberalism got a bad reputation by being associated with Reagan’s and Bush’s tax costs, mainly benefiting the rich, and deficits and the Bernanke Fed that failed to keep inflation up to target..
MarkW
Jun 2 2024 at 6:50am
No, protectionism doesn’t work, but I fear the economic stagnation will have to be much longer and more pronounced before the public turns away from their current desires for more tariffs.
Actually, the folk economics of protectionism are so naturally appealing, and the incentives for rent-seekers to want protection for their own businesses/industries are so strong that it’s something of a wonder to me that protectionism isn’t universal. I don’t think there’s any hope at all of stable, lasting majorities of the public being able to appreciate comparative advantage — it’s apparently just too subtle an idea for the average human mind. But if that’s the case, how DO we ever get a measure of free trade? Here’s my rough list:
1. The rent-seekers are such an obvious ‘villain’ class that people oppose trade restrictions on that basis (e.g. the repeal of the Corn Laws because the trade restrictions were mostly for the benefit of the landed gentry and their supporters).
2. Enlarging the group of people considered ‘us’ vs ‘them’. So, thankfully, trade restrictions *within* the US and EU remain mostly unthinkable. But even very close friendly relations don’t always suffice (e.g. trade restrictions against Canada)
3. A long enough period of economic malaise that people are finally ready to try anything (Argentina and Millei)
4. When a country and its internal markets are so small that it can’t possibly get along only with internal trade (e.g. Luxembourg)
5. When experts are sufficiently respected (and respectable) such that the public will at least grumblingly accept their guidance on trade or where those in power are sufficiently insulated from majoritarian rule (the current EU but not the current US)
6. When governments are smart enough to realize that free trade has a positive effect on the economy (and, therefore, their own re-election chances) but also recognize that many of their supporters demand protection, so they try to get by with a few symbolic trade restrictions amid a general regime of free trade (e.g. most U.S. administrations of both parties from the 70s to the 10s)
If we aren’t going to bring other countries into the US (#2), it seems like a return to #6 is about the best we can hope for in the US, but unfortunately it may happen only have some substantial period of Argentinization. On the positive side, our internal markets are so huge that we can get away with a more bad trade policy than a country like Argentina. There’s a lot more ruin in the US than most countries.
Scott Sumner
Jun 2 2024 at 9:31am
Very good comment.
Craig
Jun 2 2024 at 10:20am
I noted BYD because I read an article on Musk’s thoughts on BYD and how they have evolved over time:
https://ktvz.com/money/cnn-business-consumer/2024/05/30/elon-musk-once-mocked-chinas-byd-now-its-running-circles-around-tesla/
”
BYD’s evolution from a small producer of clunkers to a global powerhouse brand has surprised its skeptics, including Musk, who roundly dismissed BYD in a 2011 Bloomberg interview.
In that exchange, Musk responds to an honest question about BYD rivaling Tesla with a smug laugh.”
But apparently he speaks differently now:
“Of course, a lot happened in the decade that followed, and Musk ate his words this January, saying on an earnings call that he believes Chinese EV makers could “pretty much demolish most other car companies in the world” unless stronger trade barriers are put in place. (They were two weeks ago.)”
Has that Model T, VW Beetle kind of feel to it and really the numbers differential is such that the product is not just an abstract reduction in expenses, its really a triple play bonus for households, the price of the car, the price of fuel and the price of insurance (South FL I was quoted $4000 for my new Ford and I’m low risk).
Rajat
Jun 2 2024 at 5:47pm
I largely (and depressingly) agree, except in two respects. First, I don’t think (6) is achievable. In many countries (including Australia), political leaders have known about the economic benefits of free trade – in theory – even where protection is reduced unilaterally. Australia’s current prime minister studied economics at university and every university student here learns about comparative advantage in their first year through Robinson Crusoe-type examples. Maybe they never fully accept it, but lack of knowledge is not the issue; the lack of payoff for reducing protection (or penalty for raising protection) within an electoral cycle is, and that is difficult to overcome. Incidentally, the same could be said about a rules-based monetary policy, so watch out if/when Trump returns. Second, one advantage that small countries have over large countries or blocs in promoting freer trade is that the costs to consumers can be pointed out very starkly. In Australia, in 1973, Prime Minister Gough Whitlam of the left-wing Labor Partly unilaterally cut tariffs by 25% overnight, on the grounds that it would help contain inflation and help consumers, who were paying huge tariffs on consumer goods like clothing and cars. Subsidies can be converted to dollars per job saved, which in Australia reached many hundreds of thousands of dollars at one point. Unfortunately, in many countries (outside the US), the new moral and political imperative to decarbonise is now regarded as more important than costs to consumers. Virtually anything in the way of protection can now be justified if it helps a country transition to ‘net zero’ emissions.
As for your conclusion, while most countries cannot avoid trade altogether (like maybe the US could in the post-war period), almost all can raise protection to a substantial level and still muddle through with lower medium-long term growth. There is a surprisingly great deal of ruin even in mid-size economies!
Henri Hein
Jun 3 2024 at 3:00pm
I agree. Steve Landsburg wrote somewhere that he sometimes meet people claiming to understand comparative advantage, but when he then gives them an example they get the answer wrong. That’s consistent with my own experience. I don’t give people impromptu tests, but I have heard people claim to understand comparative advantage and then proceed to completely ignore it when discussing trade.
I built a simulation to demonstrate comparative advantage and the gains from trade, available here. I’d love your comments on it.
Andrew_FL
Jun 2 2024 at 8:40am
Did industrial policy begin with Obama because that’s when industrial output started stagnating (which is even more clear if you look at productivity)
Mactoul
Jun 2 2024 at 8:57am
Was there no protection and industrial policy in the neoliberal era of 80s and 90s?
Then America had quota system for textile-exporting countries.
I think government has never eschewed populism and industrial policy. In 60s you had Apollo program that consumed 4 percent of the Federal spending.
MarkW
Jun 2 2024 at 9:09am
<i>Was there no protection and industrial policy in the neoliberal era of 80s and 90s?</i>
Oh, there was — just enough to keep the rabble quiet and keep particular interest groups onside. There was a story — I wish I could find the details — I’m 100% sure even which president it was (though I think it was Bush II), but the president was in a discussion with an economic advisor who was arguing against imposing a particular tariff. The president’s response was “You handle the economics, I’ll handle the politics”.
Back then, though, the overall direction was toward liberalization of trade (e.g. NAFTA).
Jon Murphy
Jun 2 2024 at 9:30am
The 80s and 90s were a period of generally falling tariffs, major trade deals (like NAFTA and the WTO), and removing a lot of industrial policy schemes. The past 8 years were rapid additions of tariffs and moves toward industrial policy.
Direction matters; it’s not a binary thing.
Scott Sumner
Jun 2 2024 at 9:33am
“Was there no protection and industrial policy in the neoliberal era of 80s and 90s?”
You need to think more carefully before commenting. What useful points are you trying to make? Try to make them more clearly.
Mactoul
Jun 2 2024 at 9:51pm
My intention, ineptly executed perhaps was to question the existence of populism as a category.
Isn’t populism a code word for whatever the elite dislikes?
Jon Murphy
Jun 3 2024 at 10:37am
If that is what populism is, then it does exist as a category. The discussion is just around what falls in that category.
Interestingly, it would also suggest that globalization is a populist movement and protectionism is an anti-populist movement given the strong “elite” support of protectionism (and industrial policy, etc).
steve
Jun 2 2024 at 12:17pm
While I largely agree with you I think it should be noted that China didnt join the WTO until 2001. IIRC it was after that we saw so much industry move to China. So I think one could make a counterargument that it took a few years to see the full effects of that and the plateau in manufacturing is not due to industrial policy per se but rather so much moving to China and probably some elsewhere.
Steve
Jon Murphy
Jun 2 2024 at 1:08pm
I don’t know. You’re talking a lag of 16 years. That’s a very long time. Is it possible? Yes. Is it plausible? One would need a better story than just “it takes time to make adjustments.”
vince
Jun 2 2024 at 1:06pm
Based on the Manufacturing chart, it looks like the Global Financial Crisis is the culprit, which implicates globalization–of finance.
Incidentally, as long as the dollar continues serving as the global currency, the US is obliged to provide currency to the rest of the world. A trade deficit does that.
Marshall D
Jun 2 2024 at 1:19pm
A lot of the bloggers I read don’t think neoliberalism failed, exactly.
They’d probably agree with your points: manufacturing output increased, and there was a lot of surplus generated for us and for our trading partners.
Where they’d disagree is that neoliberalism led to a big loss of jobs in specific parts of the USA, although maybe not overall. Specific towns and areas in the USA had their livelihoods destroyed.
And then, there was not enough of an effort to compensate the losers. Maybe Ricardo would have agreed: there should have been more of an effort to compensate the losers, or a at least a better, more thoughtful effort.
Among the culprits was Bill Clinton’s welfare bill that stripped away large portions of the welfare state.
The second problem with neoliberalism nowadays is that we may need to build our industry up against in case there’s a war with China. It’s not economically efficient, but geopolitically necessary.
Neither of those 2 points is about neoliberalism’s failure. It’s rather that pure neoliberalism ignores those points of compensating the losers from free trade and also great power rivalry.
Jon Murphy
Jun 3 2024 at 8:13am
Good news, then: if those are the complaints, then they are unsupported by evidence, so neoliberalism (whatever the term means) is not ignoring them. After all, one cannot ignore what does not exist.
To the first: the empirical evidence indicates the “China Shock” was fairly minor when compared to normal activity in the US economy. And, for much of the handwringing about the “Rust Belt,” evidence indicates the economic issues there were more due to domestic labor disputes; international trade had a relatively little impact.
To the second: the graph we see shows the US continues to be a strong manufacturer. Indeed, along many margins, we remain stronger than China (precisely because of international trade).
So great! Problem solved.
Richard A.
Jun 2 2024 at 2:27pm
In Japan the momentum is in the free trade direction.
Todd Ramsey
Jun 6 2024 at 8:34am
Off topic, but not completely irrelevant:
The 1980s and 90s were peak libertarianism. Tax cuts, NAFTA, government hands off the nascent internet, a minimum of foreign military actions.
At the time I thought we were on an inexorable path towards a free society. What happened?
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