Last summer I lamented the recent dearth of good news:
In the last part of the 20th century, I greatly enjoyed reading news outlets such as The Economist, the Financial Times, the Wall Street Journal, and the Far Eastern Economic Review. These news sources focused on public policy issues, especially economic and political issues.
Those decades were dominated by good news, as one country after another abandoned authoritarianism and moved toward democracy. Almost every developed country did major tax reform. Many developed countries privatized state-owned enterprises and deregulated prices and production. Free trade agreements were announced. Immigration was liberalized. There was one economic reform after another. Inflation was brought down. Democracy was on the march in Latin America, Eastern Europe and elsewhere.
Now I pick up these news outlets with weary apprehension. I know there is unlikely to be a single piece of good news, just endless stories about the rise of nationalism, authoritarianism, militarism, statism, xenophobia, etc. One counterproductive economic policy after another. The world still progresses in terms of technology, with nifty inventions like the iPhone. But on political and economic issues it seems like the news is unrelentingly bad.
The Economist has a new piece subtitled “How the West fell out of love with economic growth.”
A paper published in 2020 by the late Alberto Alesina, an economist at Harvard University, and colleagues at the IMF and Georgetown University measured the significance of structural reforms (such as changes to regulations) over time. In the 1980s and 1990s politicians in advanced economies implemented a large number, making their economies sleeker. By the 2010s, however, they had lost their oomph: reforms practically ground to a halt.
Our analysis of data from the World Bank suggests that progress has slowed still further in recent years, and may even have reversed (see chart 2). The American government introduced 12,000 new regulations in 2021, a rise on recent years. From 2010 to 2020 rich countries’ tariff restrictions on imports doubled. Britain voted for and implemented Brexit. Other countries have turned against immigration. In 2007 almost 6m people, on net, migrated to advanced economies. In 2019 the number was down to just 4m.
The Economist cites a number of possible explanations, but in my view they miss the most important one—the turn against free market ideology in recent decades. The question is not so much, “Why are governments ignoring the good ideas of economists?” rather the question is, “Why have economists turned against pro-growth policies in a wide range of areas?”
There is increasing support among economists for interventionist policies in areas such as labor market regulation, antitrust, barriers to free trade and investment, fiscal stimulus, and anti-growth tax policies. Late 20th-century ideas such as welfare reform, supply-side tax reform, fiscal conservatism and globalization are becoming less and less popular among economists.
There are several possible ways that this change in ideology might be related to the rise in anti-growth policies:
1. The two changes might be totally unrelated.
2. Economists might be opportunistically latching onto a change in the zeitgeist. Telling policymakers what they want to hear.
3. Economists might be reacting to the same stylized facts as policymakers, and interpreting the implications of those facts in a similar way.
I lean toward the third view. I believe that it was a mistake for economists to move in a more statist direction, but I also believe the move was a sincere (albeit misguided) response to a number of changes in the global economy, including the China shock, job losses in manufacturing due to technology, the rise in income inequality, near-zero interest rates, and the global rise in nationalism.
There are a few glimmers of hope on the horizon. Economists are increasingly supportive of YIMBY policies such as building more houses and building more nuclear power plants. The recent rise in inflation has reminded the profession of the importance of classical ideas such as the opportunity costs of government spending. And they have not completely abandoned free trade.
READER COMMENTS
David Henderson
Jan 11 2023 at 2:44pm
Great post, Scott.
You might want to mention to readers your excellent Econlib article on this in 2010. It’s titled “The Unacknowledged Success of Neoliberalism.” And my recommending it has nothing to do with the fact that I commissioned you to write it. 🙂
Jon Murphy
Jan 11 2023 at 4:23pm
Allow me to propose a 4th possibility:
An increase in computing power (and its relatively lower cost) means that economists can develop increasingly complicated computer models that seemingly can overcome technical issues of the past.
nobody.really
Jan 12 2023 at 1:20pm
THAT’s a provocative idea. Could you elaborate?
Jon Murphy
Jan 12 2023 at 6:07pm
Here’s my thought process:
One of the main mainstream critiques of a lot of industrial planning and interventionism is that to calculate these kinds of models was too computationally heavy. The data were too difficult to collect, analyze, and act in a timely manner.*
Computing costs have plummeted, computing power has skyrocketed. Communication costs have also fallen. Consequently, some have argued all we need to do is dump all the info into the computer and let it tell us what we should do. Big Data is the savior. The technical issues of the past have been overcome. So, some say, we have no more need for wasteful competition.
*Note this is related to, but distinct, from the Knowledge Problem.
Warren Platts
Jan 14 2023 at 2:08pm
Indeed. When was the last time two general equilibrium models produced by two competing groups were able to replicate each other!
Jon Murphy
Jan 15 2023 at 5:22pm
Warren actually demonstrates my point quite well. The economic problem is not a technical one. It’s not about replication or computing power or anything like that. The economic problem is inherently a knowledge one
steve
Jan 11 2023 at 5:05pm
Or maybe they learned that bad news sells better. Media writes what sells so what we should really want to know is what has growth done worldwide if you want to evaluate the economic side of the issue. On that issue I think there should be more emphasis on the good news we have had with China and India, by far the largest two countries in the world, and growth they have thad there. Then look at the growth miracle countries to which Tyler linked today.
On the politics side there is much less good news, on that I would have to agree. Much more leaning towards authoritarian govt styles. Much more grifting, party ahead of country. If it persists then growth surely gets worse, but you appear to be dating this back to at least 2010.
Steve
Monte
Jan 11 2023 at 10:07pm
”
Free market ideology is going through an identity crisis. Self doubt has started to creep in. Its detractors allege it is responsible for a variety of ongoing social ills, chief among them: wealth inequality and climate change. Capitalism, they say, is stuck at the peak of Schumpeter’s “perennial gale of creative destruction.” Many of our younger generations prefer socialism to Capitalism, which once again must be saved from itself. And leading the way are a new fellowship of green economists. Mariana Mazzucato (https://www.amazon.com/Mission-Economy-Moonshot-Changing-Capitalism/dp/0063046237) and Tim Jackson (https://www.amazon.com/Post-Growth-Life-after-Capitalism/dp/1509542523) are among those preparing the way for the messiah: Big Government.
Anders
Jan 16 2023 at 2:24pm
Ironically enough, the reasons people like Mazzucato and, in their pieces for a broader audience, Stiglitz and Krugman argue for a strong, but also different, role for the state is pretty much the same as those usd a century ago to triple spending and launch the administrative state: while acknowledging that capitalism has worked well, with exceptions, pointing to that parameters have changed. Back then, technology and innovation had,to be tamed and channeled by administrative wisdom. Now, we are facing existential challenges that we can only fixed by rewriting the rules altogether to create a sustainable, circular economy – supported by public mission oriented innvation. 100 years after another Italian with plenty of mission orientation and few compunctions about state intervention in the economy, took power.
vince
Jan 11 2023 at 10:11pm
1. “Why are governments ignoring the good ideas of economists?”
The market for those ideas isn’t buying them. Could it be lack of salesmanship?
2. “Why have economists turned against pro-growth policies in a wide range of areas?”
Disappointing results? Recognition that the world is finite?
3. “There is increasing support among economists for interventionist policies in areas such as labor market regulation, antitrust, barriers to free trade and investment, fiscal stimulus, and anti-growth tax policies.”
I’m not sure what you mean by interventionist, but lassez faire by itself doesn’t work.
Rajat
Jan 12 2023 at 2:41am
I don’t think it can be ‘just’ facts, stylised or otherwise. As the Alesina reference suggests, the rot began in the late 1990s and had set in before the GFC. But compared to the 1990s and early 2000s, in the 1970s and 80s, US unemployment rose far higher than it did following the much milder recessions of the early 1990s and 2000s. And the ‘Japan shock’ was more visible and Japanese hegemony more threatening to most people than China until at least Xi took over in 2013. Inequality wasn’t really a thing until after the GFC. Whereas pop singers wrote about the fallout from recession and economic reform in the 1980s (Springsteen, Mellancamp, Bruce Hornsby), apart from a brief ‘Reality Bites’ moment in the early 1990s, we saw economic success in the UK give rise to Britpop and ‘Cool Britannia’. Etc, etc
Another explanation could be something to do with the sociology of the profession, and the generational change that brought that on. You would be better placed to comment than me, but my sense is that economics was not a fashionable profession before the 1980s. And as you commented on a podcast once, fashionable people tend to gravitate towards (US-style) liberalism (or is it vice versa?). And I’ve read that liberals/fashionable people tend to be less individualistic than ‘conservatives’. I’m not sure what fashionable people were studying in the 1950s and 60s, but maybe it wasn’t economics – could it have been sociology, political science or international relations (these subjects are barely mentioned now)? But when economists gained influence with policymakers in the late 70s, 80s and 90s, young liberals streamed in, looking for ways in which government interventions could ‘improve on’ market outcomes. And that’s what we’ve seen in labour markets, trade policy, and more recently in antitrust. If you read leading thinkers in these fields now – especially on a forum like Twitter where they are more ‘unplugged’ – it’s hard to see these people as well-meaning technocrats who are responding to data. They can often be quite sarcastic to those who question their positions.
Another way to think about this is to ask whether Paul Krugman’s conversion from free-marketer to government interventionist led or followed the shift in the political composition of the profession. Did Krugman see the terrible economic outcomes of the late 90s and early 2000s and change his views or did he see how the profession became enamoured of things like D-n-D following Card and Krueger and the opportunities that created for questioning free-market ideology and policy across the board?
And this shift is coinciding with a broader societal shift that people like Alex Tabarrok have commented on about the feminisation of politics and policy, where outcomes matter less than the process and the intentions behind it.
Scott Sumner
Jan 12 2023 at 1:27pm
At a global level, it is mostly just people reacting to the mistakes of the dominant ideology. During the mid-20th century, the dominant ideology was statism. Thus when things went wrong, the backlash was against statism.
By 2000, the dominant ideology was neoliberalism. Thus when things went wrong the backlash was against neoliberalism.
Spencer
Jan 12 2023 at 9:52am
The U.S. Golden Age in Capitalism took place when the upper income quintiles taxes were the highest.
…
And of course, Regulation Q ceilings were imposed on just the commercial banks in the Banking Act of 1933, which activated savings. Regulation Q ceilings weren’t imposed on the nonbanks until 1966 (at the end of the Golden Age in Capitalism).
Capt. J Parker
Jan 12 2023 at 10:51am
Here is what Joseph Stiglitz had to say in 2016 about the decline of neoliberalism. Markets don’t work has become the predominant thought among economists and policy makers. The piece seems to be saying that rational economic research has resulted in this view. So, the reason is either #1 – unrelated or rather #4 Policy makers are actually implementing the most recent ideas of economists.
vince
Jan 12 2023 at 4:28pm
“And they have not completely abandoned free trade.”
But are recognizing its failures. For example:
https://americancompass.org
Warren Platts
Jan 13 2023 at 4:46am
Yes. The idea that “trade deficits don’t matter” has proved to be bad economic advice. By exporting U.S. demand, the trade deficit is a chronic headwind to economic growth, it’s lowered wages for unskilled workers thus reducing demand even more in a vicious circle, and the capital sloshing that creates asset bubbles that eventually pop leading to global meltdowns like in 2008.
Certainly, the root cause is hyper-saving among the surplus countries. But at the end of the day, the trade deficit happens because we allow it to happen. Thus, some good advice from economists would be how to end the trade deficit. That seems to be the low-hanging, obvious fruit that would speed up economic growth.
Scott Sumner
Jan 13 2023 at 10:25pm
The trade deficit has absolutely nothing to do with demand, which is determined by monetary policy.
Warren Platts
Jan 14 2023 at 10:53am
Maybe so. But that doesn’t change the fact that the trade deficit amounts to an exporting of demand. Thus when the government sends out stimmy checks to stimulate consumer demand, a good portion of that winds up stimulating foreign economies like China.
Scott Sumner
Jan 14 2023 at 11:46am
I think you know that I strongly oppose stimulus checks. They are useless whether or not we have a trade deficit.
vince
Jan 14 2023 at 11:57am
“The trade deficit has absolutely nothing to do with demand, which is determined by monetary policy.”
Absolutely nothing is a little strong. It does or can through increased income inequality and wealth concentration.
Scott Sumner
Jan 14 2023 at 8:03pm
Inequality has nothing to do with demand, which is determined by monetary policy.
vince
Jan 15 2023 at 12:01pm
Here is an example of the counterargument:
https://www.epi.org/publication/inequalitys-drag-on-aggregate-demand/
Warren Platts
Jan 15 2023 at 8:55pm
You’re link was redirecting to the wrong page. Try this one:
Inequality’s drag on aggregate demand: The macroeconomic and fiscal effects of rising income shares of the rich | Economic Policy Institute (epi.org)
Agree 100%. That’s why the USA was doing so well in the 19th century and mid 20th century. When the overall real wage level is high, aggregate demand is high, and growth is fast. Trickle-up economics leads to middle income trap. That’s where we’re at now.
TGGP
Jan 12 2023 at 5:48pm
What evidence could we bring to bear the test the worth of each hypothesis?
Warren Platts
Jan 13 2023 at 4:48am
Too bad there’s not a policy that for every new regulation, two old regulations have to be rescinded. Then 12,000 new regulations would entail a net loss of 12,000 regulations!
Jon Murphy
Jan 13 2023 at 10:16am
I have another thought, one that matches with Scott’s comment to Rajat.
Intellectually, the current situation (say, 2000 to present) bears a lot of similarities to the early 1900s:
There’s a pushback against liberalism as the dominant ideology. The early 1900s saw a lot of turmoil: the collapse of a Spanish Empire and the rise of the American Empire, World War 1, revolutions in Russia and Latin America, the Great Depression, etc. Many intellectuals thus began trying to regulate liberalism to the dustbin as an outdated ideology (for example, see JM Keynes’s “End of Lassiz-Faire”). There were just too many problems the world faced and coordinated, planned action had to take place.
Consequently, we see a lot of intellectual justifications for totalitarianism rising, whether it be a soft “rule of the elites” like Keynes advocated, a more centralized expert board like Tinbergen wanted, or fully centrallized planning like Lange defended. Some voices, like Mises and Hayek and Coase, existed to defend the science from these nouveau and fashionable critiques, but they were quickly put in the minority.
Of course, the reast of the 1900s saw these nouveau ideas implode in spectacular fashion. Protectionism, rather than leading to stable economic growth, led to the worst economic disaser, probably since the collapse of Rome (Great Depression). Keynesian-style economics* failed miserably in the second half of the century. The Soviet Union, a supposed economic powerhouse and empire to rival empires, collpased after a few decades, and we discovered there had been almost no gain in the standard of living compared to Tsarist days. The virtues of liberalism were once again discovered and, as liberalism became dominant again, economic growth re-emerged all over the world (especially once the Soviet Union collapsed).
So, I think Scott may be right. We may be seeing a pushback simply because liberalism is the dominant ideology. It’s interesting to see the same arguments, thought long dead, resurface by todays critics of liberalism, as if the entire past 100 years hadn’t happened at all.
*I point out in a forthcoming paper in the Erasmus Journal for Philosophy and Economics that the system attributed to Keynes is better attributed to Tinbergen.
Scott Sumner
Jan 13 2023 at 10:26pm
Very good comment.
Jon Murphy
Jan 13 2023 at 11:11pm
Thank you
Warren Platts
Jan 14 2023 at 10:59am
{citation needed}
Jon Murphy
Jan 14 2023 at 11:39am
I am making two claims there (First: the Great Depression is probably the worst economic downturn since the Fall of Rome. Second: Protectionism led to the Depression). I’m not sure which one you’re referring to, so I will address both.
The first claim is speculative. Between 476 and 1929, there were many economic disasters: Black Plague, various religious wars, plagues, etc. However, what made the GD unique in my eyes is the global scope of it. For that reason, I think it is likely the worst.
The second claim is pretty established. Just about any economic history of the Great Depression will discuss how Smoot-Hawley and the subsequent trade wars it spawned contributed to the Depression. I cannot give precise citations as my library is in storage right now, but if you do a Google search (specifically the term “Smoot-Hawley and the Great Depression), the first links all say the same. If memory serves, Douglass Irwin has a detailed discussion of the rise of protectionism and its contributions to the Depression in Clashing Over Commerce. Many intro econ and trade textbooks discuss it as well. They may have citations you can see.
Warren Platts
Jan 14 2023 at 1:24pm
OK, sorry. I thought you were saying that Smoot-Hawley caused the Great Depression, rather than contributing to it.
Interesting article by Krugman here:
Hoot-Smalley – The New York Times (nytimes.com)
Jon Murphy
Jan 14 2023 at 2:05pm
Sorry, I didn’t mean “cause” but I can see how my verb choice “led” brought you to that conclusion. Sorry for the confusion. That’s 100% on me.
vince
Jan 14 2023 at 1:52pm
From wikipedia on Protectionism in the United States:
Most economists hold the opinion that the tariff act did not greatly worsen the great depression:
Milton Friedman also held the opinion that the Smoot-Hawley tariff of 1930 did not cause the Great Depression. Douglas A. Irwin writes : “most economists, both liberal and conservative, doubt that Smoot Hawley played much of a role in the subsequent contraction.”
William Bernstein writes “most economic historians now believe that only a minuscule part of that huge loss of both world GDP and the United States’ GDP can be ascribed to the tariff wars “because trade was only nine percent of global output, not enough to account for the seventeen percent drop in GDP following the Crash. He thinks the damage done could not possibly have exceeded 2 percent of world GDP and tariff “didn’t even significantly deepen the Great Depression.”
Jon Murphy
Jan 14 2023 at 2:06pm
See my comment to Warren above. The Wikipedia doesn’t contradict me. I accidentally implied “caused” when I didn’t mean that.
Fazal Majid
Jan 24 2023 at 9:17am
The population is aging everywhere and older voters’ power keeps rising. Status quo bias and opposition to policies that benefit the young, e.g. NIMBYism vs. housing construction, are growing as a consequence.
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