There have been some recent retrospectives on the neoliberal wave that swept the world in the final quarter of the 20th century. I’d like to add the perspective of someone who lived though that era. Many things that look obvious to us today, only seem so in retrospect:
- South Korea has a better economic model than North Korea.
- The British government should not run auto manufacturing firms.
- Air fares should not be set by government officials.
- Tax rates on income should not exceed 90%.
Those claims may seem obvious today, but they were far from obvious when I entered college in 1973. For instance, there is a 1967 CIA report suggesting that North Korea was richer than South Korea, a full 14 years after the Korean War ended. (True or not, that was the perception.) The UK had a top tax rate of 98% on investment income.
It helps to look beyond the US. The French refer to 1945-75 as “Les Trente Glorieuses”, three decades of stellar economic growth. And it wasn’t just France. Most of Europe, Latin America and the Soviet bloc experienced very strong growth. There was no obvious need for reform.
Also keep in mind that the Great Depression, WWII, and the rise of socialist ideology had pushed the world in a much more statist direction from 1929-1973. So this rapid growth was occurring under an economic model that rejected laissez-faire capitalist ideology.
After the mid-1970s, almost the entire world hit a wall. Growth slowed almost everywhere. Voters became increasingly frustrated.
But there was one important exception—the “tiger economies” of East Asia. Between the mid-1970s and the mid-1980s places like South Korea, Taiwan, Hong Kong and Singapore experienced extremely rapid growth in RGDP. Japan was no longer an outlier, no longer the only successful non-white economy. More and more economists began seeing East Asia’s export-oriented model as superior to Latin America’s import substitution model. I recall reading the Far Eastern Economic Review as a college student (yeah, I had no life), and being deeply impressed by what was being reported.
Today, some pundits (wrongly) suggest that places like South Korea boomed due to statist policies. That is not true, and certainly was not the perception back in the 1970s. When I entered college, the alternative to South Korea was not seen as Hong Kong’s laissez-faire, it was North Korea’s statist economy. And it was not yet 100% clear which model was better.
Many things came together to produce the neoliberal wave:
1. East Asia’s export-oriented low tax economies were growing much faster than other countries during 1975-85.
2. Voters became increasing opposed to high taxes in places where living standard were stagnating.
3. Regulations in areas such as transportation and finance were causing increasingly glaring inefficiencies.
4. Western Europe stopped catching up with America, and leveled off roughly 25% below our per capita GDP level. Inefficient state-owned European firms were seen as being a part of the problem.
5. Communist economies began to stagnate.
Once the neoliberal wave got going, it fed on itself. Places like Australia, New Zealand and Chile did better after they liberalized. (Whenever I say “better”, I mean relative to other places—hardly anywhere did better than in 1945-75 in an absolute sense.). Although neoliberalism is often associated with Ronald Reagan, the neoliberal wave was actually more pronounced outside the US.
Free market ideologues like Milton Friedman gained added prestige for making successful predictions on unrelated subjects, such as the unreliability of Phillips Curve model and the importance of monetary policy in controlling inflation. Indeed, some on the left wrongly conflated “monetarism” with “neoliberalism”.
The meaning of the term “economic reform” changed. Prior to the 1970s, it meant an increased role for the government. After the 1970s, it meant a decreased role for the government. Indeed the term “neoliberalism” was necessary because by the 1970s many people (especially in America) had begun to associate liberalism with statism. In that case, what does it mean to “liberalize” an economy?
Brad DeLong suggests that the neoliberal era ended about 2010, which seems about right. But it’s too soon to have any perspective on these trends. Others have observed that there were countertrends, with regulations on housing, occupational licensing and the environment becoming stricter during the neoliberal era. As always, it’s a very complicated picture.
You could write a 1000 word essay on the causes of neoliberalism, or look at one picture:
HT: Doug Irwin
READER COMMENTS
Andrew_FL
Oct 4 2022 at 2:59pm
An understatement, as no such wave occurred in the US at all. There’s more regulation than ever. The tax code is more complex than ever. About only two things changed in the US: nominal top income tax rates are lower and inflation was brought under control, until someone beat the drum for 13 years demanding higher inflation.
Jonathan Monroe
Oct 5 2022 at 5:33am
The Carter-era deregulations (airlines, railroads, interstate trucking, and banking) were significant and (along with the Volker Fed) kicked off the neoliberal era in the US.
This is an example of one of the patterns of the neoliberal era globally: a shift in the types of regulation. Health, safety, and environmental regulations tended to continue getting stricter over time. Regulations intended to ensure “fair” competition and protect inefficient-but-deserving market participants tended to disappear. Outside the US, this mostly meant labour laws, but US labour laws were already pretty employer-friendly in the postwar era.
Andrew_FL
Oct 5 2022 at 9:47am
Banking is more regulated than ever. You will not find a single industry in the US where the volume of regulation was lower in 2021 than 1970, except perhaps food manufacturing. It may be true that the content of the regulation of trucking and airlines changed, but the volume of it did not decrease, it increased.
Jon Murphy
Oct 5 2022 at 11:01am
That is true, but irrelevant to the post. Note the timeline discussed in the post: “the final quarter of the 20th century.” It is absolutely true that the US has seen an explosion in regulation, especially since 2008. But the timeperiod we’re focusing on in this post is 1975-2000 (approximately), and beyond just the US as well.
Andrew_FL
Oct 5 2022 at 6:54pm
Jon, I am quite certain that if I similarly examined industry level data and did a 1975-2000 comparisons, I would need to append few if any other industries.
I will respond to the other commenters here since I think it is unlikely my comments will all get through if I attempt to reply to them all individually
nobody.really-The strawman that the alternative to a Code of Federal Regulations which is millions of pages long and grows every year is a dictatorship in which even more rules are made but not written down is a very silly argument to be making. The US was not a dictatorship except during the Wilson and Franklin Roosevelt Presidencies, and I can assure you that Roosevelt made use of written regulations to arbitrarily regulate industry and control prices. The US historically had a low volume of regulation, that’s the real world regime I “pick”.
MarkW-You have some interesting notions of what constitutes an industry. Of course one cannot compare the volume of regulation of activity which was illegal in 1970, as the government did not acknowledge its legitimate existence. But you are wrong to suppose that legal markets are necessarily freer than illegal ones, and the experience with cannabis in some of the states which have legalized it actually demonstrates quite well that illegal markets can be freer than legal ones. And liquor falls under food manufacturing.
nobody.really
Oct 5 2022 at 2:31pm
Maybe the “volume of regulation” has increased–but so what? If you want a real-world regime with a low volume of regulation, you probably would pick an absolute dictatorship: Most of the rules are unwritten, and they amount to “defer to the dictator’s whims.”
In the past the US regulated prices in airlines, railroads, interstate trucking, long-distance telecommunications, wholesale natural gas, and perhaps wholesale electricity. Today there are robust markets governing these things–and often elaborate rules for maintaining those markets. Likewise, we could certainly simplify the federal tax code by eliminating lots of taxpayer options.
Introducing competition into formerly regulated markets requires care. Doing it wrong–Russia, Enron, Worldcom, Global Crossing, etc.–can have costly results. But doing it right can have beneficial results, so we keep trying–even at the expense of more pages of regulation.
It turns out that providing a world with more choice often requires MORE text rather than less.
MarkW
Oct 5 2022 at 4:31pm
You will not find a single industry in the US where the volume of regulation was lower in 2021
Not true. Cannabis, is one obvious example. Others include charter schools (which didn’t exist in 1970) and home schooling (illegal in many states, including my own in 1970). Home brewing (also illegal in 1970) and brewpubs (not legalized in my state until the early 90s). Most fireworks were banned here in 1970 and motorcycle helmets were still mandated then. Firearms are generally less regulated now due to recent court decisions. Gay sex is no longer illegal and gay marriage is no longer banned. Many command-and-control regulations have been replaced by tradeable credits or shares (as in fisheries). Nine additional states adopted right-to-work statutes after 1970. Telecom monopolies weren’t eliminated until the 80s. And lastly, keep in mind that Nixon’s wage and price controls were imposed in 1970.
KenKras
Oct 6 2022 at 7:40am
Yes, plus 1) there has been de facto deregulation in some areas as enforcement has been cut back, for example, IRS audit frequency decreased from every once every 5 years in the tax exempt org area to less than once every 10 years (and the audits are less intense when done); and 2) counting pages of laws and regs is unenlightening since many of those new laws and regs were written to provide certainty in areas that were previously unclear. I recall when some administration suspended new IRS regs leaving the entire hospital industry wondering if some new model was viable. Since the IRS could not issue regs, no one knew, things froze up. Eventually, the IRS made public a closing agreement from a hospital audit to fill the info gap caused by some naive (or is it cynical?) political operative’s desire to show his admin’s anti-regulation cred. Moral: It is very tough to tell what is happening by counting pages or pronouncements. But it’s also very tough to tell what is going on by asking interested parties, who will lie or accentuate their point of view. People who claim to ‘know’ things about regulation across every sector of the economy should be regarded with great skepticism.
David Henderson
Oct 4 2022 at 3:17pm
Interesting. Those four were all obvious to me when I started understanding economics in 1968-69.
PC
Oct 24 2022 at 10:35pm
In Sumner’s defense, it’s far better when beginning to learn things to be unsure than to be confident. Anything that is ‘obvious’ to anyone when they begin learning something is usually something it turns out they later don’t understand very well. There are very few obvious things in the world and a lot of things that seem obvious but have hidden complexity.
Spencer
Oct 4 2022 at 4:59pm
The Golden Age in Capitalism ended when banks began to outbid the nonbanks for loan funds (the 5th rate hike in Reg. Q Ceilings for the banks). The economic engine has been running in reverse ever since.
The “The reason the BoE is buying long gilts: an LDI blow-up” is déjà vu. The 1966 Interest Rate Adjustment Act is the template.
If you wanted to get rid of inflation, you should stop expanding the money supply, indeed drain the money stock, and then gradually drive the banks out of the savings business (increasing noninflationary velocity). The 1966 Interest Rate Adjustment Act is prima facie evidence.
M1 peaked @137.2 on 1/1/1966 and didn’t exceed that # until 9/1/1967. Deposit rates of banks decreased from a high range of 5 1/2 to a low range of 4 % (albeit not enough). A recession, as Powell said, was avoided.
Lizard Man
Oct 4 2022 at 6:05pm
I thought that South Korea’s government meddled a lot in its economy in order to get its huge conglomerates to focus on exports. At least that was the impression I got from the book “How Asia Works”.
I also cannot remember if or when South Korea did land reform (land redistribution to farm laborers who were then small hold farmers), but I have also read that is important in growing an economy in a country that is mostly rural and engaged in agriculture. Given that the relevant alternatives were patterns of land ownership and labor based on feudalism, redistribution of land arguably is a step closer towards a market economy.
The point being that the Asian Tigers did embrace markets, but sometimes in ways that libertarians would not recognize as being pro-market. But subsidizing export oriented companies and industries gets companies competing on global markets for tradable goods. And redistributing land turns farmers from peons facing what are effectively very high taxes on their labor, which they rationally curtail, into owners who very conscientiously and intensively cultivate their own land. Is that story inaccurate?
Scott Sumner
Oct 5 2022 at 2:11am
Lizard, You said:
“The point being that the Asian Tigers did embrace markets, but sometimes in ways that libertarians would not recognize as being pro-market.”
But that’s equally true of the US, or any other capitalist economy. The point is that the East Asia tigers were relatively capitalist, compared to other economies at the time. Hong Kong and Singapore are always rated #1 and #2 on economic freedom.
Keep in mind that a 10% universal export subsidy combined with a 10% universal import tariff is equivalent to completely free trade. So when you read about how South Korea had both export subsidies and import tariffs, it does not mean that their trade was highly distorted.
robc
Oct 5 2022 at 11:39am
You need to explain that last bit to me, because it isn’t obvious. Here is my simplified example, which is probably wrong for some reason I don’t understand.
Under free trade, country A exports 10 widgets at $100 each to country B. Country A imports 10 doohickies at $100 each from country B.
A then adds a 10% tariff and a 10% export subsidy. A now exports 11 widgets at $90 each (the widget industry within A is very competitive, so all of the subsidy benefits the purchaser) and they import 9 doohickies at $110 each.
So, country A uses more natural resources and works harder in order to import less goods, making themselves poorer.
Scott Sumner
Oct 5 2022 at 12:42pm
Think of it this way. Exports are the way we pay for imports. So if you tax and subsidize trade to an equal extent, it’s a wash. In the example I cited the exchange rate would appreciate by 10%, offsetting the effects of the tariff and subsidy.
It would be like putting a 50 cent tax on gasoline, and also a 50 cent subsidy. No effect.
robc
Oct 5 2022 at 3:59pm
As I said below, I agree the dollars would be a wash. But I think items exported would increase and items imported would decrease, meaning you are trading more for less.
Candidus
Oct 5 2022 at 1:57pm
Exchange rate would adjust so they are back to being equal.
Henri Hein
Oct 5 2022 at 1:16pm
I think this is where the problem in your example is. I would assume the price is the same. I agree the producer may respond to the subsidy by trying to undercut foreign competition a bit, but there isn’t any reason to suppose the price change will equal the subsidy. Instead, assume they keep selling 10 widgets at $100, but now get a $100 boon from the subsidy. This allows them to pay the $100 tariffs on the doohickeys, for an overall wash.
Henri Hein
Oct 5 2022 at 1:17pm
Meant to reply to robc’s comment @ Oct 5 2022 at 11:39am
Lizard Man
Oct 5 2022 at 2:17pm
But aren’t they producing more tradeable goods than they otherwise would? I thought that was the point of the policy. It doesn’t immediately make the people in a country wealthier, but over time it should as productivity in the tradeable goods sector increases.
robc
Oct 5 2022 at 3:57pm
But if there is competition domestically, as I mentioned in my parenthetical, most or all of the subsidy would go to the purchaser. The producer would sell more items, thus making more profit, but the profit per item would be roughly the same.
And the opposite for imports. Imports would be more expensive, so there would be less of them.
So you are selling more items in order to purchase less items. Dollars might (would?) balance, but seems like a loss to me.
steve
Oct 5 2022 at 3:21pm
Which is more regulated?
Government sets prices for all airline tickets for all destinations eliminating competition based upon cost.
2) Government says everyone must inspect planes twice a year and every commercial passenger plane must have a ground alert system?
I would argue the first is more regulated even though in the second example you have more regulations. I would suggest that the decrease in the costs we saw in airline tickets in the second approach supports my belief. Does that make sense?
Steve
Larry Siegel
Oct 6 2022 at 5:26am
This question is almost too silly to answer. Price regulation and route allocation by the government has nothing in common with safety regulation except for the word “regulation.” Of course we need safety regulation. How would you like to fly Air Burkina Faso? (I don’t know that such an airline exists; I am speaking rhetorically.)
Price and route regulation is anticompetitive behavior and restraint of trade. If a private company tried it, they would be broken up and someone might go to jail. There was never a justification for it.
Foseti
Oct 6 2022 at 7:45am
Good points, but do you have insights or examples from post-1980? Surely the last 40+ years must have yielded some victories too
Per Kurowski
Oct 6 2022 at 2:29pm
Since 1988: Risk weighted bank capital requirements with decreed weights: 0% government – 100% citizens; as if bureaucrats know better what to do with (taxpayers’) credit than e.g., small businesses; what kind of #neoliberalism is that?
Thomas Lee Hutcheson
Oct 7 2022 at 8:03am
Wow! None of those things seemed new or surprising to me in 1960-64 at UT Austin or 1966-69 at U Michigan. Maybe things went downhill the 70’s.
Too bad that neoliberalism in practice got diverted into reducing taxes mainly on the rich) and higher deficits. I think the secular structural deficits had a lot to do in the US with overvaluing the dollar and exacerbating the impact of China’s internal reforms on manufacturing employment that undermined political support to for continued reduction in obstacles to trade.
Imagine if instead we had gotten Pigou taxation of net CO2 emissions and vehicular congestion, CBA of regulation, and replacing high deadweight loss taxes like the wage tax and business taxes with lower loss taxes like a VAT and personal income taxation with indexed capital gains.
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