Scott Sumner On Why Neoliberalism Is Not To Blame For The Great Recession And Rising Inequality

See I wish you a very neoliberal Christmas.

"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:"