Did neoliberalism fail? And do industrial policies lead to stronger growth in manufacturing? Scott Sumner looks at the evidence

See Thanks for Nothing.

"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."