The Failures of Neoliberalism Are Bigger Than Politics

Delong focuses on the political aspect of this shift, noting that there is nothing on the conservative Right that meets left-leaning neoliberals halfway to try and negotiate market-based policies. “Barack Obama rolls into office with Mitt Romney’s health care policy, with John McCain’s climate policy, with Bill Clinton’s tax policy, and George H.W. Bush’s foreign policy,” and yet conservatives give him zero credit, call him a socialist, and actually attack each of these ideas just as much as they would more ultra-left policies.

I sit right at the middle of this transition, seeing people in the space who are older, who have egalitarian ideals, but whose instincts were shaped by this neoliberal era, and also people who are younger, whose instincts are shaped by the financial crisis, secular stagnation, and increasing precarity. I’ve also carried a rifle in this battle, trying to move the party Left—and it is happening. But this movement is happening largely because the story that left neoliberals tell us all about the economy itself, not just the politics of it, has fallen apart.

Here are two statements about acceptable tradeoffs that I associate with left neoliberalism, both of which have failed to describe the economy as it currently exists. The first is that neoliberal policies would create more growth. Sure, inequality might increase, but so would wages; and even if not wages, mobility up and down the income ladder. Delong phrases it this way: “Economic growth first, redistribution and beefing up the safety net second.”

The second is that if we get government out of corporations’ way, the market would become more dynamic, competitive and innovative. Sure, there might be some level of profits and questionable behavior in the short term, but the market itself would fix it, such that in the long term the corporate sector looked much healthier in terms of profits and dynamism.

I want to ground it this way, in two intellectual statements about the tradeoffs of a policy regime, to help understand why the confidence that left neoliberalism once held over the baseline assumption of economics has collapsed. One reason is to ground it in a specific set of ideas. Neoliberalism is a shifty word, sometimes meaning triangulating centrism, or a political project to “encase” the market against democratic challenges, or just the euphoria that comes with marketized thinking. Here, we can discuss two things people believed, ideas that motivated a whole political apparatus, that are no longer convincing. Another is to show that this isn’t (just) a matter of workers having weak wages, or that trade had more downsides than were previously understood, or this or that thing being bad. This is a matter of ideas: ideas having failed, and us needing new ones.

The Economic Failures of Left Neoliberalism

Let’s get into some research. The first tradeoff is that the economy would become more unequal under neoliberal policy, but that neoliberal policies would also lead to rising GDP growth. This, in turn, would also lead to stronger wage growth, increased mobility, and increased economic dynamism. So went the theory. Inequality did grow across this time period, first on the labor market income side then later on capital income.

The positive effects of more inequality never happened. Starting in 1980, the growth rate of the economy slowed. While the economy grew at 3.9 percent a year from 1950 to 1980, since 1980 it has only grown at a rate of 2.6 percent. Wage growth also slowed, diverging from overall economic growth and productivity growth.

The mobility numbers, however, are more telling. The rate of increase relative mobility—the rate at which people would rise up and down the economic ladder—flattened compared to the increases seen in the mid-century period. Worse, absolute income mobility—whether you are better off than your parents—has also fallen. According to research led by economist Raj Chetty, 90 percent of children born in 1940 would go on to make more than their parents. This is only true of 50 percent of children born in the 1980s. Even if you increased GDP growth rates to the faster rates of the mid-century period, this would not restore absolute mobility. Instead, they find that you could restore more than 70 percent of the decline by changing the distribution of growth along the income distribution to match that of the mid-century period. The negative tradeoff between growth and redistribution was never found in the data. Recent research by the International Monetary Fund finds that this tradeoff doesn’t exist in practice; if anything, the relationship is the opposite.

Instead, we are seeing a revival of structural arguments that wages are increasingly determined by institutional structures rather than individual measures. Unionization was a driver of mid-century wage growth, especially for people of color. The top tax rates compressed the market distribution of wages. Ideas about individual “human capital” measure of wages, where people sell their labor into an indiscriminate sea of businesses, are weakened in the presence of so-called “superfirms.” The business cycle has come roaring back as a central feature of economic struggle. Much of this confidence of left neoliberalism, in my reading, came from the idea that the severe, prolonged recessions were a thing of the past. And using market incentives to try and provide social insurance and goods in key spheres of life are poor at changing incomes in addition to being politically weak.

The second was also a sense that if the government took shackles off of business, they would innovate and grow our way out of social problems. Relaxation of antitrust enforcement would lead to more competition and innovation, as was told. Unions would no longer get in the way of businesses. An unleashed financial sector would fund and lead the entire enterprise. The idea of market power, or concentration, was seen as laughable concepts stacked against the disciplining power of markets themselves.

We saw what happened with the financial sector. But there are two broader things that happened alongside it. First, at the level of individual firms, is that firm dynamism has fallen dramatically. The rate of business startups has fallen. In turn, this has shifted the age curve of businesses further out, with firms over 11-years-old accounting for 70 percent of workers in 2000 but 75 percent of workers in 2014. Labor market dynamism has fallen as well, with workers less likely to quit and move their jobs over the past two decades.

But what is most telling is the effect on the economy overall. Tobin’s Q is a measure of equity over the book value of a firm. If it is ever over 1, it means that firms are too profitable and they should invest more to bring it down back to 1. Tobin’s Q has doubled to well over 1 and shows no sign of slowing down. More broadly, there are several other puzzles that, taken together, point to extensive market power in the economy. As economist Gauti Eggertsson and others have summarized, there’s been a sustained increase in markups, a decrease in the real rate of interest, falling by roughly half since 1980, even while the measured average return on capital is relatively constant, and a break in the link between profits and investments. Another way to look at it: Corporate profits remain high, even as real interest rates have declined over the past several decades. That profits remain so high in nominal terms even as interest rates decline has brought economists to discuss a “profit share” that has increased at the expense of both capital and labor share. All of these factors together—high markups and profits, low interest rates, weak investment—point to a significant market power problem that impacts the macroeconomy.

Where This Leaves Us

These background assumptions have been losing their power since around the middle of the Obama administration. Whether it was ever reasonable to believe them is a good question but besides the point, as these ideas are no longer able to convince liberals to the point that they shut down alternative ideas. Why always presume business and markets are the leaders in innovation and dynamism if the corporate sector looks like an increasingly bloated, shareholder-dominated rent machine? Why assume billionaires are a boon to our society if a majority of people won’t be better off than their parents? Why bother supporting this economic regime if you can’t point to these tradeoffs as having been worthwhile?

There aren’t a lot of convincing responses on the Right either. One reaction is to say nothing has changed, or that the last 40 years since Reagan have been even more about government and socialism rather than a turn to neoliberalism. I don’t think people find that convincing. Another is to try and locate the dysfunction in affirmative government policy, and if we only get government even more out of the way then we’ll make progress. These arguments are not very convincing and certainly not up to the challenge of describing or mitigating against what has happened. United conservative governance failed to do anything meaningful to correct for failed ideas. The current shift Left would have happened even without Trump—though he does accelerate the need for a new set of ideas, because it is ideas about a whole economic regime that are what we need now.