Noah Smith on the Rise and Fall of "Neoliberalism"

Wow, that was quick!

All spots in the inaugural Seminar on Liberalism and Its Critics are now filled. But if you were thinking of taking part, there’s good news.

Since so many of you want to participate, I decided to add a second section. It will meet on Wednesdays in January (1/8, 1/15, 1/22, 1/29), from noon to 2pm Eastern. You can sign up here. (And if you are still hoping to take part at 6pm, you can add your name to the waitlist here.)

(Bloomberg.)

Noah Smith is a writer and a former professor of finance at Stony Brook University. Smith is the author of the Substack Noahpinion.

In this week's conversation, Yascha Mounk and Noah Smith discuss the rise of the YIMBY ("Yes, in my backyard!") movement; why childcare, housing, and health care costs are so high in the United States; and what it would look like to embrace a genuine "abundance agenda."

The transcript and conversation have been condensed and lightly edited for clarity.

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Yascha Mounk: I've been trying to think through the state of economic policy at the moment, and it seems to me that we're in a strange moment where there was a clear paradigm that economists followed in the ‘90s and perhaps the early 2000s, and that ran aground. Then there was a principled alternative to it that parts of the left tried to put forward, but that seems to have run aground as well.

Do you think there's a kind of clear structure to how, let's say, the mainstream of the Democratic Party thinks about economic policy right now?

Noah Smith: Well, in the 2000s, a kind of an intellectual movement among progressives started to crystallize, which I guess for want of a better term you could call anti-neoliberalism. People basically got a short list of things they thought the market got wrong and told this sort of simplified, potted history: In the 1980s, we decided markets could do everything, cut the government, and then this led to rising inequality, falling worker power, environmental degradation, etc.. And they thought that in order to get rid of those, we need to basically reverse the neoliberal changes—to strengthen unions, various kinds of regulations, and the welfare state. And that was the basic progressive program. And you saw some elements of that program get implemented by Biden, but a lot got blocked.

But the neoliberal turn was a lot less dramatic, I think, than people realize. We never actually cut the welfare state, for example; in terms of social spending, it was about flat as a percentage of GDP. And then under Clinton, it went way up. Under Bush, it went up again. The regulatory state was never really cut; Reagan appointed people who were generally unfriendly to regulation, and we did some targeted deregulations in things like finance, which ended up blowing up in our face. But overall regulation didn't really go down. And some of the most important regulations, like land-use regulations, actually got tighter and tighter. We did open up trade a significant amount. And so that was probably the place where the neoliberal turn was most real, most substantive. But a lot of the anti-neoliberals dramatically exaggerate the degree to which we cut government in the ‘80s and in the ‘90s.

The real impact of this kind of neoliberalism, if you will, was not the things we did, but the things we didn't do. There were a number of things we could have done to respond to the competitive threat from China. The People's Bank of China bought a whole bunch of dollar-denominated bonds, which made the yuan very cheap, which made their exports artificially cheap. This exacerbated the so-called “China Shock” and caused manufacturing to leave America faster than would have been economically efficient. We should have said “No, we'll brand you a currency manipulator under the WTO and we'll use countervailing duties to force you to upvalue currency” in 2002. We could have done that and we didn't do it because we were geopolitically distracted with the War on Terror and because we were ideologically committed to free trade.

Mounk: I think we need to take one step back. What actually were the problems that the “neoliberals” were responding to in the first place that helped to shape some of what they were doing?

Smith: So you had a number of problems. First of all, there was inflation, obviously, which they responded to by tightening interest rates and implementing a more hawkish monetary policy regime under Federal Reserve Chairman Volcker, which continued all the way up until this day (we've never really transitioned out of that hawkish monetary stance). Companies in America were very badly managed and got very poor return on equity. I think the kind of the shareholder revolution, which included revolutions in corporate finance, was intended to clean that up.

You did see increases in profits. You saw increases in innovation. You saw increases in employment. So the crappiness of companies in the ‘70s was one thing that was being responded to. Also, some of the regulations that Carter did actually before Reagan—deregulation of trucking, transport, energy, things like that—actually had an effect. Deregulating energy supplies gave us cheaper energy, and everyone was pretty happy with that. And so there were a number of problems that the Reagan program, or the Carter-Reagan program, was designed to address and did address. Free trade in the ‘80s and ‘90s did displace a few people, but ultimately trade with Japan and with Europe and with Indonesia benefited the United States.

It wasn't until China really came on the scene that we started to see a different result. Free trade was good right up until it wasn't. Wages and income started rising again, and you did absolutely see a rise in inequality, starting with Reagan. And we can argue about the reasons for that. But income started rising too. The value of people's assets kept rising, stocks rose even more, real estate rose. Middle class people had wealth in a way that they'd never really had before, through the value of their homes, especially, but also through their pensions and their 401ks.

A lot of things that people liked came out of the neoliberal era, along with some things that people didn't like. But that's why I think you saw pretty good satisfaction with the economy right up until 2008, when the Great Recession came and sort of knocked over the old world.

Mounk: So to summarize where we stand, the phase immediately before the rise of “neoliberalism” was a lot more troubled than people sometimes remember. This was not the golden era of the 1950s and 1960s, where the economy was growing, but a moment of stagnation. And the neoliberal moment itself was a lot more complicated than people sometimes portray it as, both because the people who did want to cut the wealth estate and regulations didn't always succeed in doing so, and because many people subsumed into that program self-consciously wanted to expand social spending in many categories. At the same time, we do have some of the things that end up producing 2008—you have banking deregulation and trade with China, which starts to really undermine manufacturing jobs in places like Michigan and so on in the United States.

What is the anti-neoliberal consensus that crystallizes at that point? And why are you not convinced by it? What are the shortcomings in the actual policies of the anti-neoliberal crowd?