Why I Am Not a Neoliberal — Confessions of a Supply-Side Liberal

Without looking at the details, I would have thought that I was a Neoliberal. Indeed, I have a Storify story "The Time Miles was Called a "Neoliberal Sellout" by Matt Yglesias and was Glad for the Compliment in the End." But digging deeper, I am now not at all sure I am a Neoliberal. Let me consider point by point where I agree with Neoliberalism and where I disagree.

Whole books have been written on Neoliberalism, but I haven't read them. So let me take Mike Konczal's take on Neoliberalism in his excellent Vox essay "'Neoliberalism' isn’t an empty epithet. It’s a real, powerful set of ideas" as a rough-and-ready definition of Neoliberalism. My discussion of whether I am a Neoliberal or not will only be relative to Mike Konczal's description of Neoliberalism there. If Neoliberalism moves in the direction of Supply-Side Liberalism as laid out in all of the posts in this blog, so much the better. But historically, Neoliberalism seems to have many differences from my version of Supply-Side Liberalism.

Early on in his essay, Mike Konczal cautions:

The difficulty of the term ["Neoliberalism"] is that it’s used to described three overlapping but very distinct intellectual developments.

Moving to the Political Center

The first of these three intellectual developments was political:

In political circles, ["Neoliberalism" is] most commonly used to refer to a successful attempt to move the Democratic Party to the center in the aftermath of conservative victories in the 1980s. [One] can look to Bill Galston and Elaine Kamarck’s influential 1989 The Politics of Evasion, in which the authors argued that Democratic “programs must be shaped and defended within an inhospitable ideological climate, and they cannot by themselves remedy the electorate's broader antipathy to contemporary liberalism.”

To me, this is just democracy in action—when political entrepreneurs don't get blinded by their own personal ideology. Ignoring the views of close to half the electorate can be politically dangerous. You can see some of my views about the partisan divide abroad and in the US in

Personally, I have a great deal of sympathy for many (but by no means all) "Conservative" arguments.

The Washington Consensus

Mike Konczal continues:

In economic circles, however, “neoliberalism” is most identified with an elite response to the economic crises of the 1970s: stagflation, the energy crisis, the near bankruptcy of New York. The response to these crises was conservative in nature, pushing back against the economic management of the midcentury period. It is sometimes known as the “Washington Consensus,” a set of 10 policies that became the new economic common sense.

It is this “Washington Consensus” that I most want to put under the microscope. John Williamson's 1990 Peterson Institute of International Economics paper "What Washington Means by Policy Reform" is the touchstone Mike Konczal refers to for the "Washington Consensus." Looking at this document, one can see that, to this day, when policy folks talk about "structural reform," they are often talking about reform in line with the "Washington Consensus."

1. Fiscal Discipline

Fiscal discipline is the first tenet of the Washington Consensus. (All of this about the Washington consensus is "according to John Williamson in 1990.") I am a fiscal hawk in the sense that I worry quite a bit about the national debt. You can see this in my early post "Avoiding Fiscal Armageddon." Yichuan Wang and I interpreted the data as providing no support for the idea that national debt lowers GDP growth in "After Crunching Reinhart and Rogoff's Data, We Found No Evidence High Debt Slows Growth," but there we write:

We don’t want anyone to take away the message that high levels of national debt are a matter of no concern. As discussed in "Why Austerity Budgets Won't Save Your Economy," the big problem with debt is that the only ways to avoid paying it back or paying interest on it forever are national bankruptcy or hyper-inflation. And unless the borrowed money is spent in ways that foster economic growth in a big way, paying it back or paying interest on it forever will mean future pain in the form of higher taxes or lower spending.

What I said in "Why Austerity Budgets Won't Save Your Economy" is:

To understand the other costs of debt, think of an individual going into debt. There are many appropriate reasons to take on debt, despite the burden of paying off the debt:

To deal with an emergency—such as unexpected medical expenses—when it was impossible to be prepared by saving in advance.
To invest in an education or tools needed for a better job.
To buy an affordable house or car that will provide benefits for many years.

There is one more logically coherent reason to take on debt—logically coherent but seldom seen in the real world:

To be able to say with contentment and satisfaction in one’s impoverished old age, “What fun I had when I was young!”

In theory, this could happen if when young, one had a unique opportunity for a wonderful experience—an opportunity that is very rare, worth sacrificing for later on. Another way it could happen is if one simply cared more in general about what happened in one’s youth than about what happened in one’s old age.

Tax increases and government spending cuts are painful. Running up the national debt concentrates and intensifies that pain in the future. Since our budget deficits are not giving us a uniquely wonderful experience now, to justify running up debt, that debt should be either (i) necessary to avoid great pain now, or (ii) necessary to make the future better in a big enough way to make up for the extra debt burden.

My worries about the national debt are also an important impetus behind my arguing for a public contribution program, as introduced in "No Tax Increase Without Recompense" and developed in other posts linked in my bibliographic post "How and Why to Expand the Nonprofit Sector as a Partial Alternative to Government: A Reader’s Guide."

But what about fiscal stimulus? I am firmly of the view that, other than automatic stabilizers (such as taxes that go up with income and benefits that increase with low income), monetary policy should take on the primary stabilization role. One of my signature efforts has been to figure out the most practical and acceptable possible ways to eliminate the zero lower bound. My organized bibliography for that effort is "How and Why to Eliminate the Zero Lower Bound: A Reader’s Guide." Once a central bank's target interest rate can go as low as necessary, aggregate demand is no longer scarce. So there is no excuse for a government to then run deficits beyond those induced by automatic stabilizers to stimulate the economy.

There are three exceptions to this generalization. First, as part of the monetary policy transmission mechanism, the fiscal arm of the government should spend most of the windfall from reduced interest expenses when interest rates go down and cut back spending to compensate for higher interest expenses when interest rates go up. (See "Negative Rates and the Fiscal Theory of the Price Level.") Most governments will do this without extra prompting. Ideally, the government should also do some intertemporal substitution in spending that responds to high or low interest rates in the way that would be optimal for a private corporation. Governments have been surprisingly slow to do this.

Second, in a monetary union such as the euro zone, where countries in disparate economic situations share monetary policy, an individual nation might need to use some sort of fiscal stimulus. For that I recommend the kind of credit policy I discuss in my paper "Getting the Biggest Bang for the Buck in Fiscal Policy," which is introduced in my blog post of the same name. The abstract for the paper clarifies the key issue for fiscal hawks who see the need for some stimulus:

In ranking fiscal stimulus programs, it is useful to focus on the ratio of extra aggregate demand to extra national debt that results. This note argues that (because of repayment after the end of a recession) “national lines of credit”--that is, government-issued credit cards with countercyclical credit limits and favorable interest rates—would generate a higher ratio of extra aggregate demand to extra national debt than tax rebates. Because it involves government loans that are anticipated in advance to involve some losses and therefore involve a fiscal cost even after efforts to minimize losses, such a policy lies between traditional monetary policy and traditional fiscal policy.

Third, because monetary policy has a lag of 9 months or so in its effects, the same kind of credit policies can be of some value in the first few quarters after an unexpected shock.

Other than these exceptions, I come down decisively in favoring monetary policy over fiscal policy for economic stabilization. See for example:

On the other hand, I do not always look like a fiscal hawk. In "What Should the Historical Pattern of Slow Recoveries after Financial Crises Mean for Our Judgment of Barack Obama's Economic Stewardship?" I strongly criticize Barack Obama for not politically prioritizing and pushing through a larger fiscal expansion in 2009. At that time, the fact that interest rates could go as far negative as needed with easy-to-implement policies was not well understood, so Barack Obama should have done at least three times the amount of fiscal stimulus that he did historically. Because he didn't, a big part of the harm of the Great Recession in the US was his fault. The political prioritization necessary to get a bigger fiscal stimulus package through could easily have meant not getting the Obamacare legislation in anything close to the actual "Patient Protection and Affordable Care Act" through. But to me, avoiding a significant part of the harm of the Great Recession at the cost of being forced to proceed with health care reform on a more bipartisan basis seems the better choice.

On a more technical issue, I believe strongly that there should be a separate capital budget for national governments. Noah Smith and I argue this in "One of the Biggest Threats to America's Future Has the Easiest Fix" and I have thought hard about technical details of how to make a capital budget work well by keeping incentives to game the system mostly in check: see my powerpoint file "The Applied Theory of Capital Budgeting," which I presented at the Congressional Budget Office in May 2014. My post and the associated Powerpoint file "Discounting Government Projects" addresses another technical issue in capital budgeting.

2. The Composition of Public Expenditures

The second tenet of the Washington Consensus is that health, education and infrastructure spending are especially good types of public expenditure and that indiscriminate subsidies are especially bad types of public expenditure. Here I am in total agreement.

3. Tax Reform

For the most part, I don't want to talk about the current Republican tax reform plans being hatched in the House and Senate today. Those plans are a mix of very bad measures with some good technocratic measures. But I am sympathetic to widely agreed-upon principles of tax reform. John Williamson writes:

.. there is a very wide consensus about the most desirable method of raising whatever level of tax revenue is judged to be needed. The principle is that the tax base should be broad and marginal tax rates should be moderate.

I favor the more transparent approach of taxing the rich people who (for the most part) own corporations rather than the opaque approach of taxing the corporations themselves. And I favor consumption taxation, as you can see in "Scrooge and the Ethical Case for Consumption Taxation" and "VAT: Help the Poor and Strengthen the Economy by Changing the Way the US Collects Tax."

I do not depart from the Washington Consensus here.

4. Real Interest Rates Market-Determined and Positive

According to John Williamson, a fourth tenet of the Washington Consensus is that real interest rates should be market-determined, positive and moderate. Distinguishing between the short-run, medium-run and long-run as I do in "The Medium-Run Natural Interest Rate and the Short-Run Natural Interest Rate," in the medium-run and long-run, I certainly agree that interest rates should be market-determined. But a market-determined medium-run or long-run rate may or may not be positive. As John Williamson himself wrote in 1990:

The question obviously arises as to whether these two principles are mutually consistent. Under noncrisis conditions, I see little reason to anticipate a contradiction.

With policy heavy-weights such as Larry Summers and Olivier Blanchard talking about secular stagnation, I think the Washington Consensus may be moving toward realizing that situations where real interest rates need to be negative in the long-run are quite possible.

I fully agree that there are many bad market interventions that push some interest rates down. A good example is the low interest rates given by state-owned banks to state-owned enterprises in current Chinese policy. These divert funds away from the non-state sector, raising the rates in the non-state sector, thereby making it harder for households and private businesses to borrow.

In the short-run, the idea that interest rates should be market-determined and positive is not helpful. First, I see it as inevitable that some sort of monetary policy be central to interest-rate determination. There is no neutral "free-market" monetary policy. The gold standard is not a neutral monetary policy. The closest it is possible to come to a free-market monetary policy is for the central bank to do its best to get the economy quickly back to the natural level of output, the natural level of unemployment and the natural interest rate. I advocate that strongly, as you can see in my paper "Next Generation Monetary Policy."

Second, I believe negative rates—both real and nominal—are crucial for cutting short recessions and enabling a lower inflation target. See "How Subordinating Paper Currency to Electronic Money Can End Recessions and End Inflation."

5. Free Capital Flows

Here I think the "Washington Consensus" shifted between when John Williamson was writing and now. I feel there has been more and more emphasis not just on competitive exchange rates, but also free capital flows. Here I favor a more managed version of international capital flows than the current consensus. See "Alexander Trentin Interviews Miles Kimball about Establishing an International Capital Flow Framework."

6. Free Trade

I am in favor of free trade. Here I am in agreement with the Washington Consensus. But, in something the Washington Consensus did not push, I think the benefits are much greater for freer immigration than from freer trade. See ""The Hunger Games" Is Hardly Our Future--It's Already Here." But as I mentioned above, I think international capital flows should be better managed in order to get more balanced trade:

7. Foreign Direct Investment

I agree that encouraging foreign direct investment is a good thing. For many countries it is a very good thing. Looking at things from the standpoint of countries doing foreign direct investment, one of my favorite essays is "Nicholas Kristof: "Where Sweatshops are a Dream."

8. Privatization

I agree that many enterprises are better run privately than by the government. But privatization of core government functions such as prisons has often led to very poor quality. For a country like the US, if further privatization took place, my guess is that it would be more likely to move in the wrong direction than in the right direction.

Part of the problem with privatization of core government functions is the great danger of corruption in government contracting. Suppose I define:

core government function = something where if it isn't done by the government itself, the government needs to contract with a private firm for the service.

Then one needs to consider whether any inefficiency of having the government do the job itself is outweighed by the likely corruption in the contracting relationship.

In what might seem, but isn't, a view antithetical to a pro-privatization view, I think the US government should take a much bigger role in bringing down the risk premium with a sovereign wealth fund, which would involve it owning, at least indirectly, a large amount of stock. See:

The reason a sovereign wealth fund wouldn't violate the principle of avoiding undue government meddling is that it would be required to hold only ETFs that had no voting rights.

9. Deregulaton

Regulation is one of the areas where I most strongly disagree with the Washington Consensus. I think capital requirements/leverage limits are much too loose. I have said this strongly many times. "Martin Wolf: Why Bankers are Intellectually Naked" is a good post to start with. I have also cheered on the efforts of the Consumer Financial Protection Bureau under Richard Cordray. I give the philosophical justification for the type of regulation done by the CFPB in "On the Consumer Financial Protection Bureau." I also think there are many types of wealth that are ill-gotten, even though they are legal. See "Odious Wealth: The Outrage is Not So Much Over Inequality but All the Dubious Ways the Rich Got Richer."

On the other hand, at the state and local level, regulation is often used as a tool to keep the poor from living next door or competing with middle-class jobs. That is, state and local regulation is often effectively a tool of oppression. I write about the common impulse behind immigration restrictions at the national level and land-use and occupational licensing restrictions at the state and local level in "Keep the Riffraff Out!"

Affordable housing in desirable cities for all the people who want it requires an adequate total amount of housing. That in turn requires allowing needed construction. In "Building Up With Grace," I call for every substantial city to have some district with no height limits that has excellent bus service to the rest of the city. This is for the sake of those of modest means who want to live and work in the city. (Genuine earthquake dangers might lead to some height limits, but these should not be used as an excuse beyond genuine safety needs.)

In relation to regulatory restrictions on construction, I find myself in sympathy with the great bulk of posts on the excellent Facebook group "Market Urbanism." I highly recommend it.

I should note that allowing more construction has financial stability benefits as well as benefitting social justice. See "With a Regulatory Regime That Freely Accomodates Housing Construction, Lower Interest Rates Drive Down Rents Instead of Driving Up the Price of Homes."

Occupational licensing requirements often keep those at the bottom of the heap out of jobs, as I discuss in my post “When the Government Says “You May Not Have a Job.” The extent to which this is done in practice is unconscionable. Fortunately, occupational licensing reform efforts are afoot. But these efforts could easily stall out. This is an important area to focus on.

For those who haven't thought much about occupational licensing, there are two key related points to take away. First, occupational certification and occupational licensing are not the same thing. In "John Stuart Mill: Certification, Not Licensing" I write:

As for licensing itself, although they are often spoken of in the same breath, there is a world of difference between certification and licensing. Certification requirements say that you have to inform customers of your level of qualifications or lack of qualifications in unmistakable ways, according to a well-defined terminology established by the government. They are based on the principle of telling the truth and not deceiving, but do entail some details to make sure no one misunderstands.

By contrast, licensing requirements say you can be fined or thrown in jail for getting paid for something that someone with an absolutely crystal clear idea of your lack of qualifications is perfectly happy to pay you to do. For example, I would run afoul of the law in Michigan if I cut someone else’s hair for pay–a law ultimately backed up by the threat of throwing me in jail, even if the initial penalty is only a fine. The real reason for that stipulation is that barbers want that barrier to entry in place (I think at least a year and a half of training), not any danger that I will seriously harm someone with a basic haircut. I express some of how wrong I think the overgrowth of licensing requirements is in my post “When the Government Says “You May Not Have a Job'."

I have no problem with certification—it simply makes things clear. But I do have a problem with licensing, which says to people "You may not have a job" unless they devote time and money to training they may not be able to afford.

(Update: See also my December 5, 2017 post "Against Occupational Licensing.")

For practical reform efforts, the second key point to make about occupational licensing is that establishing a low-hurdle licensing category in each general type of job has many of the good effects of having a certification regime instead of a licensing regime. It isn't too harmful to require that "barbers" have a year and a half of training if there is also an occupational licensing category of "haircutter" that requires only a week of training, and haircutters are legally allowed to do everything that barbers are allowed to do. In that case "barber" would indicate someone highly trained, which is useful, but barbers and haircutters would still compete.

My post "Against Anticompetitive Regulation" discusses other regulatory issues as well. The title of that post indicates the very first question you should ask about any regulation: "Is the regulation about keeping everyone honest, or is it about keeping down the competition?"

Crucially, "keeping everyone honest" doesn't mean "ensuring high quality." If someone honestly signals that what they are selling is low-quality but inexpensive, they should be allowed to sell their honestly low-quality goods and services.

Overall, more regulation is needed of the financial industry; less regulation is needed for service jobs and housing construction. And it is important to watch out for firms running to the government to get the government to put an obstacle in the way of a potential competitor. Finally, regulations that make corporate deception illegal are almost always a good thing. After all, the key welfare theorems suggesting that a free market will do a good job all rely on people knowing and understanding the truth! (General anti-fraud principles in the legal code are helpful, but often don't do enough.)

10. Property Rights

There are many virtues to property rights as they exist in the United States. But I think we have gone much too far with intellectual property rights. See:

One of the bad aspects of trade negotiations in the last few years has been the emphasis by the United States on imposing its dysfunctional intellectual property system on the rest of the world. (See Dani Rodrik on one aspect of that here.) The United States should get its own house in order on intellectual property, and only then recommend its intellectual property system to other nations.

On property rights more generally, I think if, by a high standard of proof, an action can be shown to be a bad action that should have been prohibited in the past, then taxing away the wealth resulting from that action is appropriate. If done right, this has good incentives: companies and people will try to avoid doing things that people in the future will realize were wrong. However, there may need to be some statute of limitations on this.

And where uncertainty about future legal treatment stands in the way of important investments, the government may need to provide better guarantees of future legal treatment. I am thinking here of the development of self-driving cars, that could be seriously hindered if there were too much legal uncertainty. Fortunately, that seems to have been avoided.

Markets Defining More and More of Our Lives

Leaving the Washington Consensus, the last of the three meanings of "Neoliberalism" Mike Konczal writes of is markets defining more and more of our lives:

The third meaning of “neoliberalism,” most often used in academic circles, encompasses market supremacy — or the extension of markets or market-like logic to more and more spheres of life. This, in turn, has a significant influence on our subjectivity: how we view ourselves, our society, and our roles in it. One insight here is that markets don’t occur naturally but are instead constructed through law and practices, and those practices can be extended into realms well beyond traditional markets.

Another insight is that market exchanges can create an ethos that ends up shaping more and more human behavior; we can increasingly view ourselves as little more than human capital maximizing our market values.

Here let me break out as a distinct problem the idea that companies should only be concerned about maximizing shareholder value. Even if "obeying the law" is added as a constraint on that goal, it still leads to serious problems, as corporations look for every possible loophole to maximize shareholder value even at the expense of social welfare. Although it isn't perfect, a much better goal for big companies, quite consistent with economic theory, would be to maximize the overall welfare of those people who hold index funds covering all the public companies in the nation or in the world.

In his book Finance and the Good Society, Robert Shiller speaks approvingly of legal structures for corporations that stipulate that a given corporation should pursue goals beyond shareholder value maximization. This is likely to be helpful where it is used.

But what is most needed is for business school professors to quit teaching that maximizing shareholder value is the be-all and end-all duty of those who run public corporations—perhaps with obeying the law as an added duty. I am not at all satisfied with the alternatives proposed by most of those who want companies to pursue something other than shareholder value maximization. In the immediate future, I think what I mentioned above—"maximizing the overall welfare of those people who hold index funds covering all the public companies in the nation"—would be a good alternative to shareholder value maximization in business school instruction. With thought, I have no doubt that careful thinkers can come up with an even better alternative that still has some of the hard edge of economic theory but that is even more conducive to social welfare.

More specifically on the issue of markets defining more and more of our lives, I think economists need to appreciate more all of the non-monetary motives that drive people. I wrote about this in "Scott Adams's Finest Hour: How to Tax the Rich." In addition to affecting taxation and being a big part of the argument for the public contribution program I have proposed in order to expand the non-profit sector, non-monetary motives are a key reason why current copyright law is off-track, as discussed in my post "Copyright."

Religious motives are good examples of non-monetary motives though far from the only non-monetary motives. Personally, I know well how powerful non-monetary motives can be from my forty years as a Mormon. (See "Five Books That Have Changed My Life.") The posts I noted there can help you appreciate how big a difference non-monetary motives can make:

Also see this Bloomberg View article by Megan McArdle:

How Utah Keeps the American Dream Alive

The biggest share of my research time is currently being devoted to collecting and analyzing data in order to write a paper with the working title of "What Do People Want?" with Dan Benjamin, Kristen Cooper and Ori Heffetz, supported by a brilliant and capable team of research assistants: Becky Royer, Tuan Nguyen, Tushar Kundu, Rosie Li and (early on) Samantha Cunningham, and by heavy-duty coding support from Robbie Strom and Itay Zandbank. That exercise demonstrates well how many things people care about—of which only some can be purchased in the market. I hope to share some of our latest results in a few months. But for now, take a look at the results from an earlier round of data collection that I discuss in "Judging the Nations: Wealth and Happiness Are Not Enough."

It is a big mistake to think that people only care about things that can be bought and sold. Acting as if people do care only about things that can be bought and sold impoverishes our interactions with one another.

Markets are useful tools, but they have downsides as well as the many upsides that we teach in economics courses.

Conclusion

There are many areas where I agree with Neoliberalism. But I disagree with Neoliberalism in important areas:

the need for more financial regulation (particularly the need for stricter capital requirements and leverage limits and more regulation in the domain of the Consumer Financial Protection Bureau)
the need for negative interest rates
the need for international capital flow policies that lead to more balanced trade
the need for less restrictive intellectual property law
the perils of corporate decision-makers believing their job is "shareholder value maximization"
the downsides of excessive marketization—and even more the downsides of having a view of human beings as motivated almost entirely by the things money can buy
the prevalence of ill-gotten legal wealth in countries like the US
the virtues of (possibly debt-financed) sovereign wealth funds as a policy tool for countries such as the US, Japan, the UK and many other European countries

These differences seem important enough that I do not consider myself a Neoliberal. Supply-Side Liberalism is not Neoliberalism. It is a different animal.