Archive for the Category Neoliberalism


The loudest apologists for global neoliberalism

Back in 2016, the Trumpistas told us that the economy was a disaster.  Trump himself talked of economic “carnage” in his inaugural address.  When people pointed out that unemployment had recently fallen from 10% to 4.6%, they said those numbers were meaningless, and that the actual unemployment rate was as high as 30% or more.  We were told that the real issue was the huge trade deficit, which was decimating the American economy.  Those who pointed to “phony unemployment data” and ignored the trade deficit were nothing more than apologists for global neoliberalism.

Today the Trumpistas insist that the economy is in superb shape even though, as Tyler Cowen points out in a recent post, imports are surging and the trade deficit is getting larger.

I actually don’t have any big problem with Trumpistas saying the economy is in good shape, as long as they acknowledge that they have become the loudest apologists for global neoliberalism.  If they aren’t willing to acknowledge that fact, then what basis do they have to insist that the economy is in great shape?  RGDP growth?  It was just as fast around 2014-15.  Unemployment?  It fell from 10% to 4.6% even before Trump was elected.  Stocks?  They soared dramatically higher under Obama.  The big Trump issue is and always has been the trade deficit.  That’s how he wants to be judged, and that’s how I’ll judge him.

So Trumpistas should either take credit for continuing Obama’s policy of selling out to global neoliberalism with a policy of big trade deficits, falling unemployment, and soaring stock prices, or else keep their mouths shut.

PS.  The Financial Times makes the following claim:

Even if Mr Trump were gone tomorrow, nobody today in the US could run for president and win on a “let’s go back to the 1990s” platform. Laissez-faire trade and globalisation in general are under fire in the US (as well as in Europe and any number of developing countries).

Where is the evidence for this claim?  Why can’t we go back to the 1990s?  Polls show that support for free trade agreements is stable over time, and that young people and minorities are far more supportive of free trade than older people.  Why is it assumed that our future is inevitably more protectionist?  Aren’t the young and minorities our future?

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The Complacent Century

Looking backwards, it’s possible to see a number of turning points in the political zeitgeist.  America moved toward (left wing) liberalism around 1964, then swung back toward (right wing) neoliberalism in the late 1970s, and then toward nationalism in recent years.  And these were worldwide trends, with nationalism also on the rise in Europe, Russia, Turkey, India, China, Japan, and many other places.

Tyler Cowen pointed me to an article that suggests another turning point, which many people missed at the time.  The new millennium ushered in an Age of Complacency:

The eminent political economist Ross Garnaut says the Great Australian Complacency, as he calls it, took hold of the political system from 2000. This locates it halfway through the Howard era.

How can he be so specific? Because, after John Howard and Peter Costello enacted their landmark reform of the tax system in 2000, they lost interest in further reform, on Garnaut’s reckoning.

And this marked the end of not only Howard-Costello reforms but an entire generation of near-continuous reform efforts that started in the years of the Hawke-Keating governments.

As is so often the case, people put far too much weight on specific local factors when thinking about these changes.  Thus America’s move toward liberalism was not triggered by the Kennedy assassination, nor was the neoliberal era triggered by the elections of Thatcher and Reagan.  These were worldwide trends.

The Aussies have done very well in recent decades, and have a right to be complacent.  But the same thing happened in the US.  Here is government spending as a share of GDP, which rose sharply after 2000:

I know what you are going to say; “That’s due to special factors—G/GDP rose due to the 2001 recession and 9/11.

There is some truth in that, but it’s not the whole story.  G/GDP did not fall back when we recovered from the recession.  And indeed both Bush and Gore were promising bigger government than Clinton—the country was getting tired of neoliberalism by 2000.  Soon we would have Sarbanes-Oxley, a big new Federal education program, and a massive expansion of Medicare.  And that was under a GOP President—once Obama took office we moved even further towards big government.  And yet if you read pundits on the left all you hear about is endless “austerity”, which is nowhere to be seen in the data.

The UK was not hit by recession in 2001, nor was it impacted by 9/11.  But at almost exactly the same time the Labour Party got tired of austerity, and began rapidly boosting government spending:

You need a trained eye to read these graphs properly.  The G/GDP ratio usually tends to be somewhat countercyclical, rising during recessions and falling during booms. The sharp rise in the UK’s G/GDP ratio after 2000 was an exception, and is a tell tale sign that fiscal policy was dangerously out of control.

This might suggest that neoliberal reforms require economic distress, so that the public will see the need for changes.  But of course the economic distress of the 1930s led to the exact opposite—the rise of statism.

Rather, it seems that neoliberal reforms require both economic distress and a perception that the problem is caused by bad government policies.  The stagflation of the 1970s is one example.

Neoliberal reforms can also be triggered when countries are doing poorly relative to their neighbors.  Thus back in 2004 the Germans compared their 11% unemployment rate with the 5% rate in the UK, and concluded that excessively high labor costs were the problem.  This led to one of the last successful policy reforms of the neoliberal era.  Today, those amazingly successful reforms are politically unpopular in Germany

PS.  Over at Econlog I comment on the two (rumored) new Fed picks.

Argentina, Chile and China

Scott Alexander recently linked to a graph showing PISA scores by country and by income deciles within countries. Three that caught my eye were Argentina, Chile and Uruguay. These are three countries with populations of Western European descent, and are also the only three countries in South or Central America with per capita GDPs above $20,000.  But the Southern Cone does appalling bad at taking PISA exams, scoring among the lowest of all countries on the list.  Argentina is even lower than (much poorer) Brazil and Tunisia, something I would not have expected.  Argentina also scores extremely low on indices of “Economic Freedom”.

Argentina’s an interesting case to think about.  It’s a sort of composite of the worst of Chile and the worst of China.  Chile scores extremely high on economic freedom, the only developing country in the top 10 (unless Estonia is viewed as developing).  Argentina ranks 156 out of 180.  China’s sort of the opposite of Chile.  It ranks pretty low on economic freedom (#111), but (probably) pretty high on PISA scores.  I say “probably” because the scores being reported are for Shanghai, which is definitely smarter than the average Chinese city or village.  Indeed Shanghai scores above any other country in the world, including high achieving city-states like Hong Kong and Singapore.  Nonetheless, based on other studies I’ve seen, I am confident that China would still do pretty well on a more national PISA exam.  Perhaps about at Vietnam’s level.  (Vietnam is roughly comparable to Finland, and far above the US, UK or Sweden.)

So Chile and China each have one good trait and one bad trait.  Argentina has the bad trait of each.  Argentina’s a classic example of a glass half full/half empty situation.  From one perspective, you might expect Argentina to be rich.  It’s mostly settled by Western Europeans (I think it might be the most Western European country in all of North and South America), and those countries are usually pretty developed.  But Argentina’s per capita GDP seems to be either lowest in the world for ethnic Western European countries, or second lowest (I had trouble getting racial data for Costa Rica.) A hundred years ago it was among the world’s richest countries.  It has a world-class port, and rail lines fanning out across some of the world’s most profitable farmland.  It’s got lots of mineral resources.  It’s technically sophisticated, completing Latin America’s first nuclear power plant way back in 1974.

Chile’s population is also primarily Western European, but considerably less so than Argentina.  Chile also scores very low on PISA, but not as low as Argentina.  And of course Chile has far more economic freedom.  (Just to complete the Southern Cone, Uruguay is in between the two in terms of education and economic freedom, and also GDP/person.)

China is poorer than the Southern Cone.  But that may be misleading; as it’s clearly growing faster and hasn’t reached the “middle income trap” that the Southern Cone seems to have reached.  China’s high PISA scores are consistent with the high scores in other ethnic Chinese/Japanese/Korean/Vietnamese areas, but NOT other parts of Asia.

I’d like to claim that some combination of economic freedom and PISA scores explains wealth, but I see too many exceptions.  Mexico scores higher than Argentina on PISA tests, and also far higher on economic freedom, but is poorer.  Why?

Sweden is much richer than Finland, despite doing dramatically worse on PISA, and being fairly similar on economic freedom.  Maybe the answer here is that PISA and “economic freedom” don’t always measure what we might assume.  Take the Heritage Economic Freedom Index.  Argentina is down there with countries like Uzbekistan, New Guinea, Niger, Haiti and Afghanistan.  I don’t know about you, but if I were opening a new winery, I think I’d prefer the Mendoza area to Afghanistan or Niger.  Indeed reading the Heritage description of Argentina makes me wonder why it ranks so low. As far as PISA scores, I wonder if they measure the sorts of skills required for a modern economy.  According to The Economist, Swedes are the most computer literate of this set of countries, despite scoring relatively low on PISA tests.

Screen Shot 2017-02-18 at 8.21.06 PM I do think both the Heritage rankings and the PISA scores are correlated with what we think they measure (which might be ease of starting businesses and keeping the wealth you create for the Heritage index, and ability to do complex jobs for PISA).  The question I have is whether the outliers we see, such as Argentina and Sweden, are due to flaws in these two metrics, or because there are other factors that influence development, which go beyond economic freedom and intelligence/education.

At the bottom, I have (IMF) estimates of GDP per person in 2016 for the top 91 countries.  A few things worth noting:

1.  The US continues to be inexplicably rich.  Among “normal countries” (i.e. not oil rich, tiny, multinational dominated and/or city states) only Switzerland scores higher.  And number three (Netherlands) is more than 10% lower than the US.  We are no longer top 10 in economic freedom, and our PISA scores are mediocre.  So why are we so rich?  Because we are large?  But lots of small Northern European countries are high on the list.

2.  Spain finally surpassed Italy, after many decades of gradually catching up.  Wait, wasn’t Berlusconi going to Make Italy Great Again?  Seriously, I wonder if a combination of population density and regulatory complexity make if much harder to do major projects in Italy than Spain, like large new real estate developments.  Can anyone confirm?

3.  South Korea is now very close to overtaking Japan.  That may be partly due to the fact that Koreans have lower taxes and work more hours.

4.  China finally overtook Brazil, and it looks increasingly like they will overtake Mexico by 2030, (allowing me to win my bet with Talldave.)

5.   Malaysia overtook Greece and will soon overtake Portugal.  It seems increasingly likely that Malaysia will escape the “middle income trap”.

6.  There used to be a lot of articles about how the former Soviet bloc’s transition to capitalism had failed.  But there are now 5 former communist countries that are richer than Greece and Portugal, with the Czech Republic leading the way.

7.  All you need to do is look at countries #31 to #35 to realize that GDP/person (PPP) can be extremely misleading.  I wonder about some of the figures.

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It was the best of times, it was the second best of times

This is the golden age for Planet Earth.  Here is the FT:

We first asked whether young people were happy with their lives. We found that in emerging economies young people tend to be far happier than in the west: 90 per cent of Indonesians and 78 per cent of Nigerians said they were happy compared with just 57 per cent in Britain and France.

They also tend to be more optimistic. The countries with the highest proportions of young people who think the world is getting better are China, India and Nigeria; those where the highest proportion think the world is getting worse are France and Italy. The emerging economy exceptions were Argentina and Brazil, where young people are as gloomy about the future as they are in Europe.

The economic boom in the emerging markets is really starting to pay dividends in terms of human happiness.  Consider:

1.  In most of the world things are getting better at a rapid pace.

2.  Even better, the areas that are struggling, like France and Italy, are mostly already very affluent countries enjoying the “second best of times”.

3.  Even better, there are good models for these laggards, right across the border in Germany, where lots of jobs are created for young people.

4.  Even better, France and Italy are democratic countries that can freely choose the German model.

5.  Even better, we know that Germany’s success is not just cultural (although culture plays a role), nor is it based on trade surpluses that cannot be replicated worldwide.  Germany was a failed economy as recently as 2005, with 11% unemployment, despite it having the same culture and a huge trade surplus.  It was the labor market reforms of 2004 that brought success to Germany.  France and Italy can do the same, as long as they reject right-wing populism and embrace neoliberalism.  (Go Macron!)

But this is just the tip of the iceberg; there is far better news in the FT survey:

Young people in emerging economies are emphatic supporters of liberal values — even when those values run contrary to the laws of their country. In India and China more than half of young people think that same-sex marriage should be legal. Around three-quarters of young people in India, Brazil and China support equal rights for transgender people — more than in France and Japan.

Overwhelmingly, young people believe that men and women should be treated equally — with the greatest support for such values in the very different societies of Canada and China. Even in India, more than nine out of 10 young people support the principle that men and women should be treated equally — marginally higher even than in the UK and the US. We can no longer generalise about conservative developing countries and more liberal developed countries.

For all the concern about religious conservatism and polarisation, it is heartening that two-thirds of young people have close friends from other religions, and less than a fifth say a person’s religion is an important factor when deciding whether or not to be friends with them. Even in countries where this figure is highest — for instance India (29 per cent) and Indonesia (31 per cent) — two-thirds do not think a person’s religion is an important consideration when forming friendships.

Liberal attitudes are the key to progress.  The liberal attitudes of young people in the emerging markets bodes well for continued progress.

Members of Generation Z born in emerging economies are more likely to travel and forge friendships in other countries — on and offline — than any previous generation. Perhaps it isn’t surprising that they broadly agree with their contemporaries in the west on a host of personal and political issues, with some notable exceptions (Nigeria is a category of its own for religious conservatism) and, if anything, are greater supporters of the international order. With the growth of nativism around the world, it’s reassuring to know that the generation who will inherit the earth are, in most part, liberal globalists.

The future of the world has never been brighter.

Den ganzen Beitrag lesen…

Puerto Rico or Ireland? The choice facing Greece

The Financial Times has an article discussing the situation in Greece, which is described as being pretty bleak.  Living standards have fallen significantly:

The new report was prepared by IMF staff ahead of a February 6 board meeting to discuss the fund’s participation in an EU-led €86bn bailout of Greece and signals the continuing hard line the IMF is taking on debt relief for Athens. It offers a bleaker view of Greece’s economic dilemmas than an analysis prepared last year, warning that the debt load is “highly unsustainable” and would not improve even if it implemented further reforms recommended by the fund. . . .

“Even with these ambitious polices in place, Greece cannot grow out of its debt problem,” IMF staff warned in the report, seen by the Financial Times and drafted as part of the fund’s annual review of member economies. “Greece requires substantial debt relief from its European partners to restore debt sustainability.”

The IMF declined to comment, citing a policy of not commenting on leaked material.

The fund calculated that Greece’s debt load would reach 170 per cent of gross domestic product by 2020 and 164 per cent by 2022, “but become explosive thereafter” and grow to 275 per cent of GDP by 2060.

In contrast, the Germans believe that the Greeks need to tighten their belts, and get on with economic reforms.  Given that I’m a utilitarian, why do I favor Germany’s “tough love” approach over the soft love (or at least less tough love) approach of the IMF?

First let’s consider the “austerity” question.  In the Keynesian model, austerity may be a foolish policy during a temporary recession, or even a fairly long depression. But in the very long run, countries face hard budget constraints.  And by any stretch of the imagination the period from 2022 to 2060 must be viewed as “the very long run.”  It’s impossible to justify large and growing budget deficits during that 38-year period on the basis of “fiscal stimulus”.  That’s the road to bankruptcy.

It’s not easy to find accurate data on government spending and taxes, but the OECD has a graph showing that Greece spends just under 50% of GDP.  The IMF is simply wrong when it claims Greece’s debt situation is unsustainable.  If Greece had a smaller government sector, say closer to the 36% of GDP in Australia, or the 23% of GDP in Taiwan, then it could easily handle the challenges out to 2060.

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The counterargument is that those sorts of cuts are not politically realistic in Greece, and at the moment I’d have to agree.  Some would claim the Greeks have already suffered from severe austerity.  You might wonder how that can be, given that nearly 1/2 of Greek GDP goes into government spending.  The problem here is that as G has fallen sharply, so has GDP, leaving the G/GDP ratio little changed, even as the Greek people have seen slashes in important programs.  The deeper problem is that Greece does not produce like a developed country, but its citizens expect the level of services and pensions normally associated with a developed country.  That’s why there is so much hostility to Greece in the middle-income countries of Eastern Europe, where benefit levels are lower.  I can see both sides of the debate, but next I’d like to explain why I think the German approach is the best option.

Greece faces two options.  One is to become a sort of ward of the EU, kept afloat by endless subsides, with a loss of sovereignty.  Here a model might be Puerto Rico, or the US possessions of the South Pacific, or perhaps the Native American reservations within the US.  These regions consume more than they produce, with the help of transfers from Washington.

But there is another model.  When I was young, Ireland was quite poor.  Articles were written explaining how the Irish poverty reflected some sort of flaw in the Irish culture, or even a lack of intelligence.  But then Ireland adopted a neoliberal economic model, and it has now become one of the richest countries in the world (although that’s a bit overstated, as its GDP exceeds its GNP due to heavy multinational investment.)  Still it’s a successful economy.

When I researched neoliberalism back in 2008, I was puzzled by Greece’s relatively high GDP per capita, given that it had the least neoliberal model in the entire developed world.  Of course we all know what happened next, that flawed model finally caught up with the Greeks.  Greece tried to maintain developed country living standards with a third world-type economic structure, riddled with corruption and statism, by borrowing lots of money.

I sympathize with the Greek people, but the hard truth is that they continually elected the flawed and corrupt governments that brought Greece to its current situation.  The Germans are right; Greeks need to tighten their belts and adopt neoliberal economic reforms.  This will allow them to boom like Ireland, and eventually get back to much higher living standards.

The Puerto Rican option might look tempting–have other countries pay for your consumption–but in the end the political winds in Europe will shift and Greece will be left to fend for itself.  Thus the reforms should start right now.  If they start running budget surpluses then the Greek debt is certainly serviceable in this new world of ultra-low interest rates.

Unfortunately, I don’t think they will follow my advice.  I predict that Greece will choose the Puerto Rican option.  The only question in my mind is whether the Northern Europeans will allow it.  Perhaps that’s one tiny silver lining from the new nationalism sweeping the world.

PS.  The more I find out about Trump, the less I like him.  He doesn’t even know how to do populism right:

Republicans and Democrats in Congress and in state legislatures have recently pushed legislation to rein in the long-standing practice of police seizing the cash and property of suspects who haven’t been convicted. . . .

Likening such efforts to the Iran nuclear deal he has often lambasted, Trump said no one understands the phenomenon.

He said Congress would be “beat up” badly by the voters if it stood in the way of police efforts to conduct civil asset forfeiture.

A 2014 Washington Post investigation found that police had taken billions of dollars in cash from motorists without search warrants, and without charging them with a crime.

If you read libertarian media you frequently come across almost unbelievable abuses in this areas, things that you’d expect from law enforcement in Nigeria, not America.  And Trump opposes any reforms.  Sad!

He’s just an appalling human being, in every possible way.  Fortunately he’s President of the US rather than the Philippines.  The courts will at least somewhat limit the damage over here.