Explaining the Neoliberalism Paradox: How Neoliberal Policies Can Be Correlated With Slower Growth and Still Be Pro-Growth

I'd like to draw attention to this great Scott Sumner post about one of the biggest mistakes intelligent people, including experts, make when it comes to economic policy. They often reason that policies that are pro-growth are actually anti-growth, because they are associated with low growth. Of course; using Scott's example, when it comes to monetary policy, defenders of monetary stimulus will correctly point out that low growth causes those policies, (which then increase growth but not always to prior levels/trend) rather than the other way around. The causality is backwards. (For a fantastic analogy, check out Scott's post here). 

The reason I'm bringing this up, isn't so much a case of people ignoring this logic, as forgetting it when it's ideologically convenient to do so.  I frequently see this kind of thinking applied to interest rates and QE, which is good; but almost never see it, for example, when people are talking about taxes or neoliberal reforms.

For example, the fact that growth in the 1980s was only .1%/year higher than the post-war trend is used as evidence that Reaganomics wasn't very stimulative, just increased the deficit a lot and resulted in a lot more inequality. Yet they were enacted precisely because of low growth, not just in the U.S. but globally. 

Productivity growth in the 1970s was abysmal, the only reason the RGDP figures look decent from that period is that there were a ton of women entering the labor force, which was obviously unsustainable and meant living standards were only increasing almost entirely because more people were working. This was the case globally, as well.

In my best estimation, the poor performance of the '70s globally was due partially to the increased energy prices and volatility in the oil market, and also due to the lack of reform aimed at boosting the level path of GDP. The '70s saw inflation push people into higher brackets and a ton of new regulation. G/GDP rose globally in the '70s too, just as growth was slowing. The causes, however, aren't particularly relevant to the point. 

Now, keeping all of that in mind, let's throw in some assumptions:

• neoliberal reforms are substantially pro-growth
• work mainly through boosting the level-path of GDP (as in an adjustment period of higher growth, presumably about 10 years as firms and individuals react to changed incentives), not through substantially permanently increasing the growth rate
• the long-run growth rate naturally declines as nations get wealthier.
• the global growth slowdown was not temporary 

What would be the result if these assumptions were true?  Well, nations with the most neoliberal policy would start from high GDP levels, those that did the most reform would have seen the largest increase in GDP levels, and global growth would have continued to be slow.  It would also indicate that the nations with the highest GDP per capita would be the ones that were the most neoliberal. In other words, exactly what happened.  

Incredibly, these assumptions explain the pre-war boom, too (which supposedly refutes the notion that high MTRs are bad for the economy). Policy was bad, but the U.S. started from a much lower GDP Per Capita level, and enough pro-level boosting policies were implemented to keep a steady pace of impressive growth.  

Pro-Growth policies:

•  '50s - Huge reduction in G/GDP, interstate highways, disciplined and education workforce from military service/GI bill, and the fact that the private sector was depressed for 2 decades due to the Great Depression/WW2. This is particularly important due to the fact that lots of technological advances during that period were not able to be utilized/implemented until later.  This also had a huge impact on the growth of the '60s.
• '60s - Large tax cuts, improved educated for African Americans, end of segregation.

It's also worth noting these MTRs applied to very little people and raised little revenue - and the negative impact of them was lower because capital flight was not much of a concern, given that the rest of the developed world adopted similarly high MTRs and they had been decimated by the war.

I don't really see any way to disagree with this information unless somehow neoliberal policies reduce growth in non-neoliberal countries more than in neoliberal countries, or that growth is just random luck, or that social democracies are better to live in despite the lower GDP per capita. The first two claims are ridiculous on their face, the third is worthy of addressing, and I will do so in a later post.