Neoliberalism Has Indeed Been Tried, and the Results are Clear: Resounding Success. A Response to Bryan Caplan and Noah Smith.

Noah Smith recently reignited a long-standing debate on neoliberalism, making the case that neoliberal policies has been implemented and has some serious flaws. Bryan Caplan responded by linking to an old blog post, arguing that Scott Sumner was wrong to assert that Neoliberalism worked, given that it was never tried.


Neoliberalism, broadly speaking, is an economic ideology aimed at reducing the regulatory burden on the economy, privatizing state-run industries, enacting free trade policies, and cutting back on (what is perceived to be) excessive government spending. It is also highly controversial, with many believing neoliberal policies to be responsible for the financial crisis, increasing inequality, and sluggish income growth. However, it has proven difficult to discuss as many 'neoliberals' don't think neoliberalism has actually been tried.






All of them make salient points, and this is an important question to be answered, for if neoliberalism has not been tried we can't assess it's merits and flaws.
So, has neoliberalism been tried? Overall, the answer is a clear yes. Caplan is obviously correct that tax revenues and government spending as a percentage of the total economy have not fallen, and in fact have risen in many countries. While certain sectors have been deregulated, the total number of regulations, and arguably the total economic burden of them, have climbed dramatically. All of the smaller and medium sized regulations do add up.




On the other hand, those large scale deregulation policies, as well has privatization, has been undertaken in the U.S. Even more aggressive reform has occurred in nations like Denmark. Taxes/GDP may not have fallen, but marginal tax rates on income, capital, and corporate income have been drastically reduced. Since incentives work on the margin, this is certainly a welcome improvement. Outside of the U.S., the revenues have been made up with consumption taxes for the most part, which economists tend to agree are much less distortionary. Even better, they have been in the form of VATs, which have an incredibly broad base and are "hidden" so as to not effect incentives much. Free trade agreements have been enacted, and welfare has been reformed as to reduce implicit marginal tax rates further and apply strict work requirements.




To this argument, I will echo Nick Rowe here. The main battles against economic statism fought by the classical liberal economists such as Milton Friedman, were to challenge price controls, government ownership of key industries, concentrated regulations in given sectors, protectionism, and the use a demand-side view of the causes of economic growth, as well as the use of fiscal policy to stabilize the business cycle rather than monetary policy. The lesser battles were fought over taxes and government spending, and even there they made progress on MTRs as I've mentioned. Therefore, one can in fact state that neoliberalism has been implemented.




We can certainly agree that these reforms have lead to more economic freedom than the rest of the world which has not reformed. (very few have undergone true neoliberalism as per Caplan's definition).






There is also near consensus amongst economists that the main impact of these reforms will be reflective in the level path of GDP, rather than the permanent growth rate. There are a few exceptions here, but they tend to be the areas that have seen the least amount of reform, and to a lesser extent, arguably government spending. Therefore, it is still useful to reflect on the late '70s to mid 2000's period as the neoliberal era.




This is important, as simply looking at a time-series based data points will not work; both because the areas which have gotten more statist are more likely to have a significant effect on the long run growth rate (and almost certainly in a negative manner), and the fact that there are diminishing returns to economic growth in general. So even if Caplan believes that the regulatory burden and increased G/GDP outweighs the growth effects of the neoliberal policy revolution, we can still determine, with a good degree of confidence, whether neoliberalism has been successful or not, both on a broad level and also with regards to individual neoliberal policies.
Sumner has already addressed these cross country comparisons (something I expanded on, and also discussed the tax portion further). A quick summary would be that the most neoliberal nations tend to have the highest levels of GDP. Those of which that have reformed the most have seen their economies improve faster than those that haven't. Non-neoliberal nations like France, Italy, and Argentina are falling further behind, rather than experiencing the catch-up growth one would expect. Meanwhile, Chile, Ireland, Estonia, etc. are surging, and Singapore, Hong Kong, and the United States remain amongst the most wealthiest per capita nations (adjusted for price levels), after excluding nations that are oil-rich. Of course one can also point to the miraculous reduction in poverty in nations like China and India that have undergone massive degrees of economic liberalization. Clearly, neoliberalism has worked. Granted, the fact that it has achieved its goals overall does not mean each individual policy that neoliberals have pushed have been beneficial. Noah lists several such cases, and I will go over them point-by-point in a follow up post.