Neoliberalism is the worst system, except for all the others By Scott Sumner

It’s increasingly fashionable for left wing progressives to view free speech advocates as being defenders of a neoliberal system that favors the fortunate. We are told that “there need to be rules to restrict hate speech”. The use of passive voice makes it all seem quite simple.

Less often do progressives say, “The government needs to create and enforce laws against hate speech.” Even less often do you hear “Government leaders such as Attorney General Jeff Sessions need to seek out and punish people engaged in hate speech.” The Devil is in the details.

Ever since the Great Recession, we’ve been repeatedly told that neoliberalism went too far, and that there needs to be a swing back toward more government interference into markets. So let’s see how that backlash against neoliberalism is working out.

1. We were told that the big internet companies have too much power, and that regulation is needed to rein in companies such as Google and Facebook. Here’s the WSJ:

GDPR, the European Union’s new privacy law, is drawing advertising money toward Google’s online-ad services and away from competitors that are straining to show they’re complying with the sweeping regulation.

2. We were told that free trade was hurting American factory workers. So now we’ve put heterodox trade skeptics like Robert Lighthizer and Peter Navarro in positions of power, and they’ve started an international trade war. And they have also delivered a negative supply shock to US factory workers, making the cost of key raw materials like steel and aluminum much more expensive here than in our trading partners:

US businesses have warned there is a risk of severe damage from the tariffs on steel and aluminium announced by the Trump administration and the retaliatory measures launched by other countries. Business groups said the decision to impose tariffs on imports from US allies including Canada and the EU could disrupt the global trading system, curtail investment and lead to job cuts. In a statement that typified the alarmed reaction, the Coalition of American Metal Manufacturers and Users said: “Restricting the raw material supply in the US and imposing tariffs on imports from our closest trading partners places American manufacturers directly in harm’s way.”

Yes, these tariffs will help the roughly 100,000 workers in the steel industry, but what about the roughly 10 million in industries that use steel? And what about the workers in American exporting industries that are hurt by these tariffs? And what about the low-income American workers who will pay more for the products they buy? And what about the breakdown in the rule of (trade) law, and the promotion of nationalistic attitudes throughout the world? How’d that work out in the 1930s? It’s sounds nice when intellectuals express concern that free trade ideology has led to a “China shock” that cost jobs in the rust belt, not so good when you actually start to contemplate the alternatives.

3. We were told that free market ideology is not appropriate for the energy sector, as there are all sorts of externalities. So how will the opponents of neoliberalism react to this recent announcement that the US government is planning to re-regulate energy:

Trump administration officials are making plans to order grid operators to buy electricity from struggling coal and nuclear plants in an effort to extend their life, a move that could represent an unprecedented intervention into U.S. energy markets. The Energy Department would exercise emergency authority under a pair of federal laws to direct the operators to purchase electricity or electric generation capacity from at-risk facilities, according to a memo obtained by Bloomberg News. The agency also is making plans to establish a “Strategic Electric Generation Reserve” with the aim of promoting the national defense and maximizing domestic energy supplies.

National security—where have we heard that term before? That’s right, it’s also the justification for the recent protectionist moves by the Trump administration. We cannot trust Canada to export steel to the US during a war. Interestingly, the administration has signaled that national security initiatives such as tariffs and sanctions (including ZTE) will be removed if other countries satisfy our wishes in unrelated areas. I guess the administration is willing to put “national security” at risk if we can export a few more movies to China.

Maybe I’m being too cynical here, but there is a serious point. If you read left wing progressives or right wing nationalists, you are led to believe that neoliberalism is a sort of religion, and that neoliberals have been entranced by the supply and demand diagrams in textbooks into blindly supporting free markets. This is a complete misreading of where neoliberalism came from.

In 1974, statism was still the ruling ideology almost everywhere in the world. People like Milton Friedman were often viewed as crackpots. (I was at a progressive university at the time (in Madison), and have first hand knowledge of this period.) Neoliberalism arose for very specific reasons, mostly having to do with the failures of real world statist polices, such as protectionism, price controls, nationalization of industries, and regulatory barriers to entry. There were very sophisticated studies of the political economy of government intervention in the economy, including the way that policies get captured by special interest groups. Neoliberalism was aided by the superior performance of relatively open, market-oriented economies—Hong Kong vs. Argentina. It was never about blind faith in markets.

Younger intellectuals and policymakers have forgotten all of this history, and now we will be forced to relive all the mistakes of the statist period—until eventually the internal contradictions of statism become so obvious that there is another neoliberal awakening.

PS. I define neoliberalism as free markets plus some safety net/social insurance plus market-oriented policies to deal with externalities, such as carbon taxes. Of course this term has multiple possible definitions.