Fantastic Neoliberal Policies and Where to Find Them By Alberto Mingardi

Perhaps the use of the word “neoliberalism” should be taxed, so that its use may become more parsimonious and more thoughtful. In a 2009 paper, Taylor C. Boas and Jordan Gans-Mors highlighted that the word (which now basically an “anti-liberal slogan”) is very frequently used and yet very rarely defined. Historians of ideas may use it to refer to the German Ordo-liberals and some of their contemporaries (like Walter Lippman), who endeavoured to adapt the classical liberal message for the 20th century, in years when the growth of government power seemed an inevitable destiny. But that use is rare.

Typically, the neoliberal story goes like this: Thatcher and Reagan got elected, they rolled government back, the rest of the world followed their lead and here we are, today, paying the price of under-government.

If only!

Read this column by Paola Subacchi for Project Syndicate. The piece aims to be an assessment of the legacy of Margaret Thatcher. It is indeed a good summary of the commonplace uses of this much-misunderstood word.

According to Subacchi:

Her [Thatcher’s] government inaugurated a new age of economic policymaking guided by the principle of laissez-faire. In short order, a similar approach was adopted by Ronald Reagan’s incoming administration in the United States. Like Thatcherism, Reaganism was based on the idea that markets always know best.

Notice the caricature. “Markets always know best” sounds conceited and seems to imply some sort of faith in absolute, mythological creatures: “markets”. Yet markets aren’t actors with their own preferences and will: markets do not act, neither they do “know”. A market is a metaphor, which refers to a set of institutions that allow people to freely exchange good and service. Therefore, the “idea” upon which free-marketers found their policy suggestions, is that people do know better what they care for, than whatever bureaucracy that swears to act on their behalf.

Writes Subacchi that:

… Despite several mutations over the years, neoliberalism’s main tenets – privatization, deregulation of product and labor markets, low taxes, free trade, and capital-market liberalization – remain the same. And, not by coincidence, the decades of its reign have been marked by financial instability, widening inequality, and, ultimately, political discontent. … The so-called Washington Consensus exported both Thatcher’s austerity and Reagan’s tax cuts to the rest of the world, foisting free-market policies onto developing countries struggling with balance-of-payment woes.

One would expect some data on, well, government spending as percentage of GDP. You would search for them in vain, in the article. Subacchi reminds us that the top income tax rate was slashed, but she doesn’t tell us if, as a result of that, “the rich” contribute more or less to fiscal revenues. On the other hand, she seems to assume that highly different political environments can all be pigeonholed into the same neoliberal box – whatever their nuances when it comes to political culture and institutions.

Subacchi mentions revenues from privatising business but notices that “instead of investing these funds in education and the country’s development, Thatcher used them to finance more tax cuts.” Indeed, when people have more money in their pockets, you don’t know ex ante what they will do with it. But are you so sure that, whatever it is, it doesn’t bear any relationship with “the country’s development”?

Subacchi believes that what Thatcher started, Major, Blair, Cameron and other leaders -including Schroeder and Merkel – simply kept on doing. What’s the evidence? What are the major reforms that were accomplished after Mrs T left office? How did they resemble Thatcherism? To what extent did government shrank?

Though the United Kingdom enjoys a lighter touch with regulation than other European countries, it is hardly a “deregulated” country. Synthetic (and, admittedly, highly imperfect) measures like the Index of Economic Freedom would suggest that not much changed in England in recent years.

Social spending is pretty much in line with the OECD average, which has increased from 16% of GDP in 1980 to 20.6% in 2016. David Cameron’s coalition “embraced fiscal austerity” (and yet, this shouldn’t be forgotten, Cameron cashed in a substantial and unforecasted victory in 2015 – were only the “haves” voting?) but public spending is still 40% of GDP. While the dynamics of public spending as a percentage of GDP in the UK is less linear than in other developed countries (it did not always go up!), the trend hardly shows a tendency to “rolling government back”. Subacchi discusses “financial deregulation” as the stronghold/pillar? of Thatcherism – and yet scholars like Philip Booth would argue that Thatcher did not deregulate the City, but rather substituted formal regulations for long-term, freely adopted codes of conduct. In a sense, then, Thatcher regulated the City far more than it was.

Generally speaking, reading only Subacchi’s article you’d believe that average government spending in OECD countries was 6, perhaps 10 per cent of GDP. It is not. Redistributing money is what governments relentlessly did, at least for the last fifty years. Can you really pretend to explain what you do not like about income distribution, assuming that the welfare state isn’t there?

It is nice that Subacchi credites the Institute of Economic Affairs in London for forging “a new-conservative economic policy”.

Sure, ideas for an alternative path might have come from the IEA and the works of Friedrich von Hayek and Milton Friedman. However, critics of Mrs Thatcher tend to forget that it was the electorate who voted for her. Why did they do so? Perhaps because, after a generation of ambitious industrial policy, top marginal tax rates of 98% and accelerating inflation, there was a real fear that Britain would go the way followed a few decades later by Venezuela under Hugo Chávez. Thatcher’s message was timely and met popular approval, far beyond the boundaries of the rich and powerful.

This, however, doesn’t mean that she successfully smashed, once and for all, British interventionism.

The “power of ideas”, Thatcher’s included, should be put in context. I love the IEA deeply and I cherish its triumphs. Yet this view that one day a few libertarian economists won some conservative politician to their cause and the world subsequently changed, for good or bad, is hopelessly naive. Ideas have consequences? Yes, they have. But whatever policy paper (and the IEA always focused more on the big picture, than on the details of specific reforms) is not translated into law with some touch of magic. Politics, conservative or socialist, is always a complex bargaining process, in which special interest groups blossom and bureaucracy thrive to keep if not increase her own power. This may explain why “rolling back the state” is more talked about than actually accomplished. Thatcher was an amazingly determined woman, which may contribute to explain why she did more than most. Yet the British civil service was hardly under her spell.

The assumption that ideas have consequences can easily be turned into a story that bears little resemblance to reality. Sure an op-ed is by definition painted with a wide brush. But my impression is that the rather prolific industry of blaming X (substitute x for whatever social evil) on neoliberalism needs exactly such a naivety. Good stories, after all, always need a foe.