The Neoliberal Bender & Today's Hangover

Alasdair Roberts has an interesting post up on Foreign Policy blaming the American people, and our enthusiastic embrace of neoliberalism over the past 30 years, for why we find ourselves in such a political and fiscal calamity now.  There were parts I agreed with, but I think he misses a few things.

I very much agree that:

Americans wanted "a minimum of government authority," Ronald Reagan said while campaigning for the presidential nomination in 1976. "Very simply, they want to be left alone." And that was exactly the program enacted over the next quarter-century: Marginal tax rates were reduced, especially for the wealthy; social programs were restricted; controls on commerce and finance were removed. By the time 2000 rolled around, Reagan was remembered as one of the greatest presidents in modern history.
By then, the project of restricting government and liberating market forces was a bipartisan one. It was a Democrat, President Bill Clinton, who famously conceded in 1996 that the era of big government was over. Clinton signed the North American Free Trade Agreement in 1993 and a trade agreement with China in 2000, saying that this was "the only way we can recover the fortunes of the middle class in this country." He also signed laws that loosened federal control over the financial sector, promising they would actually "enhance the stability of our financial services system." 

But these moves, to remove government out of the lives of business and increasingly out of citizens' lives had consequences:

Unfortunately, the decades-long neoliberal project had a price, which became increasingly obvious in the new millennium. The removal of trade barriers put U.S. jobs at risk, while lowering top tax rates and loosening the social safety net aggravated problems of inequality. Lighter regulation encouraged overexpansion and recklessness in the financial sector. Even before the 2007-2008 crisis, Americans were uneasy about the effects that followed from policies they had once enthusiastically endorsed. In 2004, according to an ABC News poll, a majority of Americans believed that they were no better off than when Reagan was inaugurated. In a 2006 CBS poll, two-thirds of respondents doubted that the next generation would be better off than they were. And in an April 2007 Gallup poll, a similar share said that wealth in the United States was unfairly distributed.

What was seen as a good thing for our capitalist system, wasn't always a good thing for the individuals living in it and the elimination of social programs left people exposed to the harsh reality of laissez faire economics.  We instituted policies that did little to stifle the widening income gulf and we did little to redistribute wealth.  That notion was considered a dirty term (and indeed one I know will be questioned in the comments). So we find ourselves when Americans are feeling less optimistic about the future their children will face and a growing sense that income inequality is becoming a larger problem for the country.  In these moments, a polity will often look to their government for recompense, but cue the cognitive dissonance:

Popular attitudes about the handling of the crisis also reflected a deep ambivalence about the role of government in economic life. There was widespread anger at not just the rating agencies, predatory lenders, and fat-cat bankers, but also at the apparent cost of bailouts for the financial sector, along with opposition in principle to interventions like the takeover of General Motors. And as the government took on these onerous, unwanted economic necessities, many also worried about the rising federal debt. But there's little doubt that the public would have been equally outraged if the Obama administration had actually followed a strict neoliberal path of nonintervention and deficit reduction. It would have been seen as cruel and inhuman.

The government found itself in a true "damned if you do, damned if you don't" situation. And so this is where we find ourselves now and as Roberts closes he poses a challenge as a question to the American people:

[N]ow the limitations of the neoliberal project have become painfully clear. At that time, most Americans approved of smaller, more hands-off government. The question now is whether they will accept the consequences.

And this takes me into my critique and comment.  It is no secret, I'm a proponent of a strong federal government, but some of what Mr. Roberts says isn't quite right and some of the big drivers for our current conundrum aren't addressed.  The first and most easily dismissed is that people got a "smaller" government.  If you look at the chart for federal spending since Reagan, whom Roberts marks as the starter of this movement, we never get below 18% as a percentage of GDP (perhaps targeting a revenue level of 18% of GDP is to encourage chronic deficits).  Basically what I'm saying is that government, even if it was largely more hands off in the business (and I believe it was), it wasn't really smaller.


But if government wasn't smaller, but also wasn't doing as much, what was going on?  In this CBO report, you'll see in Table E-6 that mandatory programmatic spending as a percentage of GDP is growing very rapidly, but discretionary spending as a percentage of GDP was actually at the lowest level since 1971 in 1999 and 2000.  This would reinforce the argument that government was more hands off, even if on the whole, not that much smaller since discretionary spending is where the reach of government beyond Medicare and Social Security is captured. And then following on to Table E-10, you'll see spending on Social Security as a percentage of GDP has largely been flat for the past 30 years, while spending on Medicare and Medicaid have been reaching upward.  During this period we also saw defense spending that was consistently 20% of all government expenditures.


So the neoliberal experiment took a lot of government out of people's lives as discretionary spending declined.  We found ourselves with a surplus in 2000 and determined that the best thing to do would be to cut taxes, but this decision was based on flawed observations and followed up by fiscally calamitous decisions.  First, the decision to cut taxes ignored that our mandatory spending commitments, on two very popular programs, were continuing to grow.  Second, the tax cuts were followed by two wars financed entirely by debt.  As our deficits yawned ever wider we were hit by the worst recession since the Great Depression.  The government took decisive and expensive action to prevent the economy from backsliding, a move quite apart from the preceding decades.  And to some degree those moves worked.  Like a boxer that just took a thundering cross, our economy is stumbling around the ring, but still on its feet.


But here's the rub, a lot of people have learned the wrong lessons.  The cost of Medicare and Social Security continue to grow and now discretionary spending is also on the rise to help people deal with the economic downturn.  Instead of considering that the Bush tax cuts were ill-advised, that the revenue brought in is insufficient to pay for the programs the government does run and that are quite popular, we hear that this is in no way a revenue problem.  These wrong lessons are reinforced by the cognitive dissonance that leads to letters like this, where people demand government stay out of their Medicare.  Those wrong lessons lead to a stage full of GOP presidential candidates to reject a deal that would guarantee $10 in spending cuts for every $1 in revenue.


I don't know about you, but if I've run up a lot of debt, I tend to thinking making more money is a good way to try and get out of that hole.  The GOP is pretty keen to wrap themselves in common sense.  Common sense would dictate we need more money to pay for our current obligations and pay down the obligations we already made.  Our neoliberal bender has led to a hangover and its led to an important choice for the country.  Do we take the "hair of the dog" approach and double down leading to some sort of libertarian vision where the federal government is starved and budgets slashed?  Or do we take the Vitaminwater approach, realize we made some bad choices and embrace the changes we need to get ourselves right and preserve the programs we want?


The critiques I have of Roberts' piece are all around the edges.  I think we agree on the overriding point.  The American people didn't want as much government and didn't want to pay for a well funded federal government, but wanted the stuff the federal government provides.  That approach has failed.  It's clear if we want stuff from the government, we will have to pay for it.  This summer a Pew Research Center poll found that 60% of respondents want to keep the benefits of Medicare and Social Security as they are.  That's a convincing majority, but we have to pay for it.