Tuesday, May 22, 2012

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.


Colin said...

Here's a slightly edited version of the response I sent to Ben when he emailed out this Foreign Policy piece yesterday:

* That, since Reagan, we now live in an era of limited government is not at all obvious. Government spending per capita in 1980 was $10,800 (real dollars). Today it's $19,100. Shrub -- widely portrayed as a right-wing extremist -- expanded federal involvement in education, increased farm subsidies, passed the Medicare prescription drug program and signed Sarbanes-Oxley. TARP wasn't exactly a pinnacle of laissez-faire either. His dad increased taxes and made no moves towards deregulation or shrinking government that I can recall.

* That said, there have been some moves to limit government that the article points out or alludes to: free trade agreements, tax cuts, welfare reform ("social programs were restricted") and the repeal of Glass-Steagall. I think literally 85% of economists would agree that NAFTA was a net benefit for the economy (indeed, rather than the promised sucking sound of jobs going to Mexico the unemployment rate plummeted during the 90s), taxes are still higher today than when Reagan left office (top rate was 28% in 1989, 35% today), welfare reform has been widely hailed as a success (indeed, it's worth noting that DC with all of its social disorder has not implemented the terms of welfare reform) while it is not at all clear the repeal of Glass-Steagall had anything to do with the financial crisis. [Update: Andrew Ross Sorkin also addresses the alleged financial crisis/Glass-Steagall repeal linkage in today's NYT]

* The other aspect of limited government raised by the author was an end to the draft, which was pushed by Milton Friedman. He then associates this with a greater propensity to engage in conflict, but is this true? Cold War-era conscription certainly didn't prevent the US from engaging in wars in Korea and Vietnam that were far more bloody than anything seen since. Indeed, since the end of conscription it seems to me that the greatest hallmark of US interventions is their relative low death tolls and brevity. In the 25 years after conscription was ended the bloodiest conflict the US engaged in was the Persian Gulf War that saw about 150 combat deaths, with interventions such as Grenada and Panama being more the order of the day. This is pretty much what economics would dictate -- the lack of conscription forced the US to substitute capital for labor and made lives more valuable (when lives are cheap, they will expended more casually).

The obvious exceptions here are Afghanistan (which I think safe to say the US would have intervened in regardless of whether there was conscription or not) and Iraq. With Iraq, I think it's worth remembering that the initial invasion produced a relatively low US death toll, with the subsequent rise probably due more to poor planning and idiocy rather than indifference to casualties. Indeed, the US went to great lengths to harden US vehicles to reduce casualties and it could be argued the eventual withdrawal was due to political pressure stemming from a US public angered over the mounting deaths -- which of course occurred without a draft.

Colin said...

Now, to address your specific comments:

* Not sure what you mean about cuts in social programs resulting in people being left to the harsh realities of laissez-faire economics as A) these cuts are widely agreed to have produced good outcomes B) our economy isn't exactly a laissez-faire, libertarian dream and C) laissez-faire shouldn't be regarded as harsh, when policies of limited government, rule of law, etc. almost invariably correspond with wealth and improved social indicators.

* You mention the problem of income inequality, but can you please elaborate on why this is a problem. I have yet to hear a clear explanation of the bad things that result from high income disparities.

* Your citation of Table E-6 is problematic for several reasons. First off, percentage of GDP is a deceptive metric -- the only number that matters is the absolute amount spent, not percentages. My expeditures on food as a percentage of my paycheck is much smaller than 10 years ago, but that doesn't mean I'm on a starvation diet, it just means my paycheck has grown. In 1999 and 2000 GDP was booming. Second, discretionary spending includes defense spending, and the 90s saw a decline due to the post-Cold War peace dividend. Thus, this is a problematic proxy for the burden or reach of government. Lastly, this number fails to account for the burden of regulation. A government that spends $1 billion is arguably preferable to one that spends half that amount but issues $2 billion worth of regulations. Your case that the government footprint was smaller is at best unproven.

* That the economy would have collapsed into Depression absent massive government spending is a speculative assertion, not fact.

Jason said...

Don't have much time, but a couple quick things.

1) The overall point of my post was that if Americans want what the federal government provides, especially big ticket items like Medicare and Social Security, then the American people need to pay for them. We tried skipping paying for it and it's led us into this morass. You haven't commented on this part and I thought I'd give you the opportunity.

2) NAFTA may have been a net benefit to the economy, but not a net benefit to the people. I'm not against NAFTA or against free trade, but it does expose people to new economic risks based on decisions made well above their own ability to control.

3) Ever expanding income inequality leads to revolution. See also: French Revolution & Russian Revolution.

I'm afraid I don't have time to address more and I think many of your issues lie with Roberts' words, not with mine.

Colin said...

1. I don't think the notion that government should be paid for is particularly controversial, so I didn't comment. Does anyone disagree? Has anyone openly said that government should not be paid for (outside of Paul Krugman, who remains a big advocate of deficit spending)? Rather it seems the debate is over how much it should do and how it should be funded. My long-standing position is that entire agencies of the federal government should be abolished.

2. Do you have evidence to support your position that NAFTA was a net negative for people? Cheap imports are in many ways a godsend for people, especially the poor. Also, when you say "people," are you including the citizens of foreign trade partners?

3. That's a pretty grand and unsupported assertion. The French and Russian revolutions were due to income inequality? You sure autocratic government, war and grinding poverty didn't have anything to do with it? Scanning the wikipedia entries for both revolutions, the term "inequality" is mentioned zero times for the French and once for the Russian revolutions. You will have to provide a more comprehensive answer if I am to believe that income inequality is setting the US down the road to revolution.

Lastly, you don't really respond to my objection regarding your use of table E-6 as a proxy for the size of government.

Jason said...

Okay, a bit more time to respond.

My contention is that a majority of Americans like the two biggest programmatic expenditures, but don't want to see their taxes go up to pay for them. This paradox is the one that Roberts takes on and one I raise, because it's a great challenge to our political and economic system.

I'm prepared to go a bit further and suggest that Grover Norquist's "pledge" has entrenched what is the current House majority against what the majority of American people actually want, robust and well-funded Medicare and Social Security programs. Of course this is why we have elections, and maybe they'll throw the bastards out, but right now, given the fiscal problems we face we are not helped by a party that refuses to accept what the majority of Americans want.

With regard to NAFTA I'm speaking only of American citizens. Do you have proof that it is a net positive? That exports are cheaper is unhelpful for the family where the breadwinner was laid off.

Regarding revolution, we're not on its doorstep, but let's take the three things you brought up. Autocratic government: Right now one of the two main political parties will not entertain the notion of raising revenue, despite a solid majority of the electorate being in favor of a balanced approach to solving our fiscal problem. War: The previous administration embarked on two wars without attempting to pay for them. Grinding poverty: We're not here yet, but with so many moves being made to defund and dismantle the social safety net, we could be there sooner rather than later.

On E-6, yes, it's a flawed indicator. Part of the reason I brought it up is you have used the 18% of GDP threshold as the ideal size of government in previous comments. There are also tables in that report that show expenditures in dollars, if memory serves. Please don't pillory me if that's incorrect, as I can't get to the source at the moment.

As to whether our Great Recession would have become a depression without government action, it's widely been recognized that government action prevented the recession from being worse. You can't prove with certainty a counter-factual, but in most circles it's not controversial to suggest government action like TARP and the auto bailout helped the economy.

Colin said...

Your position doesn't make sense. You said that a majority of Americans "don't want to see their taxes go up" but then you reference a party that "refuses to accept what the majority of Americans want." Given your position that most Americans are against tax increases, and Republicans are especially vociferous in their opposition to tax increases, then I am guessing you are referring to the Democrats?

With regard to NAFTA I'm speaking only of American citizens. Do you have proof that it is a net positive? That exports are cheaper is unhelpful for the family where the breadwinner was laid off.

Sure, plenty of studies have found a slight but positive impact. This is not surprising, as free trade is nothing more than a means of boosting productivity, which virtually all economists believe is a good thing.

In any case, your position on this issue is curious. You claim that you are not against either NAFTA or free trade (which places you outside the Democratic mainstream), but also appear to claim it has been a net negative. Why would you support something you believe to be a net negative?

And why should we only take US citizens into account when assessing the welfare impact of free trade? Don't foreigners deserve well paying jobs too?

Regarding revolution, we're not on its doorstep, but let's take the three things you brought up. Autocratic government: Right now one of the two main political parties will not entertain the notion of raising revenue, despite a solid majority of the electorate being in favor of a balanced approach to solving our fiscal problem. War: The previous administration embarked on two wars without attempting to pay for them. Grinding poverty: We're not here yet, but with so many moves being made to defund and dismantle the social safety net, we could be there sooner rather than later.

Why are you discussing autocracy, war and poverty when you originally claimed that income inequality produces revolution? I'm still waiting for an explanation of how income inequality is responsible for the Russian and French revolutions, and how it will lead to revolution here in the US.

Also, your linkage of GOP opposition to tax increases with autocracy -- a system of government in which supreme power is held by a single individual -- is both extreme and nonsensical.

On E-6, yes, it's a flawed indicator...There are also tables in that report that show expenditures in dollars, if memory serves.

Then why use it? And why not cite the other tables, if they exist, that show non-defense, discretionary spending levels?

Part of the reason I brought it up is you have used the 18% of GDP threshold as the ideal size of government in previous comments.

I have never cited 18% of GDP as government's ideal size. Rather, I have noted that government revenue has consistently been about 18% of GDP since the end of WWII regardless of marginal tax rates. Thus, 18% of GDP should be considered the upward bound of how much government we can afford. My ideal is much lower.