The Meaning of the End of the Neoliberal Era J. Bradford DeLong Professor of Economics, U.C. Berkeley Research Associate, NBER http://delong.typepad.com/ brad.delong@gmail.com
June 14, 2009 The Meaning of the End of the Neoliberal Dream: A View from America If the current financial and economic hurricane does nothing else, it will have demolished the hold of free-market theory that neo-liberals have succeeded over the past thirty years in establishing as the dominant guide and constraint on government policies: “free-up markets; deregulate; denationalize; get government out of the economy. Pressed by economic crisis, governments all over the world are taking control of financial and industrial firms, setting out new regulations, intervening to affect market outcomes. They are tempted and pressured to rescue their big, bleeding firms and their citizens’ job and, of course, to leverage their wealth strategically, rather than invest passively as simple, though big, market players. This is going to matter. For the past generation there has been a taboo against industrial policy. Countries have pursued it. But their governments have believed that they ought not to for two reasons: first, the logic of the market is supposed to
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be superior; second, your industrial policy may be good for you but your and their industrial policy are together bad for both. The coincidence of these two reasons has led to a rollback of at least open and admitted interventions, and a general victory for Treasuries and central banks as opposed to Commerce, Labor, and Industrial Development ministries around the globe. During the past decade there has been some restless resistance to neoliberal dogma. Performance has fallen short of promise. Why has the process of transition in Eastern Europe been so haphazard and disappointing relative to state-led development in China" Why has neoliberal transition in Eastern Europe been accompanied by such a huge rise in inequality and poverty? How can Argentina be the hero of sober appropriate-government market-oriented development one year and the goat of excessive populist budget deficits four years later? Why did the world capital market try to pull the plug on the extremely successful East Asian economies’ growth in 1997-98? How has a policy of trying to relying on private self-regulation spurred by compensation-based incentives landed us with a global financial system in collapse? It is this last that is likely to be decisive. The quarter century of the neoliberals’ dream was ruled by Alan Greenspan from his seat as chair of the United States Federal Reserve. The New York Times’s Edmund Andrews caught him last October 23 reacting to the end of the dream: “Those of us who have looked to the self-interest of lending institutions to protect shareholders’ equity, myself included, are in a state of shocked disbelief,” Edmunds quotes Greenspan telling the United States House of Representatives’s Committee on Oversight and Government Reform. “Do you feel that your ideology pushed you to make decisions that you wish you had not made?” Chairman Henry Waxman asked. “Yes,” Greenspan responded. “I’ve found a flaw [in my thinking]. I don’t know how significant or permanent it is. But I’ve been very distressed by that fact…. This modern risk-management paradigm held sway for decades. The whole intellectual edifice, however, collapsed in the summer of last year…”
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When the debris from the current crisis is cleared away, it will end with governments having—once again—amassed substantial direct and indirect positions in a host of national firms in finance but also in industry and with governments having abandoned the presumption that business is not their business. Governments will then face an irresistible temptation moving forward and find themselves under considerable politial pressure to use their leverage over business for what various groups will regard as the national interest. And when one country does that will increase pressure on the others. When the US bails out its auto industry, or its banks, or insurers, or airlines—shouldn't France and Germany do so too? If auto plants are going to close in Europe, it matters a lot for Belgian and German politicians whether the closed factories are in Belgium, or Germany, or Spain. The position that detailed intervention in industrial location and structure may be sustainable politically as part of a grand international free-trade bargain among governments, a mutual and balanced reduction in industrial policy deterrence, but deterrence lasts only as long as it actually deters. But the post-crisis world is likely to see a serious international return to ambitious industrial policy will likely weaken America’s relative position. America excels at entrepreneurial and technological invention and innovation. America excels at startups like Intel, Apple, and Google. But from the American standpoint, what happens when Japan or Germany or China creates a domestic launch market, pumps billions into launching photo-voltaic or wind power companies to drive successive rounds of innovation and economies of scale, all in order to take an overpowering lead in a surging new industry in which American firms, dependent on the tight constraints of capital markets, will be left far behind? What happens when the financing for the next generation of American biotech or nanotech start-ups comes from one of China’s Sovereign Wealth funds? What happens when the condition of financing is a Chinese government demand—legitimately and understandably—that part of the deal be the rapid back-transfer of the new technology to China?
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That will matter a lot, for ultimately China and other East Asian countries with large export surpluses and resource exporters will wind up actively managing their investments in the United States. They will not be happy holding them in low-yield Treasuries, but will insist on higher yielding junk bonds and equities. And with risk has to come control: otherwise the incentives to tunnel the productive assets out of the corporate shell in which the foreigners have a stake and into some privately-held vehicle is overwhelming. In the late nineteenth century American crony capitalist political-economic operators like Jay Gould and Leland Stanford were experts at doing so. (Gould lost most of his first fortune trying to corner the Amerian gold market in 1873. Stanford held onto his, and it became the core endowment of a great California university. If America is fortunate, it will see economic growth of about 3% per year in real terms over the next two decades. Of this growth, about onequarter—0.75% per year, say—will come from the labor side: more hands with more skills and more education. Another one-quarter—another 0.75% per year, say—will come from the capital side: plant and equipment purchases funded by investors. These two components have a narrow economic logic supporting them: hands go to work and bring skills and educational capabilities with them because they are paid wages and salaries; and investors bring their funds in anticipation of interest coupons, dividends, and capital gains. However, fully half of economic growth—1.5% per year—comes from technological and organizational progress--innovation. It is not distributed to those who first undertake the innovations, create the technologies, and pioneer the organizations. These important fruits of innovation do not remain confined to the innovators but instead spill out in a capillary fashion into the broader economy, usually quite near by. Ford did not capture the lion’s share of the gains from the Ford-invented and Fordpioneered assembly line—General Motors, and Caterpillar and Westinghouse and many others did. Xerox did not capture any of the gains from the invention of the windows-icons-mouse-pointer computer interface—Apple and Microsoft did. Fully half of economic growth is an unrecompensed byproduct of what businesses do. It spills out and over 4
into the local industrial eco-system. This is an opportunity which governments always have and inevitably will try to seize: This is one place – capturing and repatriating the spillover growth of innovation --where governments have sought—with some successes and many failures—to make industrial policy. But it is not the only one; protecting and supporting your Lemons – steel, autos, farms, -- and, by easily foreseeable extension, squeezing those same lemons in other countries, is another. Now individual governments outside the United States may or may not succeed—they will, probably, largely fail in their industrial policy goals: technology transfer is very hard; the global economy is littered with the bones of unfit “national champion” firms and unsuccessful governmentled programs to force via hothouse the growth of commercially-successful technologically-sophisticated high-wage firms. Economist William Easterly has a very large list of countries that thought they could do better than trusting to the market. It is, however, incontestably true that there have been industrial policy successes. And not all of the successes have been in East Asia—even in Africa, Mauritius and Botswana look to a small extent surprisingly like Hong Kong and Taiwan. France in 1945 was supposed to be a country of small-scale family enterprise incapable of rapid industrialization or productivity growth, yet a generation of government ownership of “commanding heights” and indicative planning transformed it into the post-industrial equal of Germany and superior to Britain. And what of U.S. high-tech leadership in the post-industrial sectors of the economy would exist in its current form without DARPA, NIH, and America’s research universities? Boston’s Route 128 and California’s Silicon Valley were always inconceivable without MIT, without Stanford, and without the Pentagon. Given these successes, all the countries of the world are likely to try as we move forward. The neoliberal order sought a mutual and balanced relaxation of government interventionist policy tensions. Technological and organizational progress would still be of immense value and still be realized through largely-unintended spillovers from economic decisions 5
taken for other motives. But if the logic of the market ruled, at least the game would be a fair one – in a cultural comfortable, but restricted sense of fair: minimizing direct political influence on national economic outcomes. But the neoliberal policy order will not survive this downturn intact. Those governments that have been practicing industrial policy will up their efforts; and all the others recently sworn off the sauce to go cold turkey will undoubtedly try again. This will, I think, be very bad for the future of the world economy. It will exert a substantial drag on world growth. It will politicize issues and disputes that are best kept out of politics. But I see no way to avoid it. The current financial crisis has scrambled the egg that was the dominance of the neoliberal ideological order, which was a useful thing. And eggs cannot be unscrambled.
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