The Death of Neoliberalism Is Greatly Exaggerated
The West’s economic orthodoxy of the past 40 years has been shaken by the pandemic—but the fight isn’t nearly over yet.
BY JAMES K. GALBRAITH | APRIL 6, 2021, 3:51 PM
For 40 years in the United States, through Republican and Democratic administrations alike, a certain brand of economic thinking held pride of place. It was an economics of markets, governed by regulations as light as possible under a government of low expenditures, low taxes, balanced budgets, and private ownership of capital and land. In this understanding, control of inflation was the central task of the central bank and the pursuit of full and fair employment largely the province of education and job training in an otherwise liberalized “labor market.”
It is true that actual policies and institutions in the United States never corresponded to this ideal type. Taxes were cut, infrastructure was neglected, but military spending and social security kept the government big. Regulations were pared and then sporadically repaired. Many public services remained public and occasionally new ones, like Medicare Part D and the Affordable Care Act, were added. In crises, the nostrums of free-market nonintervention were quickly—though always temporarily—abandoned in a panicky moment of pragmatism.
But the ideology remained. It was what mathematicians called an attractor and astronomers a black hole: a massive blob of thought around which economic policy views revolved. The financial crisis of 2007 to 2009 shook the blob. The complete failure of mainstream economists to foresee the crisis—indeed their denial that it could have been foreseen—was embarrassing. The fact that so many were on the payroll of the perpetrators was even worse. But in the end, the blob survived. In the end, not a single senior economist retired in disgrace nor was a single dissenter or pre-crisis prophet hired to any senior post—and quite possibly not to any junior one—at any of the self-described “top” academic economics departments.
Last year though, the COVID-19 pandemic blew the post-financial crisis world apart. Millions of service and office jobs, many low-wage jobs, others not, disappeared. Investment in retail and commercial office construction, certain advanced sectors ,and energy production collapsed. The stock market crashed. The vast buildup of suddenly unpayable rents, mortgages, utility bills, credit cards, and student and health care debts threatened to bring down the entire fragile financial system.
In this emergency, actions outpaced ideas and created unmistakable facts. Direct federal income supports and unemployment insurance totaling 10 percent of previous national income were enacted. Even larger sums were placed in support of bond markets and by extension of the stock market. Both continued to function. Manufacturing and residential home construction revived even in the teeth of the pandemic. In a seeming vindication of heterodox Modern Monetary Theory, there was no revival of inflation. Neoliberal economists fell in line or fell silent.
The pandemic year combined with other factors—a left turn in the Democratic Party led by Sen. Bernie Sanders, the unexpected deliverance of a narrow Senate majority, and the new president’s own political instincts and experience—gave the United States the rare gift of a progressive political moment. This has already produced the $1.9 trillion American Rescue Plan, bringing financial relief to households, businesses, and state and local government budgets—a prospect that presages a surge of local infrastructure, transportation, and urban projects long blocked by fiscal constraints. A new federal infrastructure, energy, and climate initiative, totaling $2 trillion, is on the horizon.
Whether public works on that scale can be enacted is a political question, but without a doubt, the economists who fret over deficits, debt, overheating, and inflation are right now on the defensive. A few, most notably economist Lawrence Summers, president emeritus of Harvard University, have made their unhappiness known. Their discontent is understandable as they seem to be losing the fight over the economy’s future. But the fight is not over yet.
To an old progressive Keynesian like myself, with family roots in former U.S. President Franklin D. Roosevelt’s New Deal and former U.S. President Lyndon B. Johnson’s Great Society, and personal experience attempting to resist the Reagan Revolution back in 1981, all this seems a bit like the parting of the Red Sea. But what happens next? Is the 40-year revival of 19th century pieties in economics finally over? Will the channel of new thought remain open or will the waters close up again? That question is, unfortunately, in the hands of academic economics and not in the control of today’s political forces.
That mainstream academic economics is a stagnant lake is no secret to anyone familiar with its doctrines, most of which have been fixed in place for at least half a century. But one should remember that it got that way for a reason: the preceding generation’s failure to effectively deal with the central problem of that day—which was stagflation, the unpalatable mixture of slow growth, and unemployment with high inflation. Summers, whose family links to economists of that generation go back almost as far as mine, is not wrong to be a bit spooked by those memories. This is not to say that he’s right to transpose them to society’s present condition but only that the economy has a way of throwing up new problems that old ways of thinking do a poor job of solving.
While the Keynesians of our parents’ generation had participated in the construction of the U.S.-centric global order of the postwar world, by the late 1960s and early 1970s, mainstream academic economists had substantially pushed such issues to one side. The conditions that led to stagflation in the early 1970s had an international dimension to be sure. They included a war in Vietnam involving half a million U.S. soldiers at its peak, a falling dollar after former U.S. President Richard Nixon abandoned in 1971 the postwar Bretton Woods global economic system that had set a fixed exchange rate, rising world commodity prices led by oil, and strong U.S. labor unions who could recover cost of living increases and set a pattern for wage increases generally.
Most economists, however, saw the issues of inflation and unemployment in domestic terms and focused on the domestic consequences of policy actions. Summers and I were raised in an academic worldview—for instance of the Phillips curve trade-off between inflation and unemployment—that considered the United States to be essentially a “closed economy.” Global trade and global finance were for specialists in those topics. Even the emergence of Japan as a global competitor was peripheral, a topic quite far from the heart of the economic policy problem. Lacking a global perspective, the Keynesians were quite unable to cope with the winds of economic change coming from outside.
After stagflation dethroned the Keynesian consensus, the rise of a globalized neoliberal dogma unfolded in an atmosphere of political triumphalism. The Soviet Union was in decline and eventually split apart, the market model had won out over central planning, and all major issues of the political economy appeared resolved. The only remaining agenda was to eliminate the vestiges of socialism impeding free markets; peace and progress would then prevail. This mindset fostered a one-size-fits-all approach to the economic policy issues faced by other countries: Accept “comparative advantage” and free trade; apply the “Washington consensus” of privatization, deregulation, sound money, and balanced budgets; and let the magic of the marketplace do the rest.
Today, it is impossible to consider the U.S. position in isolation. It is impossible to sensibly treat the United States’ economic problems without having a grip on the global setting and specifically (though not exclusively) on the role of China—a country that only 50 years ago was utterly irrelevant to the economic welfare of the United States. But it is equally impossible to treat the global economy in neoliberal terms and make any sense at all of what is going on.
That’s because China refused to conform to neoliberal ideas. What grew up in China was instead a curious hybrid of what Westerners might recognize as—and, in important cases, actually were—the teachings of economists Adam Smith, Henry George, John Maynard Keynes, and my father John Kenneth Galbraith, flavored by Marxism and adorned with Chinese characteristics. The focus was on continuity, growth, improvement of productive practices, acquisition of new technologies and engineering skills, construction of new cities and transportation systems, social stability, and the elimination of mass poverty—and therefore, the drag of impoverished people on national economic and social life.
The result is a model that may be mocked as authoritarian as much as one may like. It is nevertheless the most successful case of up-from-poverty development in human history. And its appeal is undeniable for anyone anywhere in the world struggling with poverty, inequality, underdevelopment, or debt dependence. It is essentially free of any dogmatic ideology or pretense to worldwide control. It also has the powerfully attractive feature that to keep growing, China must now export not only consumer goods but also advanced engineering and infrastructure products at bargain-basement prices. It thus is becoming the engine of economic development for much of the entire world. And there is prestige associated with having whipped the coronavirus.
Today, partly because of China, the United States is no longer a strong manufacturer of mid-range consumer goods. The United States is also now in the process of losing its position in more advanced sectors and are threatened in information technology—where it has dominated since the 1940s. It is now largely a rentier state with a global financial sector, a bloated military, and a heavy reliance on service sectors to provide jobs and incomes in a globalized economy where basic resources remain fairly cheap and consumer goods have—for reasons sufficient to those countries—long been supplied by Asia’s rising manufacturing economies.
The problem the United States may face going forward is thus not one of old-fashioned overheating. U.S. households do not lack consumer amenities, and even if they did, the consequences would be backlogs and delivery delays, not a bidding up of prices. Inflation in the traditional sense is not the issue; if there are surplus funds (as there surely will be), they will be saved or (in good part) placed in capital assets, bidding up the price of stocks, land, and housing. In that way, they further enrich the already well-to-do. Those prices do not figure into the consumer price index; their rise is generally greeted with applause, not distress.
But bringing back demand for industrial, retail, and commercial office building construction will be harder, if not impossible, since there is ample excess capacity available and the pandemic has taught society how to work and shop from home. Global demand for the United States’ advanced product sectors—think aircraft or oil field services—is also likely to remain depressed. Meanwhile, an infrastructure package, if enacted, will indeed create a certain type of engineering, construction, and machinery job, but it will not reemploy the millions of services and office workers who have been wiped out by COVID-19. The problem of arrears in the vast pre-pandemic mountain of U.S. household debts will be faced when moratoria expire. And in the uncertain future, the question of the dollar’s role as the financial anchor of the world economy may, at some point, come into play.
In short, the United States has an entirely new set of problems—rooted in the decay of core economic functions, the fragility of its recovery from the last crisis, and its unstable position at the top of the world’s economic pyramid—in the face of a new, hybrid, competing, and non-neoliberal model that shows every sign of lasting success. These structural facts are among those that policymakers must now address with no help from mainstream orthodoxies—and no possibility of returning to the equally deficient orthodoxies of an earlier era either.
But here is the way forward the United States needs for academic economics, for economics education, and for the training of future economic policymakers. That way is to replace the defunct neoliberal dogma and the people who diffuse it with scholars who have practical and historical knowledge of the economic problems, policies, and institutions of the world—and of the United States with all its complexities and details.
Such people exist, and more can be trained and found. They are, or must be, the people who are doing policy now and who are, or must be, grappling with these questions—both in the United States and in other countries. Those who have any success, vision, or imagination should become the teaching economists of the next era. Scholar practitioners with pragmatic knowledge of the real world should be put in charge of the next generation of economists and, therefore, of the future direction of economic thought. The movement should be as it was during the New Deal, World War II mobilization, and the construction of the postwar order: from practice and policy to thought, not from abstract dogma to economic policy.
In sum, knowledge of diversity, in thought and practice, is what Americans need. It is up to universities and the people who run and fund them to renovate intellectual resources. Such people, and only those, can protect society from the return of the zombie ideas of the neoliberal era.
James K. Galbraith is the Lloyd M. Bentsen Jr. chair in government and business relations at the University of Texas at Austin’s Lyndon B. Johnson School of Public Affairs.