I’ve been having an email conversation with Scott Sumner on the topic of neoliberalism, which he has now given permission to display. It is below the fold.

Me: I should say at the outset that I’m basically an extremist libertarian on these matters, but I am going to play Devil’s Advocate. Krugman & others have argued that growth was higher before neoliberalism, the slowdown since is then an indictment (or at least an argument against the claim that we have to trade equality for growth etc). You respond by noting that the countries which engaged in the least neoliberal reform fell even further behind. There is a way for an anti-neoliberal to respond to that: accuse you of falling prey to the fallacy of composition. Kevin Carson likes to mock it (and economic optimists) by saying we can’t all be CEO, (another favorite is that the pharaoh didn’t get his job by being good at building pyramids). Many high-tax E.U nations and globalization protesters have complained of a “race-to-the-bottom” where countries must reduce their capital taxes & regulations so that businesses don’t flee to more neoliberal countries. But this competition for business could merely be zero-sum (and many economists have pointed out how special tax-breaks and subsidies for stadiums are inefficient examples of such competition). I happen to view this “policy competition” as a good thing, but others don’t. Paul Krugman has also complained about the Germans & China (“Chermany”) running trade surpluses since other countries must in turn have deficits. I know you have replied to such arguments, but it should suggest to you that many of your opponents may react in that manner. So I propose that you should beat them to the punch by arguing why neoliberalism really does make us all better off rather than merely distributing growth to bandwagon-followers from those sticking to old-fashioned social-democracy.

Scott: Thanks for the note. I do see your point, but I also think my article already has a rejoinder. The fastest reformers were the countries with the most idealistic or civic-minded cultures (such as Denmark.) That hardly indicates a race to the bottom.

Me: To be blunt, it’s a rather weak rejoinder. You are essentially relying on the halo effect. Perhaps a few liberals will shrink back at the mention of Denmark and other Scandinavian totems, but someone like Dani Rodrik who seems more interested in strictly economic issues like industrial policy in developing countries (as opposed to a broader left-right struggle) is unlikely to.

Scott: Yes, it may be a weak rejoinder, but it is also a weak argument. The argument only makes sense to people who don’t buy into the theory of comparative advantage. According to most economists, things like low taxes and weak environmental regulations do not give a country an unfair advantage in international trade. Instead the exchange rate adjusts to offset any advantage.

I will give it some more thought, and see if I can come up with something better.

Me: I hadn’t thought about the exchange rates, perhaps because I have no economic training. I think the counter-argument would be that taxes & regulations serve as public goods (indirectly, in the case of taxes). A race-to-the-bottom in those areas means producing fewer public goods. To be extra-dramatic you could call the collective action problem a “death spiral”.

Scott: Taxes and regulations may be public goods at the national level, but your argument requires that they be public goods at the international level, which seems doubtful (other than foreign aid.)

Me: I don’t see how that is a requirement. Imagine taxes & regulations only directly effect the country in which they are enacted, so all the benefits accrue to that country. In a world of separate autarkies, they all produce an optimal amount of public goods for their citizens. When globalization introduces competition, each reduces the amount of public goods. Ignoring gains from trade, each country would have been better off as an autarky. Including gains from trade, they would all be better off if they formed a cartel to ensure that each country retained the old optimal level of public goods.

Scott: Why does trade make them produce less public goods? An optimal tax regime only taxes consumption, with or without trade.

Me: I suspect many opponents of neo-liberalism would disagree with you on the optimal tax regime. A sales tax is regressive, after all. They may well view discouraging the richest from earning more income as a good thing! Low corporate income and capital gains taxes encourage a shift of wealth toward corporate ownership and capital prices. There is a documentary titled “The Corporation” about how that form of organization is inhumanly sociopathic. The mobility of capital & corporations means that governments are competing to serve their interests, rather than salt-of-the-earth common folk who are more rooted in place. Though of course if the common folk were mobile that might not be so great either, since that would undermine community. The simplest version of this tragedy of the commons story would be environmental standards since that poses obvious externalities, though I’m not sure whether that would actually fit an anti-neoliberal narrative since I believe things have improved on that front since the 70s.

The most obvious rejoinder of the anti-neoliberal though would be that growth was faster before and your explaining away of it as a result of a slowdown in technological advance sounds both ridiculous to those immersed in talk about how we’re living in techy-times and awfully convenient as a defense of your ideology. One possible way to get around this would be to try to disentangle the occurrence of the technological shock and the shift to neoliberalism. Your story is that the slowdown happened first, then neoliberalism came as a response. We can’t simple look at, say, the five years preceding the introduction of neoliberalism and the five after to see if there’s a slowdown and then recovery, because if you’re right that there was a general economic slump we should expect to see reversion to the mean afterward. In demonstrating the technological shock we might be able to look at number of patents issued, though I suppose that’s a very imperfect proxy. We could also make an assumption of locality in the externalities of neoliberalism and then see whether neoliberal reforms are associated with growth or decline in its neighbors (even if they don’t reform themselves).

Scott: A sales tax is not regressive, but it would take too long to explain here. I will do a post on that soon. The short explanation is that income is the wrong base, it is consumption that matters.

The tax code is biased against capital in general, some firms actually incorporate for tax reasons, so I am not sure about that argument.

The change in growth before and after 1973 is one observation. The relative performance of 200 countries with varying degree of neoliberal policies is 200 observations. Even more, as there are variations within countries like China, with the more neoliberal areas like Zhejiang doing best. And even better, countries converted to neoliberalism at different times. Sweden converted in the 1990s, and then started doing better relative to the US. Britain converted in the 1980s. If critics of neoliberalism think one observation is enough, more power to them. But I think they make a silly argument. It would be like me pointing out that unemployment was much higher under FDR than Coolidge. And what would that show? Neoliberalism occurred precisely because the old model was failing after 1973, and FDR’s New Deal occurred precisely because the Republican model was failing in 1933. Those countries that didn’t adopt neoliberal reforms after 1973 did horribly (perhaps with one or two exceptions like Norway.)