December 7, 2021

What’s Wrong with “Neoliberal Economics”?

“In practice, ‘neoliberal’ economics often results in a cycle of ‘stimulus’ (Keynesian-type deficit spending) followed soon afterwards by “austerity” (higher taxes). The weaker economy that results pushes governments back toward a cycle of ‘stimulus.'” ~ Nathan Lewis

As a member of the “supply side” branch of modern classical economics, I might be labeled a “neoliberal economist” by some. But, there are important points at which common “neoliberal” economics fails badly, and which give rise to much-deserved criticism.

It is mostly Keynesianism. “Keynesianism,” in a broad sense, is a doctrine of macroeconomic manipulation, via two main channels: monetary distortion through changes in the value and quantity of currency, typically combined with manipulation of interest rates; and, government spending as a means of “stimulus.” This has been the overwhelming focus of economists since 1930 and continues today, among those economists without more overtly Marxist tendencies.

This has been true even of the supposedly arch-neoliberals such as Milton Friedman, who steadfastly advocated a system of macroeconomic manipulation via monetary distortion and floating currencies — “monetarism.” It was Friedman who said “we’re all Keynesians now,” including himself in that categorization. Conservatives are often hesitant to back the big-spending “stimulus” plans favored by the Keynesian left, but they usually end up voting for them in the end anyway. Then, appalled by the big deficits that result, they often follow up with tax increases.

It creates currency disasters. One country after another has discovered that, when they invite the “neoliberal” advisors from the IMF, US Treasury, Harvard and elsewhere to their countries, disasters ensue.

It promotes “austerity.” Governments everywhere are rife with terrible waste. A lot of them could cut spending by 30% or more with no meaningful decline in services. Governments really shouldn’t run chronic budget deficits. However, the outcome of “austerity” is typically not a more efficient government, which accomplishes its important tasks while spending less money, but higher taxes and bigger government. The higher taxes lead to a weaker economy.

A friend of mine used to call the IMF the “Death Star,” because it could blow up whole economies at a single stroke — mostly via a combination of some kind of currency collapse, and higher taxes. The IMF’s own researchers came to a similar conclusion, blaming “neoliberal” policies including “capital account liberalization” (one ingredient in the typical currency collapse outcome), and “austerity” (higher taxes).

In practice, “neoliberal” economics often results in a cycle of “stimulus” (Keynesian-type deficit spending) followed soon afterwards by “austerity” (higher taxes). The weaker economy that results pushes governments back toward a cycle of “stimulus.” If this goes on for very long, it can be very bad for economies.

It is basically socialism. Whether from ideological principles, or simply as status-quo-maintaining centrism, “neoliberalism” often boils down to Post-WWII big government socialism, with some post-Reagan modifications — the common practices of Western governments during the 1990s. This is basically a highly interventionist big-government welfare state, with high and “progressive” taxes and unstable fiat currencies. The moderate left also often calls itself “neoliberal” in its economics.

It is a cover for exploitation. “Globalist” institutions like the IMF, World Bank, and the related United Nations arrive in a country’s capital bearing big bags of money in the form of “loans.” The leaders who sign off on these loans soon retire with bloated foreign bank accounts. The countries themselves fall under globalist debt slavery. One person involved in this process wrote a book about it, Confessions of an Economic Hit Man. It explains how the scam works in gory detail.

Another recent example was Ireland, where the government debt/GDP ratio exploded from 23.9% in 2007 to 119.9% in 2012. Were the Irish suddenly seized by an overwhelming urge to spend money on bridges or healthcare? No, the money was used to bail out bank creditors in the crisis of 2008. But, the Irish people still have to pay for it. Along the way, taxes rose, with the top personal income tax rate rising from 41% to 48%, and the sales tax rising from 21% to 23%. Thanks a lot “neoliberal economics!”

It is a cover for globalist goals. Some have argued that free trade and free immigration have had a disastrous effect on the American working class, especially since huge amounts of new labor from China and elsewhere have been introduced into the world economy since about 1980. I think the critics of this process — the “economic nationalists” — have some meaningful arguments. The most prosperous recent period for the US middle class, the 1950s and 1960s, was a time of limited immigration.

What is the alternative to “neoliberal economics?” With this long list of failures correctly ascribed to common “neoliberal economics,” it is no surprise that some are driven to even more leftist, and statist, solutions. But, I think a much better model is an embrace of economic principles that predate the present Keynesian big-government socialistic status quo. I call this “twenty-first century economics,” and it is already in use today, with generally successful results. Here are some of its basic characteristics:

  1. Much smaller government. Some people argue for a return to a pre-1914 model of a government that provides little more than, as Adam Smith described: “peace, low taxes, and a tolerable administration of justice.” In practice, this is a government tax revenue/GDP ratio of about 5%-10%, primarily to fund the military and perhaps, legacy debt. But, I think a broader consensus can be formed around a model that includes most of the 20th century’s innovations, including some kind of public education, welfare programs, and universal access to healthcare, while keeping the tax revenue/GDP ratio below 20%. Today, this is exemplified by places like Singapore and Hong Kong, and also a number of other mostly Asian states. With much lower taxes, businesses are much healthier, unemployment is low and wages are high. There is much less need for socialistic remedies.
  2. Low, Flat Taxes. “Progressive” taxation is completely abandoned in favor of simplified single-rate “flat” tax systems. This could include some variant of the “Flat Tax” or “FairTax” proposals of the 1990s, or, combining them, something like Herman Cain’s “9-9-9” plan. The “flat tax” proposals popularized by Steve Forbes and Jack Kemp in the 1990s didn’t get much traction in the US, but over thirty governments have adopted them since 2000 with great success. Remember, since tax revenue/GDP is below 20%, the rates of these taxes can also be low.
  3. Stable Money. Places like Hong Kong today do not attempt to manage the macroeconomy with some kind of monetary manipulation. They just have a simple stable currency policy, in this case, a link with the USD. Actually, more than half of all the countries in the world have some form of stable-currency policy, an explicit link to an external benchmark of value, usually the dollar or euro. Singapore uses a currency basket. In US history, and world history before 1971, “stable money” meant a currency linked to gold. This would completely eliminate the distortions caused by Keynesian or monetarist attempts at macroeconomic management by monetary means. Interest rates would be set by the free market.
  4. Abandonment of Keynesian macroeconomic manipulation. Stable money already eliminates all Keynesian monetary manipulation. Also, Keynesian macroeconomic manipulation via government spending would also be curtailed, or eliminated. Instead, a recession, and its accompanying decline in tax revenue, would be a great time for governments to slash waste, while also supporting necessary services.

Economies have their own ups and downs. If a government simply maintains, or enhances its business-friendly policy environment, a quick return to prosperity can be expected. This also means no “austerity” during recessions in the form of higher taxes. A government does not need to sit idly by and “do nothing.” There may have been some kind of error of past policy, or some long standing problem that should be corrected. But the focus should always be on fundamental solutions that bring long-term benefit, not short-term jiggering of economic statistics via “stimulus” either of the monetary or fiscal variety.

Hong Kong, one of the world’s most successful governments, had great success following this policy framework. It simply maintains stable money (USD-linked currency), and low taxes (flat tax with a top 17% rate for individuals, a 16.5% rate for companies, and no sales or payroll taxes), and didn’t change its spending very much in response to recession (until recently). For example, in the crisis of 2008, while most developed world governments attempted to “stimulate” their economies with big deficit spending plans, Hong Kong’s government actually ran a budget surplus. The US and most of Europe had huge deficits in 2009-2010, which were soon followed by higher taxes — the deadly cycle of stimulus and austerity.

Nothing in this list is very new or controversial. It was conventional wisdom in 1910, when the US dollar was “as good as gold,” the Sixteenth Amendment had not yet been passed, and nobody knew who Keynes was. But, it is easy to see how different it is from the conventional “neoliberal” economics today — with its high taxes, floating fiat currencies, interventionist governments, and generally socialistic tendencies. This doesn’t work very well, and it is not hard to figure out why.

This article, What’s Wrong with “Neoliberal Economics”?, was originally published by the American Institute for Economic Research and appears here with permission. Please support their efforts.