100 Years of Statism, 100 Years of Neoliberalism

I’d like to argue that to understand what’s going on in the world, one needs to understand the megatrends.  Yes, I know that ‘megatrend’ is a rather disreputable term, associated with crackpots.  But I’m going to use it anyway.  Here’s my basic hypothesis:

1.  For nearly 100 years statism was on the advance in the US, and indeed in almost every country.

2.  In the US the period of growth of government started at least as far back as 1887 (the ICC) and continued until 1977, after which deregulation, free trade agreements, and MTR cuts kicked in.  In other countries one saw MTR cuts, deregulation and privatization.

3.  During the statism megatrend, the term ‘reform’ implicitly meant bigger government.  That’s how governments reacted to crises.  During the current (neoliberalism) megatrend, the tern ‘reform’ implicitly means less government.

4.  In the US this pattern has recently been hidden by health care, which is one aspect of the welfare state that was never completed in the statist era (although it was completed in all other developed countries.)

5.  During the megatrends, there are periods of consolidation, which are falsely viewed as countertrends.  They are not countertrends.  The trend is still intact.  In the US the 1920s and 1950s were falsely viewed as countertrends.  Don’t be fooled, we are only 1/3 of the way through the neoliberalism megatrend.

The following three examples come from a single issue of The Economist.  First, how Greece spells “reform”:

WITH a target of €50 billion ($72 billion) by 2015, Greece’s privatisation plan aims to raise more cash as a share of GDP than any OECD government has managed before. If the goal for listed companies is met, the market capitalisation of the Athens stock exchange would double. The economic benefits of privatisation are widely accepted: a 2003 OECD study found “overwhelming support” for the idea that “privatisation brings about a significant increase in the profitability, real output and efficiency of privatised companies.”

Of course one could find many such examples in Europe.  Even where progress is slow, such as Spanish labor reforms, the long terms direction of change is very clear, and exactly the opposite of what FDR did in the Great Depression.

Reform is even more in evidence in developing countries, despite a drumbeat of press reports that reform has stalled in places like India and China.  Here’s a report on China:

China leads the way to freedom

For the first half-century of its emergence after the second world war, civil aviation was dominated by the huge American market, where distance favoured air travel for domestic journeys. Internationally, other countries were afraid of the dominance of the two biggest American carriers, TWA and Pan American. For their part, Americans were afraid of hostile European planes flying over their homeland, perhaps to drop bombs rather than passengers. That mutual lack of trust gave rise to the Chicago Convention on air travel in 1944 and then to restrictive bilateral air-traffic deals, exemplified by the so-called Bermuda agreement covering transatlantic flights. IATA was formed to run this regulated aviation commerce, acting as a clearing house for payments between airlines and drawing up rules for everything from the size of sandwiches to the price of headphones for in-flight films.

Those days are on the way out. Mr Bisignani, the retiring boss of IATA, reckons that China will lead the way now.  .  .  .

Asia is also proving an unlikely champion of free trade, with little enthusiasm for clinging to outdated, traffic-limiting bilateral deals. ASEAN, the Association of South-East Asian Nations, is working on establishing a single aviation market with no traffic restrictions by 2015. “China will break Bermuda and the old IATA system,” says Mr Bisignani. Thus a new economic power that joined the World Trade Organisation only in 2001, whose trade policies are frequently criticised by members of longer standing, is likely to play a leading role in tearing down the restrictions of the most regulated of global industries.

And here’s what going on in the most dynamic region of India:

SO MANY things work properly in Gujarat that it hardly feels like India. In a factory packed with kit from Germany and China, slabs of rubber and bags of carbon black are turned into tyres. After being X-rayed for imperfections, they will be distributed across India or sent for export within three days. Sandeep Bhatia, a manager for CEAT, the firm that owns the project, says it took only 24 months to complete, including the normally fraught process of buying land. There is constant electricity, gas and abundant water. The state government, he says, kept red tape to a minimum, did not ask for bribes, and does not interfere much now.

.  .  .

The state government uses the usual tricks to try to jump-start growth, including special economic zones. But more important, it has provided the bog-standard things that businesses pray for across India but often do not get—less onerous labour laws, passable roads, reliable electricity and effective bureaucracy.

Don’t just look at national governments.  The states that reform race ahead of those that don’t.  Eventually the voters of the lagging states get disgusted and throw out the bums (or communists in the case of West Bengal.)  But also don’t be too influenced by ‘left/right’ terminology.  There is little difference between the rate of liberalization in governments of the left and the right.  They both respond to the political pressures of the day.

In America, progressives are scratching their heads trying to figure out how the Bush-produced Great Recession failed to deliver FDR II:

Liberals are furious that President Obama agreed to massive spending cuts, and the promise of more, without any increase in revenues. They should be: Given how much the Bush tax cuts have contributed to the deficit (and how little they’ve spurred economic growth), it’s mind-boggling that they’ve apparently escaped this deficit-reduction deal unscathed.

But there’s a reason for that: since the economy collapsed in 2008, only one grassroots movement has emerged in response, and it’s been a movement of the right. Compare that with what happened during the Depression. In 1933, Franklin Roosevelt assumed the presidency and launched the hodgepodge of domestic programs that historians call the first New Deal. By 1935, however, he was looking warily over his left shoulder at Huey Long, whose “Share our Wealth” movement demanded that incomes be capped at $1 million and every family be guaranteed an income no less than one-third the national average.

At the same time, the Townsend plan to guarantee generous pensions to every elderly American had organizers in every state in the union. To be sure, FDR had vehement opponents on his right, but he was at least as concerned about the populist left, which helps explain why he enacted the more ambitious “second new deal,” which included Social Security, the massive public jobs program called the Works Progress Administration and the Wagner Act, which for the first time in American history put Washington on the side of labor unions.

Obama, like FDR, had a reasonably successful first two years: a stimulus package that while too small for the circumstances was still large by historical standards and a health care bill that while subpar in myriad ways still far exceeded the efforts of other recent Democratic presidents.

And then, unlike FDR, he ran into a grassroots movement of the right. Historians will long debate why the financial collapse of 2008 produced a right-wing populist movement and not a left-wing one.

Of course historians are confused.  They don’t like the idea of megatrends, especially right wing megatrends.  But we know better.

Update: Note to equity investors.  Ultra-low real interest rates as far as the eye can see and persistent neoliberal reforms—the trend is your friend.

About Scott Sumner 490 Articles

Affiliation: Bentley University

Scott Sumner has taught economics at Bentley University for the past 27 years.

He earned a BA in economics at Wisconsin and a PhD at University of Chicago.

Professor Sumner's current research topics include monetary policy targets and the Great Depression. His areas of interest are macroeconomics, monetary theory and policy, and history of economic thought.

Professor Sumner has published articles in the Journal of Political Economy, the Journal of Money, Credit and Banking, and the Bulletin of Economic Research.

Visit: TheMoneyIllusion

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