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Sumner on neoliberalism and growth

This week’s EconTalk is Scott Sumner talking about why some countries grow faster than others. His basic argument is that starting around 1980 (and maybe a little before) there was what he calls an embrace of neoliberalism–a movement toward privatization, lower tax rates, and deregulation. He argues that while growth slowed in the United States in this period, it slowed worldwide and slowed less than in other countries that failed to liberalize or that liberalized less.  (I speculate in the podcast that the woridwide slowdown in growth was due to an increase in the divorce rate–some of the slowdown was real as men and women coped with unexpected divorce and some is a statistical artifact of the way data are gathered.) In general, in statistical work that he has done, he finds (as do others) that economic freedom is correlated with growth. (See this post and this one at Scott’s blog for details.)

While I am sympathetic to Scott’s argument I am skeptical of it on a couple of grounds. One is that it’s very hard to avoid confirmation bias and even harder to find reliable ways to test the hypothesis. Yes, you can regress economic performance on various measures of freedom and other factors. But how robust are the findings or the measures of freedom?

But even on the level of the simplest of narratives, it’s not clear what the stylized facts are. Let’s look at the United States since 1980. Is the glass half-full or half-empty? Scott points to falling marginal tax rates, and deregulation. When I pressed him on how much dergulation had occurred, he pointed to transportation, communications (the breakup of AT&T) and financial deregulation such as the elimination of regulation Q.

My response was that yes, marginal tax rates are lower. The total tax burden is higher. In the last decade, much higher. On deregulation, how important are the changes in trucking, airlines, phone service and financial competition? Pretty important. On the other side you have an enormous increase in government’s role in health care. You have a large increase in gvoernment’s role, especially at the federal level, in education. There is more environmental regulation not less. I would guess that in most places it is harder to start a business than before. The tax code is more complicated. The nanny state has expanded. The government has intervened significantly in the tobacco market. Local zoning has become much more discretionary and interventionist.

In financial markets, you have the repeal of Regulation Q, the repeal of Glass-Steagall and probably a few other changes I’m not thinking of. But you have the relentless subsidization of lending through creditor rescue that increased leverage in the financial sector.

So is the glass half full or half empty? Is there any way to measure the effects of these changes indepenedently of culture (a factor Scott includes), demographic changes such as changes in the divorce rate, and other factors–the explosion of the internet and so on? I don’t think so. But I enjoy listening to Scott and though I disagree with him on these points, I really like the breadth and thoughtfulness of his blog and his thoughts.

UPDATE: Scott responds with some more examples of deregulation. He also points out that most of the action was outside the US.

UPDATE: I forgot about the government’s increasing role in housing in the 1990s. I’m sure there are other areas where government involvement has grown (or shrunk) dramatically since the 1980s. Feel free to make suggestions in the comments.


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