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Revenge of the neoliberals

Photo by K. Mitch Hodge on Unsplash

Hello,

Welcome to Known Unknowns, a newsletter that is playing the long game.

Neoliberal economists not so foolish after all

For a free-trader, I am feeling oddly calm—or resigned—lately. After all these years of hearing that neoliberalism failed, that we never should have listened to economists… well, now we got what they wanted. Or rather, we got a pause—and some pretty big tariffs—and now free trade has become a left-wing cause. But what’s even more striking is that in 2023, so few Americans (of any political persuasion) supported free trade.

Around 2022, Ken Rogoff said we had to go full-bazooka Keynesian—it was inevitable. Everyone had gotten it into their heads that there was no harm, in any amount, that government spending could do. It would never cause inflation or increase interest rates. Turns out scale is a thing. Maybe you can do some spending during a recession to smooth out the business cycle, but that doesn’t mean you can unleash a multi-trillion dollar stimulus just as the economy is recovering without facing costs. Sometimes we need to test these limits.

I suppose the same thing is happening with trade. We had some small tariffs and they didn’t cause too much damage, so now we’re trying some really big ones. There are legitimate security concerns that might warrant certain tariffs, but somehow it has become conventional wisdom that the neoliberal policies of the last 30-odd years made the country worse off. But what is the counterfactual here? Had we retreated from global markets, many people who escaped poverty would still be poor. But would America have been better off? I don’t think so. We also experienced higher living standards, rising wages, and lower costs.

I’m not minimizing that some people were left behind—even if, in absolute terms, they were better off too. But this isn’t new. I’m the fourth generation from southern New England, a region that de-industrialized before the Midwest did—and before NAFTA, before China joined the WTO, or whatever the latest trade villain is. And there are still scars: jobs that never came back, generations stuck in poverty, and drug addiction.

It’s tragic, and I also see it as a big policy failure—but not that we didn’t create factory jobs there or keep them from moving south in the first place. The real problem was the market frictions we imposed that made it hard for people to build, develop new economic projects, get a decent education, or just move. There were also many toxic social issues. Seeing these failures up close is why I became an economist—I wanted to find solutions. I did: better development of human capital, free markets, with a robust safety net. It’s not complicated.

Market frictions—even well-intentioned ones that try to freeze an economy in time or turn back the clock—only make things worse. Tariffs and industrial policy are just another form of friction. And frictions are always tempting in times of change that bring uncertainty—they slow things down. But it would sound absurd now to say we need to bring factory workers back to agriculture—yet people said the same thing 100 years ago. And that desire made the transition to industrialization messier than it needed to be, too.

But I suppose we need to play this out. People got sick of the Smoot-Hawley tariffs pretty fast, and the realization that tariffs are bad ushered in a period of global cooperation that aimed to lower trade barriers and unleashed prosperity like the world had never seen. I suppose we just need to do this every 100 years or so. Economists lecturing people on what brings prosperity isn’t enough—people need to see it for ourselves.

Trade is unfair

I’m also not minimizing that Trump isn’t wrong when he says many of our trading relationships are unfair. We had low tariffs and largely followed the rules of international trade. Other countries may have appeared to have low tariffs too, but Trump is right—they had other kinds of trade barriers. Even the EU had significant barriers for other EU countries. The IMF estimated they were equivalent to a 44% tariff on countries within the “free trade” zone. We did not have the market access we should have. And it isn’t fair.

But the odd, unintuitive thing about trade is that when you erect a barrier, you are the one who suffers—not the country that’s shut out. Europe is an economic basket case because of these barriers. India’s economic development has never taken off the way it should’ve, largely due to its protectionist history. Retaliation only hurts the country that fights back. The best revenge is living well—and that means letting other countries hurt themselves, rather than taking down our economy too.

I don’t know where this ends. I haven’t ruled out that we might end up with lower tariffs and better deals in the end. But the irony is: the countries that would benefit most from a truly low-tariff world will be our “cheating” trade partners. If so, maybe Trump will deserve the Peace Prize after all.

Until next time, Pension Geeks!

Allison