Neo-Liberalism Is Not Dead, It Never Lived

January 11, 2024

A friend called my attention to a piece by Dan Drezner disputing the current fashion that neo-liberalism is dead. Drezner makes several good points, and gets some important things wrong, but like most “neo-liberals” and critics of neo-liberalism, he still gets the basic story wrong.

The basic point that both sides miss here is that no one was actually committed to a free market without government intervention. The difference was that the so-called neo-liberals liked to claim that their policies were about the unfettered free market, whereas their opponents liked to claim that they were attacking the free market.

In reality, the neo-liberals were simply trying to structure the market in ways that redistributed income upward, while claiming that it was all the invisible hand of the market. Their opponents bizarrely chose to attack the market instead of the way the neo-liberals were shaping it. I’ll come back to this basic issue in a moment, but first it is worth dealing with a couple of key points that Drezner gets right and then a big one he gets badly wrong.

The most important point Drezner gets right is that we can’t reverse the hit from trade to manufacturing workers, and the larger group of workers without college degrees, by adopting protectionist policies now. There is now an extensive literature showing that the opening of trade to China and other developing countries led to a loss of millions of manufacturing jobs and downward pressure on the pay of the manufacturing jobs that remain.

Since manufacturing jobs had historically been a source of relatively good-paying jobs for workers (especially male workers) without college degrees, the loss of these jobs, and the wage premium in the ones that remained, put downward pressure on the wages of non-college-educated workers more generally. The wage premium in manufacturing has largely disappeared primarily as a result of the increased openness to trade in manufactured goods.

In 1980, according to data from the Bureau of Labor Statistics, the pay for production and non-supervisory workers was nearly 6.0 percent higher for manufacturing than in the rest of the private sector. In 2023 the pay of production and non-supervisory workers in manufacturing was 9.7 percent less than in the rest of the private sector. This is not a comprehensive measure of the wage premium in manufacturing since we would also have to add in benefits and adjust for factors like age, education, and location, but there is little doubt that the wage premium has fallen sharply in the last four decades.[1]

A big part of the explanation for the decline in the premium is the plunge in unionization rates in manufacturing. In 1980, 32.3 percent of workers in manufacturing were unionized, compared to 16.5 percent in the rest of the private sector. In 2023, 7.8 percent of manufacturing workers were unionized, only slightly higher than the 5.8 percent rate for the rest of the private sector.  

The plunge in unionization rates among manufacturing workers largely explains the loss in the wage premium. However, this also reinforces Drezner’s point, there is little reason to focus on bringing back manufacturing jobs in a context where there is no reason to believe they will be especially good jobs.

In fairness to the Biden administration, it has tried to couple its protectionist measures with efforts to promote unionization of the jobs that are created. But it is not clear how successful these efforts will be. And, if it can succeed in promoting unionization in manufacturing then it may also be successful in promoting unionization in sectors like healthcare and retail.

In any case, the key to creating good-paying jobs in this story is that they be union jobs. There is no magic to manufacturing. The loss of good-paying jobs in manufacturing to trade was indeed a huge hit to the working class, but simply getting back manufacturing jobs will not be a gain.

The Resilient Supply Chain Mythology

One lesson that many took from the pandemic is that we need more domestic production to ensure that our supply chains are resilient. This view involves some major confusions.

First, many of the shortages of things like face masks and other protective equipment and ventilators, that appeared at the start of the pandemic, had nothing to do with supply chains. These were stockpile problems.

We could not suddenly produce hundreds of millions of masks or tens of thousands of ventilators even if these items were all produced in Ohio. We should have had substantial stockpiles on hand for the sort of emergency that COVID created. It was a major failing of the Trump administration that we had grossly inadequate stockpiles of these items.

The second point is that having domestic suppliers doesn’t guarantee resilience. We had many factories in the United States shut down at various points because of the pandemic. If we relied exclusively on domestic production, these shutdowns would have created major problems.

The key to having resilient supply chains is having diverse sources, both domestic and international. There is a good argument for not relying on a potentially hostile country like China for a key manufacturing input like semiconductors. But apart from a relatively small number of strategically important materials and manufactured inputs, there is little reason to equate a reliance on domestic production with resiliency. There is no reason to think we somehow would have fared better in the pandemic if all our manufactured goods were produced domestically.

The Cost of Making Workers Whole: What Drezner Gets Seriously Wrong

There is an ideology among supporters of our trade policy arguing that if we had just thrown out a few dollars for additional retraining or health care then we could have ensured that everyone came out ahead. This is a story of very bad arithmetic.

The median wage has increased by around 17 percent between 1980 and 2023. If it had kept pace with productivity, as it did between 1947 and 1973, it would have roughly doubled. The difference comes to around $15 an hour or $30,000 for a full-time full-year worker. If we say we had to make 60 million workers whole, the payments would be around $180 billion a year.

Of course, there were other factors than trade depressing wages. We also had a more anti-union National Labor Relations Board. We deregulated major sectors like airlines, trucking, and telecommunications, putting downward pressure on the wages of workers in these sectors. Suppose we say that 40 percent of the lost wages, or $76 billion a year, can be blamed on trade. That is two orders of magnitude larger than the amount of assistance approved by Congress.

This sort of trade assistance is simply not a plausible story. This is not just a case of an oversight where we forgot to compensate the losers from trade, it is a fantasy to imagine that anything like the assistance needed to make the losers whole would be politically feasible. Furthermore, as an economic matter, if we have the idea that we would raise this sort of money through taxes, the distortionary impact of these taxes would offset many of the gains from more open trade.

In short, making losers whole was not a serious possibility. The point of the trade policy pursued by the country over the last forty years was to redistribute income from the bottom half of the wage distribution to those in the top 10 or 20 percent. That is the result predicted by economic theory and that was the reality.

Neo-Liberalism is a Lie

The biggest problem in the debate over the demise of neo-liberalism is that it accepts a view that is obviously at odds with reality. Neo-liberalism was never about just leaving things to the market. That is an absurd proposition on its face. There is no market out there to leave things to, markets must be structured by policy. The debates over the last four decades were about how to structure markets, not whether to just leave things to the market.

Starting with trade, there was no big effort from so-called neo-liberals to open up trade in physicians’ services or the services of other highly paid professionals. This is not because increased trade in these services, by travel of physicians or patients or telemedicine is not possible, it is because these professionals have a lot of political power and could keep any discussion of lessening of the barriers that protect them off the political agenda. As a result, our doctors get paid twice as much as doctors in other wealthy countries. (Our manufacturing workers get paid considerably less.)

There is nothing about the market that tells us to subject manufacturing workers to competition with low-paid workers in the developing world and to protect the most highly paid professionals from the same sort of competition. That was a conscious policy with the predictable effect of increasing inequality.

Government-Granted Patent and Copyright Monopolies Are Not Given to Us by the Free Market

An even bigger area that the critics of imaginary neo-liberalism like to overlook is patent and copyright policy. We redistribute over $1 trillion annually in rents, close to half of after-tax corporate profits, due to these government-granted monopolies. In drugs alone the amount likely comes to over $500 billion annually, as we will spend over $600 billion this year for drugs that would likely sell for less than $100 billion in a free market without patent monopolies or related protections.

These government-granted monopolies also account for the bulk of the price in a number of other areas, including computers, software, smartphones, medical equipment, and of course video games and movies. It is almost Trumpian that anyone can look at an economy where government-granted monopolies play such a massive role in distribution and then pronounce it to be a free market without government intervention. It is even more absurd when we consider that the government plays a large role in creating the intellectual products subject to these monopolies, most notably with prescription drugs where it spends over $50 billion a year on biomedical research.

The Rules of Corporate Governance Are Not Given to Us by the Free Market

Corporate governance is another enormously important area where the critics of neo-liberalism apparently believe that detailed rules get written by the free market. It is common for people on the left to criticize the practice of share buybacks, at least in part on the basis that they allow top management to manipulate the market to maximize the value of their stock options.

If that claim is accurate, it effectively means that top corporate management is getting high pay by ripping off the companies they work for. After all, if the shareholders wanted CEOs and other top management to get higher pay, they could just give it to them.

The implication is that if shareholders had more control over the companies that they ostensibly own, CEOs would get lower pay. The current pattern persists because CEOs and top management largely control who gets on and stays on the corporate boards that determine their pay.

This is not just an issue of the pay of a small number of executives at the top of 500 or 1,000 major companies, the pay of top executives sets pay patterns throughout the economy. We would be in a very different world if CEO pay had roughly the same ratio to the pay of ordinary workers as it did fifty years ago. In that case, CEOs would be getting around $3 million a year rather than $30 million a year. And this change would have absolutely zero to do with a free market or government intervention, it is about writing different rules of corporate governance.

Financial Industry Bailouts Are Not Given to Us by the Free Market

In 2008, when the collapse of the housing bubble was sending shock waves through the financial system, the high priests of “neo-liberalism” ran to Congress and demanded a massive bailout to prevent a Second Great Depression. The risk of a Second Great Depression was of course a lie (we know the secret for getting out of a depression, it’s called “spending money”), but the point was that they were not yelling that we need to leave things to the market.  

It’s not just the occasional bailout that pulls the government into the financial sector, the entire structure of the industry depends in very fundamental ways on the government, most obviously with deposit insurance and the Fed’s lending windows. Here too the interventions matter in a big way for inequality since many of the biggest fortunes in the country were made in the financial industry.

We could shape the industry in ways that make it less conducive to accumulating vast fortunes. For example, nothing about the free market says that we need to have special tax treatment, in the form of the carried interest tax deduction, for private equity and hedge fund partners, some of the richest people in the country. We also could look to ensure that the bankruptcy laws, often used by private equity funds in the firms they take over, are not a tool to rip off workers, suppliers, and other creditors.

And we could try to minimize the need for the financial sector by having the government perform tasks where a centralized entity is most efficient, like Social Security or health insurance. It is a simple truth of economics that an efficient financial sector is a small financial sector. Finance is an intermediate good like trucking. It is essential for the economy, but it does not provide a direct benefit to households like the healthcare or housing sectors. Believers in the free market should want to see the financial sector downsized, not the bloated financial sector we have today.

Section 230 Was Not Given to Us by the Free Market

Many progressives (and non-progressives) have complained about the power of huge social media platforms like Facebook, Twitter (now “X”), and TikTok. These platforms reach an order of magnitude more people than even the largest television stations or newspapers. Their moderation decisions are entirely at the whim of their owners, who also happen to be very rich.

The astounding growth of these platforms was not just the natural working of the market, although the network effects associated with online platforms are important. A major factor allowing for the growth of these platforms was the decision by Congress to exempt them from the same sort of liability for spreading defamatory material that print or broadcast outlets face.

If a television station or newspaper spread defamatory material statements, they would face legal liability, even if they did not originate them. This in fact was largely the story with Dominion’s suit against Fox. Much of the material cited in the suit was not from people paid by the network, but rather statements from guests on its news shows.

But Section 230 of the 1996 Communications Decency Act protects Internet platforms from liability for third-party content. This means that Mark Zuckerberg and Elon Musk can profit from spreading lies that would cost the New York Times or CNN millions in defamation suits.

It is often argued that it would be impossible for Internet platforms to screen the hundreds of millions of items posted every day. That is true, but they could face a takedown requirement after notification. They have managed to survive just fine with this sort of requirement with reference to copyright violations for a quarter century since the passage of the Millennial Copyright Act.

We can also structure a repeal in a way that is likely to favor smaller platforms, for example by allowing platforms that don’t sell ads or personal information to continue to enjoy Section 230 protection. In any case, it should be pretty obvious that Section 230 protection is not the free market. It was a decision by Congress to benefit Internet platforms relative to print and broadcast outlets. And it hugely facilitated the growth of giant Internet platforms.

The Death of Neo-Liberalism: Victory Over a Non-Existent Enemy

Like everyone else, I love a victory party, but it’s hard to get too excited over defeating an enemy that does not exist. The Biden administration has adopted many progressive economic policies. Its ambitious recovery package quickly got the economy back to full employment, which also led to large wage gains for the lowest-paid workers.  

It has also pushed forward with a major infrastructure program, and the Inflation Reduction Act is by far the most aggressive climate legislation ever passed in the U.S. It also has taken steps to rein in patent monopoly pricing for prescription drugs. And for the first time in decades, we have an administration that takes anti-trust policy seriously. In addition, it has made the terms for buying into the exchanges created by the Affordable Care Act far more generous, and crafted an income-driven student loan repayment plan that should mean that this debt is not a major burden.

All of these are positive developments, which can be built upon in a second Biden administration. But they have nothing to do with defeating neo-liberalism.

If we want to make serious progress in advancing progressive economic policies, we need to have a clear idea of what we are fighting. The idea that we were fighting against the free market is absurd on its face.

The market is a tool, like the wheel. It would be as absurd to have a fight against the market as a fight against the wheel. The problem is not the market, but rather a set of policies that the right has used to structure the market to redistribute income upward. We need to attack those policies, not celebrate a victory over an imaginary foe. (Yes, I am talking my book, Rigged [it’s free].)

[1] Larry Mishel has a fuller analysis which also shows a sharp decline, but still finds a substantial wage premium, although the analysis ends with the period 2010-2016, missing any declines in the subsequent seven years.  


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