Saving Neoliberalism From Itself: Part 1 - How We Got Here
Long-Term Horizon, Deep Value, Dividend Investing
Seeking Alpha Analyst Since 2009
My name is Phil Mause. I am a lawyer in Washington, D.C., getting close to retirement. I am a yield oriented investor and in the last two years, I have done reasonably well in junk bonds, BDCs, mortgage REITS, and dividend paying blue chip stocks. As an avocation, I dabble in stand up comedy. I have been and continue to be a collaborating author with High Dividend Opportunities, a subscription site based on Seeking Alpha.
Summary
- A definition of "neoliberalism".
- The pre-World War I consensus.
- The shock of two world wars and a depression.
- The new Keynesian consensus.
This series is going to attempt to describe the challenges faced by neoliberal policymakers in the 21st Century and to suggest some measures that may be able to preserve the benefits of neoliberalism without creating the seeds of its destruction. I will admittedly be taking a 35,000 foot view of some economic developments and will be describing complex matters in general terms. Still, I hope to be able to tease some promising proposals out of the complexity.
A. What is Neoliberalism? -
Although definitions vary, neoliberalism is generally considered to be the modern implementation of laissez-faire capitalism. It generally includes deregulation of business entities, lower marginal tax rates, privatization of government functions, free trade, reasonably free immigration, and reduction of government activity. The magazine, "The Economist", generally reflects neoliberal views. The measures that the International Monetary Fund imposes on distressed economies generally reflect neoliberal ideology. Presidents Reagan and Clinton, Prime Minister Thatcher, and German Economic Minister Ludwig Ehrard are all generally considered to have implemented neoliberal programs.
Neoliberalism has become very unpopular for a variety of reasons. Conservatives don't like it because it contains the word "liberal". Progressives don't like it because it allegedly produces income inequality and it is used as a rationale to dismantle government programs. Economic nationalists don't like it because it involves free trade and liberal immigration rules. Neoliberalism has become a favorite punching bag for all sorts of pundits and politicians.
B. Pre WWI Classical Economics -
At the outset, it is useful to review some history to determine how we got ourselves to our present predicament. Prior to World War I, a classical economic consensus was emerging. There was strong support for free markets, and free trade was becoming more popular although not universally accepted. There was optimism about the future. New technologies abounded. The economic interdependence of the major powers was celebrated as a strong deterrent to any future war. Although there were periodic "panics" and even extended depressions, the consensus was that it was best to let these things correct themselves.
There was a strong body of well reasoned economic literature supporting free markets. Say's Law "proved" that there could never be inadequate demand for whatever was produced. Other formulas demonstrated that free markets maximize efficiency and welfare by permitting participants to trade and produce optimal allocations of resources, finished goods and labor.
All appeared well. Innovation was moving at a breathtaking pace. Science promised endless progress. Trade reduced the danger of war. Standards of living were improving. Monarchies were gradually ceding power to elected assemblies. The world seemed to be on a positive trajectory with no clouds on the horizon. This is the world described by Barbara Tuchman in The Proud Tower.
C. The War and Depression -
Starting in 1914, the world experienced two world wars, a horrible Depression, the rise of fascism and communism, and a terrible degree of disillusionment. It affected every discipline - art, music, literature, and philosophy were changed forever. Coincidentally, in science, new developments in quantum physics demonstrated that we really didn't know as much as we had thought we knew.
In economics, classical analysis was undermined and there was a search for an alternative. The depression seemed to prove that free market capitalism does not "correct itself" and resume growth after a shock. While classical economists argued that "in the long run" the economy would correct itself and growth would resume, realistic politicians pointed out that "people don't eat in the long run." Some embraced communism; others were entranced by fascism's focus on the nation as an economic unit Many intellectuals were confused by the seemingly positive performance of the USSR and Germany during the 1930's while Western capitalist nations struggled.
D. Postwar Consensus -
"Keynesian economics" emerged as a popular solution. While the definition was imprecise, it was generally viewed as including - 1. the use of fiscal and economic stimulus to counteract a depression, 2. the redistribution of wealth, 3. state planning of the economy, and 4. automatic "guardrails" like unemployment insurance aimed at reducing the impact of business cycles.
Because the depression had featured uncontrolled deflation, various measures aimed at preventing price decreases were employed. Labor law favored unions and unions prevented wage declines. These measures also included prohibitions on retail discounting, and entry and price regulation in key industries (trucking, railroad, airlines, banking, etc.). Steeply graduating income tax rates achieved the redistribution of wealth and also modulated business cycles by increasing tax receipts as more workers moved into higher brackets during periods of growth and reducing tax receipts when the opposite occurred.
Liberal economists including John Kenneth Galbraith and Leon Keyserling noted that the United States had achieved massive economic growth during the Second World War even though roughly 10 million men and women were in the military. This suggested that with proper government policy encouraging growth, the economy could produce sufficient output to make poverty a thing of the past.
The United States and the West in general appeared to be heading into an era of prosperity and amity with the issues of the past fading into the rear view mirror. The "golden age" which many Trump supporters now long for was emerging and the 1950's world of suburban expansion, progressive advances for each generation, and rapid growth of the middle class seemed here to stay.
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