The Economist as Scapegoat
A lot of things are wrong with America these days. A rising suicide rate. Opioid addiction and deaths. Unaffordable housing in America’s most prosperous cities. Rising inequality. Pockets of poverty in the Rust Belt and elsewhere. Steadily declining jobs in the manufacturing sector. A falling marriage rate. Stagnant wages. Health care costs spiraling higher as life expectancy falls. Very high levels of government debt. Very high levels of student debt. A stubbornly high trade deficit. A failing elementary and secondary education system for many.
Some of these problem may be mere statistical artifacts. Others may not strike you as problems. But when we look at all of them in their totality, it seems difficult to dismiss all of them. Surely, something has gone wrong.
These kinds of social problems and processes are difficult to quantify in any way that allows for reliable statistical precision in weighting different possible explanations. It’s complicated.
But according to some observers, the source of America’s problem isn’t complicated at all. One man and his ideology explains what ails us. Who is this man?
Milton Friedman, of course.
Allegedly, Friedman, once a lone voice in the wilderness of ideas, managed to convince the economics profession, the intellectual elites, and ultimately the American people that market forces should be left to their own devices, that what is now called neoliberalism is the road to prosperity for all Americans.
Now to be sure, according to the critics of Friedman’s ideas and the impact of those ideas, he had help from F.A. Hayek and other economists. But Friedman and Hayek are the big two. According to the critics, they are the evil twins of laissez-faire dog-eat-dog capitalism that convinced Americans that government was bad and that markets could solve every problem. The result is what is sometimes called a fetishization of markets, or a blind faith in markets, or a knee-jerk aversion to government spending and government solutions.
Here is Binyamin Applebaum writing in the New York Times in an essay adapted from his book, The Economists’ Hour: False Prophets, Free Markets and the Fracture of Society:
In the four decades between 1969 and 2008, economists played a leading role in slashing taxation of the wealthy and in curbing public investment. They supervised the deregulation of major sectors, including transportation and communications. They lionized big business, defending the concentration of corporate power, even as they demonized trade unions and opposed worker protections like minimum wage laws.
Growth slowed and inequality soared, with devastating consequences. Perhaps the starkest measure of the failure of our economic policies is that the average American’s life expectancy is in decline, as inequalities of wealth have become inequalities of health.
And while a number of economists contributed to the policies that led to these problems, one economist stands out for Applebaum:
The most important figure, however, was Milton Friedman, an elfin libertarian who refused to take a job in Washington, but whose writings and exhortations seized the imagination of policymakers. Friedman offered an appealingly simple answer for the nation’s problems: Government should get out of the way.
To summarize Applebaum’s view — we slashed taxes for the rich and deregulated the economy while failing to make sufficient public investments. This led to slower growth, an increase in inequality, and a reduction in life expectancy.
A similar judgment is delivered in a recent article in the Boston Review by Suresh Naidu, Dani Rodrik, and Gabriel Zucman:
Leading economists such as Friedrich Hayek and Milton Friedman were among the founders of the Mont Pelerin Society, the influential group of intellectuals whose advocacy of markets and hostility to government intervention proved highly effective in reshaping the policy landscape after 1980. Deregulation, financialization, dismantling of the welfare state, deinstitutionalization of labor markets, reduction in corporate and progressive taxation, and the pursuit of hyper-globalization — the culprits behind rising inequalities — all seem to be rooted in conventional economic doctrines.
To summarize — deregulation, cuts in welfare spending, reductions in union power, and globalization have led to rising inequality.
And here is an excerpt from a recent essay from Larry Kramer, President of the Hewlett Foundation and former dean of the Stanford Law School that summarizes the intellectual revolution that these authors and others blame for so many of our current ills:
Unfortunately, today’s prevailing intellectual paradigm — which has come to be labeled “neoliberalism” — is no longer up to the task. However well this free market orthodoxy suited the late 20th century, when it achieved broad acceptance, it has proved unable to provide satisfactory answers to problems like wealth inequality, wage stagnation, economic dislocation due to globalization, and loss of jobs and economic security due to technology and automation.
I was alive in the late 20th century, or at least I think I was. But somehow I missed the moment when “free market orthodoxy…achieved broad acceptance.” I never noticed it becoming the “prevailing intellectual paradigm.”
And the reason I haven’t is that it’s simply not true. It’s not even true among economists. Thomas Piketty, Joseph Stiglitz, and Paul Krugman are three of the most, if not the most influential economists alive. They write best-selling books, one writes weekly in the New York Times and two have Nobel Prizes. No one would call them proponents of free-market orthodoxy.
How would we assess the impact of Milton Friedman, Hayek, and others on policy. Did we really being a period of free market orthodoxy in America starting around 1980? Did policy move in Friedman’s direction over the last 40 years?
Let’s start with the most basic measure. The size of government. Has government has gotten “out of the way” over this period.
Today, government spending across Federal, State, and Local levels is $7.2 trillion dollars. That doesn’t strike me as a small number. As a percentage of GDP it is 33%. That compares to 30% in 1980. That compares to 25% in 1962 when Friedman published his manifesto, Capitalism and Freedom.
How about deregulation? Here are the total number of pages in the Federal Register, the rules administered by the government’s regulatory agencies:
This is a crude measure. One page of regulations can be much more onerous than 20 depending on the content. But it’s hard to argue that deregulation has been let loose upon the economic landscape. Some industries are less regulated than they once were — trucking, transportation, and communications being the most obvious examples. Most observers, including Applebaum, think that these changes turned out pretty well for consumers.
Meanwhile, there are other sectors whether government’s hand has become much heavier over time relative to the market’s invisible one. Over time, government spending on health care has risen steadily in absolute terms and relative to the economy:
Meanwhile, out of pocket spending as a proportion of total health care spending has fallen steadily. Friedman liked to say you spend your own money more carefully than other people’s money. In health care, we didn’t listen to Friedman. We spend a lot less of our own money as a proportion of the total. There’s not much “market” in this so-called market:
Or look at education. One of Friedman’s ideas was to give parents more freedom in choosing schools for their children to attend. There has been an increase in experimental programs such as vouchers to cover private school tuition and charter schools, though the latter are still government-run. How important are these innovations? Children in charter schools are still less than 5% of total enrollment. There are only about 150,000 students receiving vouchers out of the 56 million students in K-12 schools.
What about spending for public schools? Has that been reduced in this allegedly draconian neoliberal era?
In 1960, per pupil expenditure for elementary and high school students was just under $4000. In 1980, when the neoliberal ideology allegedly began its ascendance, it was a little less than $8000. The latest numbers from 2015–2016 are just under $15,000. All numbers are corrected for inflation (in 2017–2018 dollars). So under this time of alleged cutbacks and resource starvation, per pupil expenditures rose dramatically.
What about transportation infrastructure? Total spending is up in real terms. What about as a percentage of GDP? There has been a decline since 1962 as a percentage of GDP but the numbers are basically flat since 1980:
What about investment in non-defense research and development, and health? Up dramatically since 1980 in real terms.
Not exactly the “curbing of public investment” that Appelbaum decries.
What about the “deinstitutionalization of labor markets” and “demonization of unions?” Yes, unionization has declined since 1980. But the decline began around 1950. Hard to blame that on Friedman or the triumph of free-market ideology. Perhaps the decline of unions is more about what kind of jobs have emerged over the last 50 years and not the triumph of free-market ideology.
Has there been a dismantling of the welfare state? Nope. Real expenditures to help the poor have grown pretty steadily in absolute terms and as a proportion of GDP:
Income rates facing the wealthy have fallen as Applebaum writes. But the share of tax revenue coming from the richest Americans is much higher than was in 1980.
What about globalization? Tariffs fell dramatically in the United States long before Friedman was influential:
Trade as a proportion of GDP has grown dramatically in recent decades, particularly since 2000 when China jointed the WTO. It is reasonable to worry about the impact of globalization. I think increased trade has been hard on people who used to work in the manufacturing sector. And yes, economists, including Friedman, have been championing free trade since at least 1776.
Reasonable people can debate whether the magnitude of trade with China and the speed at which it took place was a policy mistake. It certainly lowered prices for lots of products making life better for the poor, especially. And yes, it was hard on others. At the same time it helped lift hundreds of millions of Chinese out of abject poverty. Was that entire of mix of good and bad a blunder caused by the ideological triumph of free-market economics?
Did President Clinton and Vice-President Gore champion NAFTA because they were bewitched by the ideas of Friedman and Hayek? And Reagan, who supposedly was under Friedman’s spell, still put quotas on Japanese cars, a move I am sure Friedman opposed.
Friedman opposed sugar quotas, corporate welfare, Amtrak, and many other forms of government intervention. They are all still with us. He opposed occupational licensure. It has grown mani-fold over time. He wanted to privatize social security. Hasn’t happened. He wanted a negative income tax to replace the complex array of welfare programs. Instead, it was reborn as the Earned Income Tax Credit and supplements rather than replaces other aid to the poor. The only places he triumphed outright was in his support for a volunteer army and floating exchange rates.
He did defend the right of businesses to make profits but he always stressed that capitalism was a profit and loss system and when he said that, he stressed the loss part. I think he would have been appalled at the bailouts that took place during the financial crisis. He opposed corporate welfare. Applebaum is correct that Friedman and other members of the Chicago School were skeptical of the effectiveness of antitrust. But Friedman never “lionized big business.” He often pointed out that businesses didn’t like capitalism and were its enemy. He argued that most businesses prefer to avoid competition and like it when the government handicaps competitors.
Friedman believed in personal responsibility. He surely opposed the rise of the nanny state. He couldn’t stop it. He believed in legalizing marijuna. If you want to credit him for that, go ahead, but I don’t think he was the driving force behind the recent rise in legalization and it certainly isn’t what his critics have in mind when they decry his influence.
Yes, life expectancy has been falling in the last few years due to the opioid crisis and the increased availability of heroin. Is that Friedman’s fault? It might be related to globalization and the loss of opportunity in certain parts of America that once had more manufacturing jobs. Or maybe it’s also partly due to increased land use regulation that has raised rents in so many cities making it hard for people in search of economic opportunity to move there. You want to blame Friedman for that? Or for the subsidies through Medicaid that made pain-killers extremely cheap to users? Or the social pressure on doctors to find new ways to reduce pain? Or to a cultural malaise where people feel less connected to each other which has fueled addiction? It’s complicated.
And as I write this essay, the new data on life expectancy for 2018 shows a reversal of the trend over the last three years as opioid use has fallen. Do you think this has anything to do with free-market ideology?
Inequality is up. But some of that is due to cronyism — subsidies to the financial sector for example — that Friedman opposed. Some of it is due to the high marriage rate of people with advanced degrees to each other leading to households with two high-income earners. Some of it is due to market forces that Friedman would applaud — entertainers, athletes, and software innovators who reach more people today.
Growth has slowed in the last 40 years. Given the myriad of other things that have happened since 1980 culturally, demographically, and in terms of economic policy that Friedman opposed — to you really want to blame it all on a single ideology that has had such limited success? Wouldn’t you want to take a more nuanced view?
The bottom line: it is absurd to think that somehow Friedman’s free-market ideology triumphed and the time has come to roll back his polices. Most of them have never been tried. Over the last 50 years government has gotten larger, not smaller. Government is mostly more intrusive not less, when it comes to regulations facing a new business, the labor market, and in key areas like housing, education, and health.
I am big fan of Friedman’s work though I certainly don’t agree with him about everything. But I cannot understand the claim that his ideas have decisively shaped our economic policy or the resulting complex set of consequences that we live with today. Those who blame Friedman (and Hayek) for what has gone wrong in the US — the ones I have quoted above and others such as Joseph Stiglitz — are attacking a straw man of remarkable flimsiness.
I invite these critics of Friedman to respond to the numbers and claims I’ve posted here. I will happily post rebuttals and charts with different numbers.