Neoliberalism and its enemies, Part III

The specter of "political economy."

This is part of an ongoing series of essays on the movement to construct a “post-neoliberal” economic policy agenda for Democrats. Part I considered the problematic decision to define neoliberalism as an overemphasis on economic growth. Part II considered the difference between a foreign policy decision to reconsider engagement with China and the (separate) idea of rejecting the economics of free trade.

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When Uber first arrived on the scene, I thought it was broadly — and fairly obviously — change for the better.

Uber was making it somewhat cheaper and dramatically more convenient to hail a cab, which was good because making it cheaper and more convenient to do things is good. Of course, taking a cab generates pollution (from burning gasoline) and traffic congestion (more cars on the road), but it would be weird to try to address those problems specifically through regulation of the taxi industry. What we ought to do is try to regulate (or ideally price) pollution externalities appropriately and manage road access appropriately (again, pricing is good), while looking to regulate specific markets with an eye toward economic growth. That means that if licensing cartels or other barriers to entry are making the taxi market excessively uncompetitive, technologically sluggish, or otherwise overpriced and unfriendly to consumers, we should welcome a disruptive new entrant and align rules appropriately.

But I realized in the Obama years that there is significant principled disagreement about this. There’s a view that economic regulation should be made with an eye to the distributional consequences of each individual policy shift. So if an inefficient cab regulatory system helps bolster the bottom line of a mix of working class cabbies and affluent-but-hardly-billionaires dispatch companies owners, you ought to side with them against the interests of a gaggle of VCs and yuppie cab riders.

And I’ve believed ever since that this is the crux of the argument over “neoliberalism” inside the Democratic Party. The term is, of course, invoked in lots of other contexts. But with regard to intra-party factional politics, the “neoliberals” think you should try to address individual issues on the merits and deal with distributional concerns separately through tax policy and the welfare state. The anti-neoliberals think this is misguided, and a big part of how they’ve persuaded more people to join their team is by convincing them that the “address distributional concerns separately through tax policy and the welfare state” is impossible to execute on.

But it is not impossible to execute on. In fact:

• The overall tax-and-transfer system of the United States has become meaningfully more progressive over time.

• Sluggish economic growth is an impediment to sustaining the existing safety net, and more rapid growth would make it easier to expand the safety net.

• Another major impediment to continuing the project of expanding the safety net is that lots of people on the left seem to have lost interest in favor of chasing shiny objects.

I think people should recommit themselves not necessarily to “neoliberalism” (which, again, means many things to many different people), but to the idea that taxes and the safety net are the primary means of addressing the distribution of income and that regulatory policy should be geared towards growth, rather than bank shot efforts at redistribution.

The mythical impossibility of redistribution

Josh Marshall, the founder and editor of TPM and a personal inspiration of mine, and Rick Perlstein, the author of several great books of political history, are both great writers and sharp thinkers. But they’re not really in-the-weeds, charts-and-graphs policy guys. Which I think makes their opinions about charts-and-graphs type issues a very important indicator — when the smart guys who aren’t in the weeds start saying stuff, you know the stuff they’re saying has really penetrated elite consciousness and is driving thinking about a broad set of issues.

So I was struck by this bit that Perlstein wrote profiling Marshall, about how Marshall came to realize that my formula of economic growth plus redistribution was mistaken:

The way he recalls how that debate went down makes for an exceptionally useful lesson in why the neoliberal moment in the Democratic Party once made sense to so many thoughtful folks. It seemed like a kind of political magic. “The very smart Clintonian people were saying, ‘Let’s really rev the market economy, let it distribute everything very efficiently, and then we’ll win elections and we will come in after the fact and put in a little redistribution—and we won’t even call it ‘redistribution.’” Coming out of the political reversals of the Reagan era, the electorate seemed to be saying they had had enough of that. It just seemed to make so much sense.

But what “was certainly lost on me, and fundamentally lost on them,” Marshall continues, was political economy: “If you rev the economy that hard, the people who benefit the most are not going to let you win the elections that let you fix everything after the fact.”

What’s true here, obviously, is that the American business class did not respond to four years of peace and prosperity under Bill Clinton by saying, “Thank you, let’s elect Al Gore so he can intensify the level of redistribution.” Instead, Bush outspent Gore (and later John Kerry) by levels that would be inconceivable to Trump-era Democratic operatives who are used to playing with a financial advantage. And then Bush came into office and enacted regressive tax cuts. There’s no magic formula of growth-and-redistribution that ensures an endless series of electoral victories.

At the same time, I think we shouldn’t hinge too much of our interpretive view of the world on the fact that Gore lost. He won the popular vote, for starters. Even failing that, he lost Florida only because of flawed ballot design. He also faced a challenger on the left who deliberately tried to sink his prospects of winning the election. Still, he did lose and we did get regressive tax cuts. That said, it’s not like Bush shredded the safety net for the poor. He certainly tried to privatize Social Security (but he failed), just as Donald Trump’s later efforts to pair regressive tax cuts with repealing the Affordable Care Act only succeeded halfway. And what happened between Bush and Trump? Well, taxes on the rich went up and the safety net expanded. Under Biden, too, taxes on the rich went up and the safety net got a bit larger.

American policy has gotten more redistributive

The broad story is that this process is a kind of see-saw. Clinton and Obama implemented something like the strategy that Marshall thinks is impossible, and it kinda sorta worked, but it’s also true that the political parties rotate in power and Republicans have their own ideas. Under Biden, the see-saw tilted back toward redistribution. The reason it tilted somewhat less vigorously toward redistribution is because Democrats chose to give more weight to the idea of spending money on climate-related objects and less to the idea of spending money on helping people in the bottom half of the income distribution. But Kamala Harris seems to be gearing up to focus on pushing for more spending on lower-income kids if she wins, and (pending more clarity on the policy details) I think that’s smart.

One key thing about this see-saw is that while GOP tax bills are regressive (they deliver disproportionate goodies to the rich), they usually contain provisions that benefit the middle class and sometimes the poor as well.

Left-wing intellectuals tend not to love these ideas, but practical Democratic Party politicians embrace them. The result is the GOP lowers taxes on the rich and the middle class, but then Democrats raise taxes on the rich and spending on the poor. In the aggregate, the poor get more and the middle class get more and the rich end up ping-ponging back and forth. The result, according to the CBO, is that even if you ignore the plague year of 2020 (as you should), the see-saw tilts toward more redistribution over time.

Similarly, academic researchers find that when you take in-kind transfers (SNAP and Medicaid) into account, the American government is actually more redistributive than European welfare states. The big difference between the US and the EU is that the United States gives fewer benefits to the middle class (our higher education is more expensive and our health care comes out of our paychecks), and in exchange, our middle class pays substantially lower taxes.

I think there are good reasons to believe that the American way of financing health care is worse than the European way. But it’s not a political economy failure of redistribution.

Josh Bivens, meanwhile, argues that the CBO paints an unduly rosy picture because so much of this redistribution is health care. I’m certainly open to the argument that low-income Americans receive less than $100 in subjective well-being for every $100 they receive in Medicaid benefits. If that’s what progressives believe, though, then it calls for being willing to come to the table in a bipartisan negotiation with Republicans about partially financing a Child Tax Credit expansion with Medicaid cuts. But also note that this take on health care for the poor is inconsistent with the standard progressive take about the superiority of the European health arrangement for the middle class. Either way, these arguments strike me as arguments that belong in the health policy bucket. The claim that there is an insurmountable political economy barrier to increasing redistribution seems false, because redistribution has in fact increased over time.

Pre-distribution for growth

To be fair to critics of Clinton-Obama political economy, even though the US social model is more redistributive than Europe’s, we still have significantly higher levels of after-tax inequality. That’s because the pre-tax distribution of income in the United States is so much more unequal that the greater level of redistribution doesn’t compensate for it. Or to look at it another way, one reason the US tax code is so redistributive is that the rich have so much goddamn money. So the baseline anti-neoliberal point that we should pay attention to the pre-tax distribution of income makes sense to me.

That said, I feel like most of the time, anti-neoliberals wind up giving too much credence to the idea that the only way to achieve lower levels of pre-tax inequality is to adopt distortionary anti-growth policies.

The truth is that a lot of distortionary anti-growth rules in the United States are also inegalitarian. Excess land use regulation, to cite the most important example, redistributes resources upward toward landowners. I don’t like it when people portray land use as pure zero-sum competition between homeowners and renters, because it’s not that either. It imposes massive deadweight loss and leaves the country as a whole poorer on average, just like banning Uber would make the country poorer on average. But banning apartments hurts the poor more than the rich, and while legalizing them would have widespread benefits, the largest benefits would occur to people with below-average incomes. The same is true of regulatory barriers to the supply of medical professionals and many other things. So while I agree with the idea that it’s important to think about the pretax distribution of income, I think rubber stamping anti-growth policies while mumbling about “political economy” is a terrible way to do that. We should rely not on political economy, but economic analysis to identity pro-growth measures that are also egalitarian and try to prioritize those measures.

That’s good because it will boost equality and because it will boost growth.

And economic growth is very important. Europe is more egalitarian than the United States, but middle class living standards are higher on our side of the Atlantic because the United States is richer. Faster growth is also the thing that will make it easier to sustain Social Security and Medicare. Beyond that, because we have a progressive tax code, when real incomes rise, the tax share of GDP mechanically goes up. The faster the economy grows, the easier it is to finance more redistribution. That’s the political economy that Marshall’s “very smart Clintonian people” understood in the 1990s. That Jimmy Carter and large Democratic majorities weren’t able to accomplish much in the late-1970s, in part because a shitty macroeconomic situation made it very challenging to do anything programmatic. And I think it’s actually what the current crop of very smart people are missing.

There were important substantive failures of the Clinton-Obama approach to China, but turning our backs on trade is a massive overcorrection. Similarly, there was one very big economic policy failing in the Obama years — the sluggish labor market recovery — but going from that to this new posture of indifference to efficiency and microeconomic concerns has been a big mistake. I’m very glad that Kamala Harris is doing better in the polls than Joe Biden was and that she’s a younger, more meme-able, more charismatic carrier of the message. But it’s still the case that a new approach adopted in the name of political economy has proven, in practice, to be less politically popular than the old way. The good part of Bidenomics is the part that focused on correcting the actual failure of the past and really focusing-in on full employment. But that’s a story for another column.