David Leonhardt has Part of the NYT to the “new centrism”, which he calls neopopulism. Politicians in both parties are increasingly embracing ideas like protectionism and manufacturing subsidies. These policies are said to be necessary because neoliberalism has failed:
New centrism is a response to these changes. It is a realization that neoliberalism has failed to deliver. The idea that this old-fashioned way would bring prosperity, as Jake Sullivan, Biden’s national security adviser, said, “was a promise made but not kept.” In its place rose a new worldview. Call it neopopulism.
Both Democrats and Republicans have grown skeptical of free trade; On Tuesday, Biden announced an increase in tariffs on several goods made in China, in response to Beijing’s subsidies. Democrats and a sliver of Republicans have also come to support industrial policy, where the government is trying to fix market failures. Infrastructure and semiconductor regulations are examples.
But is that true? Has neoliberalism failed? And do industrial policies lead to stronger productivity growth? Let’s look at the evidence:
In the last 10 years, there has been zero increase in productivity. This is true for both the Trump and Biden administrations. Industrial policies do not seem to work.
In contrast, industrial production increased dramatically during the so-called neoliberal era of the 1980s, 1990s and 2000s.
So why did industrial policies fail? Let’s start with the most important part of neopopulism—protectionism. Protectionist policies are based on the myth that trade deficits are caused by “unfair trade policies”. In fact, the deficit is caused by a mismatch between domestic savings and domestic investment. Because populist policies often lead to large budget deficits, they reduce national savings rates. This often leads to an even larger trade deficit, since the current account deficit is, by definition, equal to the gap between domestic savings and domestic investment.
NX = S – I
Not surprisingly, Trump and Biden’s economic policies have also failed to reduce our trade deficit, as a share of GDP.
None of this should surprise us. Latin America has years of experience with the failure of populist economic policies. The puzzle is why so many in Washington now believe that the solution to America’s problems is to emulate the policy path Argentina followed 80 years ago—extreme deficits and protectionism.
PS. Here is a picture of Juan and Eva Peron. Ask an Argentine how their policies have worked for the working class.
Source link