The Economist as Scapegoat
By: Russ Roberts
Tags: Growth, Data, Free Market, Public Policy, Economics

Photo by Karim MANJRA on Unsplash

A lot of things are thought to be 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 be real problems at all. But 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 Appelbaum 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 Appelbaum:

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 Appelbaum’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 begin 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 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.

Government spending at all levels as a proportion of GDP:

How about deregulation? Here are the total number of pages in the Federal Register, the rules administered by the government’s regulatory agencies: