Winner of the New Statesman SPERI Prize in Political Economy 2016

Monday 3 July 2017

Was Neoliberal Overreach Inevitable?

In June 2017 a member of the hard left of the Labour party, reviled by the right and centre for his association with left wing leaders and movements around the world and for his anti-nuclear views, in a few short weeks went from one of the most unpopular party leaders ever to achieving the highest vote share for his party since Tony Blair was leader. While this unexpected turn of events was in part the result of mistakes by, and inadequacies of, the Conservative Prime Minister, there is no doubt that many Labour voters were attracted by a programme that unashamedly increased the size of the state.

Contrast this with the United States. A Republican congress seems intent on passing into law a bill that combines taking away health insurance from a large number of citizens with tax cuts for the very rich. Let me quote a series of tweets from Paul Krugman:
“The thing I keep returning to on the Senate bill is the contrast between the intense hardship it imposes and the triviality of the gains. Losing health insurance -- especially if you're older, low-income, and unhealthy, which are precisely the people hit -- is a nightmare. And more than 20 million would face that nightmare. Meanwhile, the top 1% gets a tax cut. That cut is a lot of money, but because the 1% are already rich, it raises their after-tax income only 2 percent -- hardly life-changing. So vast suffering imposed to hand the rich a favor they'll barely even notice. How do we make sense of this, politically or morally?”

Or to put it another way, 200,000 more deaths over the next ten years for a marginal increase in the after tax income of the 1%. This is no anachronism created by a Trump presidency, but an inevitable consequence of Republican control of Congress and the White House.

Although these two events appear to be in complete contrast, I think they are part of (in the US) and a consequence of (in the UK) a common process, which I will call neoliberal overreach. [1] Why neoliberal? Why overreach? Neoliberal is the easy part. Although some people get hung up on the word, I use it simply to refer to the set of ideas associated with Ronald Reagan and Margaret Thatcher in the 1980s. That includes the goal of reducing the role of the state in many areas of society, including its role in either replacing or regulating markets and taxing individuals (see Kansas), particularly reducing taxes for the well off.

Overreach is more contentious. I use the term because I think, in the UK at least, the period from the 1990s until the global financial crisis could be described as a stable neoliberal hegemony. By this I mean that governments largely accepted the transformations that took place in the 1980s, even when Labour or Democrats were in power. Of course changes did occur. In the UK Labour were prepared to involve the state in alleviating poverty in ways that Thatcher never contemplated, but Labour’s concern did not extend to the other end of the income distribution, and the income share of the 1% continued to rise. They were prepared to see an expansion in the size of the state to meet a natural increase in the demand for health, but they also experimented with bringing in market elements into state provision. However none of these changes compared in size to what went before or came afterwards. (As Tom Clark argues, Labour did not change the [essentially neoliberal] political discourse.)

This period was also characterised in the UK and US by macroeconomic stability: inflation had been contained, perhaps through the delegation of monetary policy to central banks, and growth remained strong such that the high levels of unemployment seen in the 1980s gradually disappeared. This was the ‘great moderation’.

It was undone by a major flaw in the neoliberal project: the self-destructive nature of an unregulated financial sector. The reaction to that, if the left had remained in power, might have been greater controls on finance and perhaps some attempt to reduce inequality (as the two are related). But the left lost power, and we got what I call neoliberal overreach.

Neoliberal deceit in the UK

By 2008 the conversion of the right in the UK to neoliberal ideas was largely complete. This meant that they were determined to continue where Thatcher had left off. But they faced what appeared to be an insurmountable problem: voters wanted the NHS (and other public services) and they wanted more of it partly because they were getting older and wealthier. The recession gave the right the opportunity to continue the neoliberal project by deceit, using two mechanisms.

The first was austerity, which I have talked about many times, but alas what I and other macroeconomists say has so far reached only a small minority (a minority which, importantly, includes the Labour party). What I call deficit deceit was the pretence that we needed above all else to cut spending (that would reduce the size of the state) because otherwise the markets would not buy the government’s debt. There was never any real evidence to back this story up, and plenty to suggest it was nonsense. The fevered imagination of some market participants who turned out to be wrong does not count as evidence. But the politics to make deficit deceit possible was all there: a recent financial crisis, consumers cutting back on debt themselves, a Treasury worried as Treasuries do, a central bank head who acted as central bank heads often do, and a Eurozone crisis that mediamacro made no attempt to understand.

The second deceit was immigration. Elements in society are apt to blame immigrants at a time of rising unemployment and falling real wages, and terrorism gave this an extra twist. The right and their supporters in the press had decided before the crisis that they could exploit fears over immigration to their advantage, and after the recession this became a more powerful weapon. They talked about how immigration was responsible for reduced access to public services and falling real wages, and they promised to bring levels of immigration down. It was deceit because those in charge knew full well that immigration benefited the economy in various ways and as a result they had no intention of really controlling it. But, as with austerity, the deceit worked: so much so that an already weak opposition appeared not to know how to respond.

Some may disapprove of the language I use here. Should a normally sober Oxford macroeconomist talk about political parties deliberately deceiving the electorate? It is not a view I have adopted lightly, but when a Chancellor repeatedly argues that public spending must be cut to meet deficit targets at the same time as reducing inheritance or corporation tax, or a Prime Minister continually repeats the lie that immigration reduces access to public services, what other conclusion can you come to? They could get away with this deceit because academic economists (the majority of whom know that austerity would reduce output, and that immigration improves the public finances) are largely ignored by the media.

Austerity and the deceit required to achieve it was neoliberal overreach in the UK. Austerity quickly became a disaster because it was done at just the wrong time, when monetary policy was unable to offset its effects. That hurt the economy a lot. Whether GDP was reduced by a few percentage points temporarily or permanently we may never know for sure. But for the political reasons I have already outlined, combined with feeble opposition, the Conservatives got away with it sufficiently to win a general election in 2015.

Populism and anti-neoliberalism

The deceit over immigration was also key to a second disaster: the vote to leave the EU. Although the case to Remain in the EU was led by the Prime Minister and Chancellor, neither could combat anti-immigration rhetoric with a positive case because of their earlier deception. For this reason alone you could also label Brexit as a consequence of neoliberal overreach. More importantly, factions on the right that actively campaigned for Brexit did so in part because they believed they could only achieve their regulation free neoliberal nirvana by doing so.

As Jan-Werner Müller writes
“The image of an irresistible populist “wave” was always misleading. Farage did not bring about Brexit all by himself. He needed the help of established Conservatives such as Boris Johnson and Michael Gove (both now serve in Prime Minister Theresa May’s post-election cabinet). Likewise Trump was not elected as the candidate of a grassroots protest movement of the white working class; he represented a very established party and received the blessing of Republican heavyweights such as Rudy Giuliani and Newt Gingrich.”

It would be wrong to say that Brexit or Trump represent an evolution of neoliberalism. Both promote strong restrictions to trade, and so it would be more accurate to view Brexit as a split within neoliberalism. [2] What is clearer to me is that populism is a consequence of neoliberalism as reflected in the policies of the political right. In the UK immigration was used as a scapegoat for the impact of austerity, which fuelled the Brexit vote. In the US one of the first acts of Reagan was to repeal the Fairness Doctrine, which led eventually to the precursor and cheerleaders for Trump: talk radio and Fox news. In addition neoliberalism demonises any kind of regional or industrial strategy designed to alleviate the impact of globalisation.

Why was it Corbyn who led the revolt against austerity in 2017 rather than Miliband in 2015? One obvious explanation is that the more ‘moderate’ left in both the UK, much of Europe and the Democratic establishment in the US had become compromised by neoliberal hegemony. Instead it required those who had stayed faithful to socialist ideas together with the young who had not witnessed the defeats of the 1980s to mount an effective opposition to austerity and perhaps neoliberalism more generally. [***]

I am less familiar with the details of US politics, which are clearly different in some ways from the UK. The way the Republican party has co-opted both race and culture to their cause is different and clearly crucial. But there are plenty of similarities as well. Both countries have had austerity combined with tax cuts for the rich. Both countries have a right wing media which politicians can no longer control, leading to Brexit and Trump respectively. Bernie Sanders, like Corbyn, came from nowhere preaching socialism, but unlike the UK the established Democratic party halted his rise to power.

Was Overreach Inevitable

I’m not going to speculate whether and by how much this neoliberal overreach will prove fatal: whether Corbyn’s ‘glorious defeat’ marks the ‘death throes of neoliberalism’ or something more modest. Instead I want to ask whether overreach was inevitable, and if so why. Many in the centre ground of politics would argue that it would have been perfectly feasible, after the financial crisis, to change neoliberalism in some areas but maintain it in others. It is conceivable that this is where we will end up. But when you add up what ‘some areas’ would amount to, it becomes clear that it would be hard to label the subsequent regime neoliberal.

I think it is quite possible to imagine reforming finance in a way that allows neoliberalism to function elsewhere. Whether it is politically possible without additional reforms I will come to. If we think about populism, one key economic force behind its rise has been globalisation (see Dani Rodrik here for example). If we want to retain the benefits of globalisation, then counteracting its negative impact on some groups or communities becomes essential. Whether that involves the state directly, or indirectly through an industrial strategy, neither of those solutions is neoliberal.

Then consider inequality. I would argue that inequality, and more specifically the extreme wealth of a small number of individuals, has played an important role in both neoliberal overreach (in the US, the obsession within the Republican party with tax cuts for the wealthy) and populism (the financing of the Brexit campaign, Trump himself). More generally, extreme wealth disparities fuel political corruption. Yet ‘freeing’ ‘wealth creators’ of the ‘burden’ of taxation is central to neoliberalism: just look at how the loaded language in this sentence has become commonplace.

Indeed it could well be that gross inequality at the very top is an important dynamic created by neoliberalism. Piketty, Saez and Stantcheva have shown (paper) how reductions in top rates of tax - a hallmark of neoliberalism in the 1980s - may itself have encouraged rent seeking by CEOs which makes inequality even worse. Rent extractors naturally seek political defences to preserve their wealth, and the mechanisms that sets in place may not embody any sense of morality, leading to the grotesque spectacle of Republican lawmakers depriving huge numbers of health insurance to be able to cut taxes for those at the top. It may also explain why the controls on finance actually implemented have been so modest, and in the US so fragile.

The other key dynamic in neoliberal overreach has to be the ideology itself. In the UK surveys suggest that fewer than 10% of the population favour cutting taxes and government spending to achieve a smaller state (see my next post). There is equally no appetite to privatise key state functions: indeed renationalisation of some industries is quite popular. Yet the need to reduce the size and scope of the state has become embedded in the political right. Given that, it is not hard to understand the motivation behind the twin deceits of austerity and immigration control by Conservative led governments.

The dynamic consequences of extreme inequality and an unpopular ideology both suggest that neoliberal overreach may not be a bug but a feature.

[1] Reasons why this discussion might focus on the US and UK are discussed here.

[2] Among those who voted for Brexit, the two main groups were social conservatives who had a social rather than economic fear of immigration and the left behind who were deceived into thinking it was the EU and immigration that was behind their plight rather than neoliberalism itself. Liberal leavers may amount to little more than a few MPs and small businesses. Even among Conservative MPs, it is not clear that neoliberalism was the key factor in determining their position on Brexit.

***Postscript 06/07/17  It came out after I had written this post, but this article by William Davies expresses much better what I was trying to say in this paragraph.  


  1. This analysis might apply more to the UK than to the US. If Trump supporters are voting on values (questionable given the stability of their support in the face of Trump's inconsistent stances), they express anti-globalization rhetoric, state support of specific industries, and fiscal leadership to cut trade deficits. Likewise, many ostensible progressives support occupational and licensing constraints, and NIMBY permitting/zoning policies. Perverse housing policy may be implicated in reduced labor mobility, persistent inequality, and a multi-generational transfer of wealth to landowners.

  2. Excellent article. This is a cyclical process though. The 'overreach' of the post-war consensus following the oil crisis in the 70s led to Reaganomics. In 30 years or so we could witness the breakdown of (for want of a better word) corbynism through socialist overreach. A pendulum between capital and labour swinging the advantage one way or the other through history every 30-40 years, seems to be the pattern.

  3. Would you agree neoliberalism is enshrined in the EU's principles (eg stability and growth pack) and evident in its daily actions (austerity against Greece)?

    If so, then isn't the Leave vote a logical (over) reaction to neoliberal overreach?

    1. We have to distinguish between leadership and voters in both the US and UK. Leave voters might have been responding to overreach but you have to separate overreach from industrial decline that occurs as a result of globalism and higher wages in the west. Leadership of Leave appeared to want more neoliberalism--less regulation, less protections for labor--packaged in another guise.

      Same in the US. I don't think Trump really cared all that much about helping the dislocated, although seemingly Bannon and his group does. But their purported help is accompanied by massive deregulation and tax cuts, which are neoliberal to a t. The Republicans continue to push a strong neoliberal agenda. Like with Labor in 2010/2015 being blamed for the financial crash, the Democrats were "clotheslined" by the Republicans dialing back macroeconomic responses to the crash, aims to cut the state, and wrapped it up in anger about "Wall Street," not taking responsibility for Congress' abetting of deregulation etc.

  4. "Bernie Sanders, like Corbyn, came from nowhere preaching socialism, but unlike the UK the established Democratic party halted his rise to power." I'm told that behind the scenes it's Silicon Valley interests that are now, along with Wall Street and other usual suspects, the big force fighting against a realignment.

  5. On the Midlands version of Daily Politics, Professor David Bailey of Aston University was asked by the BBC interviewer whether he, the interviewer, was right to say that big businesses mostly wanted to Remain and smaller businesses to favour Leave.

    Bailey replied that he had surveyed midlands motor manufacturers and their suppliers and had found that in fact smaller businesses that were the most productive were far more inclined to vote Remain whereas those smaller businesses with poorer recent productivity gains were tending to support Leave.

  6. I wish you would find a better word than 'neoliberal' - I appreciate that you are careful to define it, but even your careful definition is not the only one - note that Brad Delong is happy to call himself a left neoliberal, and Brad is no less sophisticated about political economy than you are, but while the two of you are having principled arguments about the fine detail, other people are throwing the word around the as a synonym for (depending on forum) 'capitalists' the way the CP used to use the word, and Nazis, the way the word is used on internet forums.

    I know it comes across as definitional nit-picking from one perspective, but I really don't think it helps your case. Please find another word.

    1. «note that Brad Delong is happy to call himself a left neoliberal»

      B DeLong calls himself a neoliberal part of the Rubin wing of the Democratic party. The "left" aspect is the "identity politics" socially liberalism one, and neoliberals are pretty much social liberals. It is paleocons who are not socially liberals.

      As to neoliberalism in Economics B DeLong after mentions of fiscal policy and praising "centrist technocrats" end up always advocating: bigger asset prices via much bigger central-bank bailouts of bankrupt speculators, or viceversa.

      His latest series of posts is so driven by asset price boosterism that he ends up arguing (thanks to what seems to me sophistry) that a 2.4 leverage factor in investing in USA stocks is the best to maximize profits from a 7% per year average base risk-free after-inflation return on USA stock market "investment". He is promoting the idea that margin speculation in USA stocks has a long term risk-free real return of 15% per year compound (double your money every 5 years!), twice as high as UK south-east property and 50% higher than London property.
      I hope that Wall Street will reward him for his carrying so much water for them.

      Neoliberal, without qualifications, champion of upward redistribution.

  7. Wasn't a significant factor in constraining inflation during the "long moderation" the entry of a million Chinese workers into the global economy?

  8. “..academic economists (the majority of whom know that austerity would reduce output, and that immigration improves the public finances)”.

    There’s a big problem with that idea, namely that every study of the costs and benefits of immigration that I’ve looked at fails to take account of the fact that each net immigrant requires the community at large to invest in tens of thousands of pounds worth of extra infrastructure etc. The actual figure according to one study (link below) is £140,000 per head.

    This is a complicated issue, and the real figure could be only half that £140,000. But even so, to totally ignore this issue is a major shortcoming in most immigration studies.

    1. This is misleading nonsense.

      What is true is that we can think in terms of investment in infrastructure per capita. This has to remain the same in order to main a given infrastructure in per capita terms.

      As every serious study has shown, immigrants are proportionately less likely to be benefit recipients, and more likely to be working. The income they generate gets taxed and can be used to support infrastructure spending - most importantly to a greater extent than natives.

      The penny is even starting to drop with the Tory Brexiteers on this.

  9. Neoliberalism may seem like a happy target, but tax policy under many different variety of regimes over centuries seems to have failed to tackle inequality.

    Rent extraction has an inglorious history in Britain. Our ninth wealthiest man remains a landowner whose ancestors happened to own most of what is now west London.

    Scheve and Stasavage (and now Scheidel) all point to people only accepting methods of redistribution that are politically and socially exogenous, e.g. mass mobilisation through war. How would political consensus for endogenous change be created? And how would checks and balances work to ensure it wasn't a less-filtered form of rent extraction by favoured in-groups, i.e. Müller's Latin American populism)?

  10. "this is where we will end up"

    you never "end up", the process continues

    the only thing that has staying power is the truth

    compromises on the truth are always going to be temporary

  11. Thank you.
    This is devastating.
    We are being explicitly lied to.
    We have beeen warned.
    I've linked to this on progressivepulsedotorg which I hope your'e okay with.

  12. A poor effort by the author.
    THe immigration issue is termed one of deceit rather than the expression of a political class benefiting itself at the expense of lesser parts of society.
    Equally, the conflation of austerity with mere economic dogma. Austerity as the end game of the neoliberal playbook is very different than an "unfortunate" misstep by the economics ivory tower.
    At least the author acknowledges his deficit in understanding American politics, although it should be abundantly obvious - even from across the Atlantic - that Donald Trump is not beloved by even his own party.
    This could be excused, however, by the much more class based political system of the UK in which said author resides.

  13. I must admit I don't understand how large scale immigration of low skilled people doesn't depress wages and working conditions of the low skilled. What do you make of and how do you explain how Japan works so well with their extreme immigration restrictions?

  14. "But the left lost power, and we got what I call neoliberal overreach."

    Both Bill Clinton and Obama were purportedly leftists. And Clinton presided over the dismantling of many of the regulations that directly led to the crisis; and under Obama, there were barely any penalties imposed on those whose recklessness or deliberate malice (in the form of being fully cognizant of the moral hazard created by having such an enormous financial sector) led to the impoverishment of millions.

    I don't think one can, or should, make such an stark distinction here between left or right, because by and large, both are complicit. The right can be more brazen about it because their voting base is either too deluded or too desperate to understand the long-term crisis they are creating, but the left is not much better either. Until forced by Bernie Sanders to adopt a more 'extreme' position, Hillary Clinton was pretty centrist in most respects.

    1. «Both Bill Clinton and Obama were purportedly leftists. [ ... ] Hillary Clinton was pretty centrist in most respects.»

      That “purportedly” is a very opportune qualification, as all of them and T Blair were a bit to the right of Reagan and Thatcher on many issues. As to the UK some academics have been tracking the left-right positioning of UK parties over the past few decades:

      summarized by a commenter on another site as:

      Mid-1970's Conservative policies were slightly to the left of 2015 Labour. Political Compass Website: Ted Heath Tories 1970s (+3) Labour 2015 (+4) A score of (+5) is perfectly centre-right. The Scottish Socialists 2015 are in (-7), Greens 2015 are on (-3), SNP 2015 on (-1), LibDems 2015 on (+5), UKIP 2015 on (+8) and the very right-wing Tories of 2015 on (+9).

  15. Never mind Neoliberal Overreach this blog is not f***ing working.

    Just caught a clip on TV of May on PMQs going full blast UK could become Greece if she lets Hammond spend any money. Made me choke on my cheese sandwich. Had to look in my wallet to confirm it had a few pounds in it and not f***ing Euros.

    Prof for heavens sake get your boat race on Newsnight and explain the facts to em till you can't stand the sound of your own voice. You are wasting your time with this blog its not getting through.

    Prof is got to be you or someone like you. You can at least press your nose up against the Overton window. They won't let the likes of me even clean it.

  16. slightly off topic. Would be interesting to hear what you think the best way would be of spending printed as opposed to borrowed money. i.e. where does increasing public sector pay appear on the list which presumably starts a la Keynes with digging holes and burying the money in them?

  17. " [Are] political parties deliberately deceiving the electorate? It is not a view I have adopted lightly, but when a Chancellor repeatedly argues that public spending must be cut to meet deficit targets at the same time as reducing inheritance or corporation tax, or a Prime Minister continually repeats the lie that immigration reduces access to public services, what other conclusion can you come to?"

    Sir John Chilcot told us that Blair was "not straight with the nation" over his decision to go into the second Iraq war. Would it be too much to hope that the UK's Conservative newspapers will call for an inquiry into Cameron's and Osborne's conduct of the economy five years ago? They certainly lead the charge against Blair. Will they lead the charge against Cameron with the same vehemence?

  18. Thanks Prof. Wren-Lewis, very nice article!
    Yours, Antonio Giuffrida

  19. «the self-destructive nature of an unregulated financial sector. [ ... ] we got what I call neoliberal overreach.»

    This to me is an incomplete view: the single largest aspect of "real neoliberalism" was the colossal increase in property prices and rents (and similarly in share prices) in the past 35 years, which was designed by politicians to buy the support of the affluent middle and upper-middle classes with a "wealth effect" by redistributing upward colossal amounts of wealth and income.
    That support was bought for an overall policy of replacing downward redistribution via tax-and-spend with upward redistribution via privatised borrow-and-spend: middle and upper-middle class people whose properties double in price every 7-10 years care a lot less about socialdemocratic goals like good pensions, social insurance, safe jobs, state services, because their standards of living and their security are backed by property capital gains and rents.

    Therefore I think that the colossal debt-fueled "wealth effect" was the result of a right-wing political bipartisan strategy, even if it was enthusiastically supported and implemented without restraint by the financial sector, with central banks at the forefront.

    Property and share bubbles have been happening in countries where a specific political, more than financial, strategy has been adopted. Allegedly neoliberal/thatcherite countries like Germany have not had huge property and share bubbles, and their finance sectors have not gone that much off the leash, by political decision.

    Note: while New Labour did have some policies that were more favourable to the lower income classes than Thatcher would have contemplated, they also worked hard to triple property prices (and double rents), which redistributed upward from the lower income classes much more than the other policies helped them.

  20. Sure, but what is neoliberal overreach in the West was incredibly emancipatory and equalising for the world at large. What's immoral is that the West supports China manufacturing your iPhones when you want to outsource pollution and reduce inflation, but you don't want the negative effects. Too bad.


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