David Leonhardt has a New York Times piece on the “new centrism”, which he calls neo-populism. Politicians from both parties are increasingly embracing ideas such as protectionism and manufacturing subsidies. These policies are supposedly necessary because neoliberalism has failed:
The new centrism is a response to these developments. This is a recognition that neoliberalism has failed to deliver. The idea that the old approach would bring prosperity, as Biden national security adviser Jake Sullivan said, said, “was a promise made but not kept.” In its place a new worldview was born. Let’s call it neopopulism.
Both Democrats and Republicans have become skeptical of free trade; Tuesday, Biden announcement increase in customs duties on several products manufactured in China, in response to subsidies from Beijing. Democrats and some Republicans have also come to support industrial policy, in which the government attempts to address market failures. Examples of this are infrastructure and semiconductor laws.
But is it true? Has neoliberalism failed? And do industrial policies lead to stronger growth in the manufacturing sector? Let’s look at the evidence:
Over the past ten years, manufacturing production has barely increased. This is true for both the Trump and Biden administrations. Industrial policies do not seem to be working.
On the other hand, industrial production increased significantly during the so-called neoliberal era of the 1980s, 1990s and 2000s.
So why have industrial policies failed? Let’s start with the most important component of neo-populism: protectionism. Protectionist policies are based on the myth that trade deficits are caused by “unfair trade policies.” In fact, deficits are caused by gaps between domestic savings and domestic investment. Because populist policies tend to lead to large budget deficits, they reduce national savings rates. This often leads to even larger trade deficits, because 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, even as a percentage of GDP.
None of this should come as a surprise. Latin America has experienced the failure of populist economic policies for several decades. The puzzle lies in why so many people in Washington today believe that the solution to America’s problems is to imitate the policy approach that Argentina has followed for the past 80 years – large budget deficits and protectionism.
PS. Here is a photo of Juan and Eva Peron. Ask an Argentinian how their policies have worked for the working class.
