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Economics

THE POST-NEOLIBERALISM MOMENT

ANYONE ADVOCATING NEOLIBERAL POLICIES IS NOW PERSONA NON GRATA IN WASHINGTON,
D.C.

Daniel W. Drezner | From the February 2024 issue

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THE BEST OF REASON: THE POST-NEOLIBERALISM MOMENT

Back in the day, columnists for the Financial Times were of a type. They were
predominantly pale, male, Oxbridge-educated world travelers. Their politics
ranged from centrist to libertarian right. Most importantly, they were fans of
neoliberalism.

The term neoliberal has been stigmatized far more successfully than it has been
defined. For our purposes, it refers to a set of policy ideas that became
strongly associated with the so-called Washington Consensus: a mix of
deregulation, trade liberalization, and macroeconomic prudence that the United
States encouraged countries across the globe to embrace. These policies
contributed to the hyperglobalization that defined the post–Cold War era from
the fall of the Berlin Wall to Brexit.

Neoliberalism was embraced by policy makers from both major parties. For free
market Republicans, neoliberalism meant scaling back barriers that stunted
market efficiency. For moderate Democrats, it was viewed as a set of policies
that could lift the poorest of the poor out of poverty. What united those across
the political spectrum was the belief that neoliberalism fostered greater
economic interdependence, which could, in turn, generate global peace and
prosperity. After all, why would China ever go to war with the West if it could
get rich by trading with it instead?

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In recent years, however, the Financial Times has hired some new voices who
share a deep suspicion of neoliberalism. Last fall, economic historian Adam
Tooze's inaugural Financial Times column pushed the idea of a "polycrisis"—a
series of disparate shocks that threaten the world as we know it. The neoliberal
failure to avert or alleviate the polycrisis has become a central theme in
Tooze's recent work. Meanwhile, another recent Financial Times hire, Rana
Foroohar, wrote multiple columns, a book, and a Foreign Affairs article exulting
in the demise of neoliberalism as an economic model.

Foroohar's Foreign Affairs piece was frankly titled "After Neoliberalism." In
it, she called China's entry into the World Trade Organization (WTO) "a seismic
shift that removed the guardrails from the global economy." She predicted that
politics "will have a greater impact on economic outcomes than it has for half a
century." She concluded that countries will have to "rethink the balance between
growth and security, efficiency and resilience." Foroohar might still be an
outlier in the pages of the Financial Times, but her philosophy fits snugly with
the prevailing sentiment in the world's major capitals. Anyone advocating
neoliberal policies is now persona non grata in Washington, D.C.

Despite America's growing political polarization, Democrats and Republicans seem
to agree the globalization of yesteryear should be put out of its misery. In his
2017 inaugural address, President Donald Trump declared: "We must protect our
borders from the ravages of other countries making our products, stealing our
companies and destroying our jobs. Protection will lead to great prosperity and
strength." In this dimension, President Joe Biden has represented continuity
rather than change. He kept Trump's steel and aluminum tariffs in place. His
administration has continued to veto any appointments to the WTO's Appellate
Body, thereby hindering the ability to settle trade disputes. The Washington
Post recently concluded that he "is making it clear that the United States'
rejection of full-throttle globalization during the Trump administration was no
aberration." Biden's Office of the United States Trade Representative was so
pleased with this assessment that it blasted the article out to trade reporters.
In his 2023 State of the Union address, Biden declared, "On my watch, American
roads, American bridges, and American highways will be made with American
products." The line earned him his biggest applause of the evening.

In the 16 years since the 2008 financial crisis, neoliberalism has taken a
rhetorical beating; New Yorker essayist Louis Menand characterized it as "a
political swear word." Until recently, no coherent alternative set of ideas had
been put forward in mainstream circles—but that has been changing. A welter of
think tanks ranging from the Institute for New Economic Thinking to the
Roosevelt Institute have sponsored new initiatives in heterodox economics. In
2020, the Hewlett Foundation announced a five-year, $50 million commitment to
"help develop a new intellectual paradigm to replace neoliberalism." That
funding has started to yield benefits to its proponents. Foroohar
has described Hewlett's conferences as "a kind of Mont Pelerin Society for
people who want to move beyond neoliberalism." After attending a Hewlett
conference this past spring, The American Prospect's Robert Kuttner wrote,
"We've just about won the battle of ideas. Reality has been a helpful ally. The
core neoliberal claim that the economy would thrive if government just got out
of the way has been demolished by the events of the past three decades."

These ideas are being shaped by powerful officials. The primary difference
between Biden and Trump in this area is that Trump's opposition to globalization
was based on gut instincts and implemented as such. The Biden administration has
been more sophisticated. Policy principals ranging from U.S. Trade
Representative Katherine Tai to National Security Adviser Jake Sullivan have
been explicit in criticizing "oversimplified market efficiency" and proposing an
alternative centered far more on resilience. This shift is evident in the
administration's signature economic policy accomplishments to date: The
Infrastructure Investment and Jobs Act, the CHIPS and Science Act, and the
Inflation Reduction Act all represent a pivot to industrial policy—a focus on
domestic production.

Given the various shocks hitting the global economy over the past decade, it
seems intuitively obvious to focus more on resilience. But what if this
intuition rests on a false premise? The claims of a "post-neoliberal" paradigm
rest on the belief that there is a tradeoff between resilience and efficiency,
between strategic autonomy and globalization. But it seems increasingly clear
these values are not mutually inconsistent. The best hope for economic
resilience might come not from post-neoliberal policies but from neoliberal
ones.

***

"If all politics is local, the same could soon be true for economics," Foroohar
argued in her Foreign Affairs essay. She elaborated: "Nationalism isn't always a
good thing, but questioning the conventional economic wisdom is. Rich countries
such as the United States cannot outsource everything save finance and software
development to emerging markets without making themselves—and the broader
economic system—vulnerable to shocks."

Foroohar and others argue the "China shock"—the sustained negative economic
effects felt in U.S. manufacturing regions in response to China's entry into the
WTO—widened the divide between America's haves and have-nots. In an April 2023
speech, Sullivan declared that the new Chinese competition "hit pockets of our
domestic manufacturing industry especially hard" and that this "wasn't
adequately anticipated and wasn't adequately addressed as it unfolded." Other
critics were even more outspoken. University of California, Berkeley,
international relations and legal scholar David Singh Grewal has argued China's
rise falsified David Ricardo's theory of comparative advantage in trade. "In a
world of semiconductors, electronics, and pharmaceuticals—in addition to wine
and wool—the old model of trade no longer applies," he wrote recently
in American Affairs. "Comparative advantage is given not so much by nature but
by industrial policy….This means it is possible for one country's gains to come
at the expense of another country." Unsurprisingly, the Hewlett
Foundation promoted and sponsored Grewal's work.

The pandemic and the economic chaos it unleashed convinced many that too much
efficiency led to too little resiliency. Shortages of everything from cars to
toilet paper seemed to show problems with relying on other countries when an
infectious disease is running amok. In one interview, Katherine Tai explicitly
referenced COVID-19 to illustrate the flaws of neoliberal globalization:
"Whether it was personal protective equipment, masks, gloves, or ventilators
early in the pandemic or the semiconductor chip shortage that impacted all of
us, we see global supply chains that were designed for efficiency, chasing the
lowest cost, without recognition that concentrations of supply and production
create significant risks and vulnerabilities."

For post-neoliberals, the final nail in the neoliberal coffin was Russia's
invasion of Ukraine and the knock-on effects it had on the global economy. Food
prices spiked as Ukraine became unable to supply grain. Europe became acutely
aware its dependence on Russia for cheap energy had increased its strategic
vulnerability. Russia's invasion suggested the benefits of global trade were
insufficient to tame revanchist claims on territory. Given China's aspirations
to reunify with Taiwan, any lessening of the power of economic interdependence
to function as an adequate constraint is a wake-up call for America's grand
strategists.

The proponents of post-neoliberal ideas can now cite respected peer-reviewed
scholarship to buttress their claims and can count powerful politicians in their
corner. On the China shock, they can reference David H. Autor, David Dorn, and
Gordon H. Hanson's work demonstrating that U.S. labor markets failed to adjust
properly to Chinese imports. On the risks created by the pandemic and great
power competition, they can reference Henry Farrell and Abraham L. Newman's
work on weaponized interdependence, demonstrating how Chinese control of rare
earths or Russia's control over energy can threaten the U.S. and its allies. One
Trump official told historian Chris Miller, "Weaponized interdependence…it's a
beautiful thing." As for the Biden administration, Kuttner
happily concluded that it "has explicitly disavowed all aspects of
neoliberalism, including the assumptions about free trade."

Post-neoliberals have been positively giddy about their newfound status in the
past year. The Roosevelt Institute recently published a retrospective by some
Biden alumni on the policy revolution they have wrought. In the foreword, Todd
N. Tucker enthused that today's debates "are taking place within a new,
exciting, and suddenly broadly shared paradigm that offers a sharp break from
neoliberal 'free-market' ideology." The combination of real-world events,
academic analyses, and policy relevance has infused post-neoliberal ideas with
energy.

But are these ideas actually correct?

***

The China shock was undeniably real. Some American communities struggled
mightily from the loss of manufacturing. But there are two problems with the way
post-neoliberals frame what happened.

First, it is presented as an ongoing and persistent problem. Yet economists
agree the shock began fading more than a decade ago and has completely
dissipated in recent years. Arguing for more protectionism now over the China
shock is like arguing for closing the barn door long after the animals have
left.

Second, the costs of the China shock had less to do with trade policy and more
to do with federal, state, and local authorities failing to respond to it.
Writing in 2020, the Cato Institute's Scott Lincicome observed a vast gulf
between affected regions: Some American towns thrived with new investments,
while others were "still reeling from a trade shock that ended a decade ago."
This suggests the problems from the China shock had less to do with import
competition and more to do with variations in community response.

This is not just the conclusion of the free traders at the Cato Institute; it is
the conclusion of the authors of the original China shock paper. In a follow-up
paper published by the National Bureau of Economic Research in 2021, they
rejected the idea that admitting China into the WTO was a mistake: "We are aware
of no research that would justify ex-post protectionist trade measures as a
means of helping workers hurt by past import competition." Their point was not
that admitting China into the WTO was a net negative for the U.S.; it was that
the failure to adjust the domestic social safety net prevented China's entry
from being a win-win outcome. "Few economists would interpret our empirical
results as justifying greater trade protection," they explained. In fact,
"quantitative models indicate that U.S. aggregate gains from trade with China
are positive."

Even with these caveats, post-neoliberals would argue this simply reinforces the
importance of location in economic production. Both the pandemic and the Ukraine
war have shown the fragility of the global supply chain, they'd argue. Europeans
as well as Americans have articulated such fears. During the early stages of the
pandemic, European Commission Vice President Věra Jourová concluded that COVID
"revealed our morbid dependency on China and India as regards pharmaceuticals."
NATO Secretary General Jens Stoltenberg stated in 2022 that the Ukraine war
"demonstrated our dangerous dependency on Russian gas. This should lead us to
assess our dependencies on other authoritarian states, not least China."

Yet the more economists study the effects of the pandemic, the less evidence
they find for the argument that globalization reduces resilience. Almost all of
the shortages that occurred during the pandemic had little to do with globalized
supply chains. Rather, they sprang from two causes. First: In many instances,
producers and suppliers were caught short by radical shifts in the composition
of demand. Semiconductor shortages were not due to a reduction in production but
a shift from using them in automobiles to using them in video games. By the time
auto manufacturers realized they had overestimated the falloff in demand, the
semiconductors they needed were being used to power Xboxes. Second, and
relatedly: Some firms relied so heavily on lean manufacturing techniques that
they lacked the inventory to cope with even a mild perturbation in their supply
chains.

Meanwhile, the more globalized supply chains were, the more resilient they were
in the face of the pandemic. One study of Indian producers found that in the
areas hardest hit by the pandemic, it was the producers who relied on more
complex supply chains that were more able to weather the storm. Apparently, such
firms tended to be more conscious of the risks from disruption and thus better
prepared to cope with shocks.

This phenomenon was not limited to the subcontinent. Economists Pinelopi K.
Goldberg and Tristan Reed recently looked at whether the global economy suffered
from shortages due to disruptions in the global supply chain. They found
the exact opposite. That's because an economy with thoroughly nationalized
supply chains increases its vulnerability to localized shocks. Even in instances
like personal protective equipment (PPE), the evidence strongly suggests
economies more reliant on imports were able to recover their stocks far more
quickly than those that tried to produce more PPE indigenously.

"In sum," they write, "despite the prominence of resilience concerns in the
public debate in the past three years, the evidence to date provides no support
either for the view that global supply chains were not resilient during the
pandemic or that the world economy would have been more resilient if there had
been less dependence on foreign inputs and trade…unless a sector is highly
dependent on a single import source (as is the case with the dependence of the
energy sector in Europe on Russia), international trade seems to contribute to
resilience, not compromise it." They conclude "it is unlikely that trade
restrictions will improve countries' resilience." In other words, a more
globalized economy might prove to be a more resilient economy. The
post-neoliberal emphasis on the location of production is largely misplaced.

The big lesson to draw from the pandemic is that globalization weakened
robustness—i.e., the ability to maintain the status quo in the face of shocks.
While resilient structures can bend without breaking, robust structures have the
resources to withstand sustained shocks, so it would be wise for companies to
hold greater inventories. Adam Posen, president of the Peterson Institute for
International Economics, recently offered a simple diagnosis for this problem:
"Stockpile strategic reserves and turn to trade with other places."

European dependence on Russian energy does highlight the potential problem of
weaponized interdependence. Farrell and Newman stress this point in their new
book, Underground Empire: How America Weaponized the World Economy. As their
book's subtitle suggests, the primary weaponizer of interdependence is neither
Russia nor China but the United States. Indeed, Farrell and Newman have
repeatedly warned about the dangers of relying too much on weaponized
interdependence as an instrument of foreign policy. As they note, Chinese
efforts to bolster its capacity for economic coercion were constrained by the
ill will they had sowed over the past decade. They also warned that "American
officials, like their Chinese equivalents, had difficulty understanding how
their own actions helped feed the widening gyre."

Meanwhile, weaponized interdependence seems no more effective than more
conventional economic sanctions. After the United States coerced Iran into
signing a nuclear deal in 2015, one would be hard pressed to find another
successful example. U.S. sanctions against Russia failed to coerce Moscow out of
Ukraine; Russian efforts to coerce Europe to stop supporting Ukraine failed as
well. The Trump administration's efforts to pressure Iran show weaponized
interdependence can wreak havoc on a middle power but cannot necessarily compel
it into acquiescence.

Make too many efforts to weaponize interdependence, and you can erode the mutual
benefits of interdependence. U.S. and European officials like to claim they are
not interested in decoupling from China but in derisking. Ask anyone who knows
anything about economic sanctions—including the U.S. Treasury—and they'll tell
you that "derisking" is when coercive measures force out more legitimate
economic exchange than originally intended. Aim for derisking, and you may come
closer to decoupling instead.

As China is forced to be less dependent on developed economies, the constraints
of complex interdependence also fall by the wayside. Eurasia Group's Ali
Wyne warns we may soon have "weaponized detachment," the condition "in which
greater economic independence emboldens states to act more aggressively." This
is why Farrell and Newman do not want the United States to retreat from
globalization: "Instead of withdrawing from global networks, the United States
must learn to live with them. Doing so will give the United States new powers
and generate enormous vulnerabilities, and policymakers will need to carefully
manage both."

Post-neoliberals believe that after decades of dealing with derision from
economists, they finally have social science research on their side. But the
very experts they cite most have made it clear that while neoliberalism has its
problems, post-neoliberal policies would lead, on net, to economic and strategic
losses.

A key assumption behind post-neoliberalism is that policy makers can implement
the right policies in the right way to nudge markets in the right direction.
Talk to Biden administration policy makers, however, and one senses a bit more
uncertainty about the whole process. Phrases like, "we're all trying to figure
this out in real time" and "we're building the plane as we're flying it" abound.
Congress has forced additional changes to some of their trade ideas. The closer
one gets to Washington, D.C., the more skeptical one becomes of the government's
ability to implement the best version of post-neoliberalism.

***

Many critiques of neoliberalism are grounded in reality. Even some libertarians
have acknowledged that economists underestimated the effects of the China shock.
The pandemic and the Ukraine war have raised valid questions about when and how
globalization actually works. Climate change is beyond the scope of this essay,
but there is no denying that globalization has been part of the problem as well
as part of the possible solution. And as China turns more autocratic and
nationalist, the case for export controls will get stronger.

But while the post-neoliberal critique is worth considering, it is flawed in
multiple ways. The China shock has been over for quite some time. The alleged
tradeoff between resilience and efficiency might not be a tradeoff after all.
Weaponized interdependence is a thing—but its impact on international politics
is far from widespread, and the biggest weaponizer has been the United States.
There are costs to globalization, but the benefits are still greater.
Post-neoliberal policies could produce a Western economy that is both less
efficient and less resilient. The International Monetary Fund has estimated the
costs of continued geoeconomic fragmentation could exceed 7 percent of global
economic output. Some of that is due to strained Sino-American tensions, but not
all of it.

Post-neoliberals are having a moment. If it continues for too long, the result
could be a less productive, less resilient, more warlike economy.

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NEXT: Universities Use DEI Statements To Enforce Groupthink

Daniel W. Drezner is professor of international politics at the Fletcher School
of Law and Diplomacy at Tufts University. He publishes the Substack newsletter
Drezner's World and is author of The Ideas Industry (Oxford University Press).

EconomicsNeoliberalismPhilosophyLibertarian History/PhilosophyFree
MarketsGlobalizationFree TradePoliticsLibertarianismClassical liberalism
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