Did We Just Experience a Break in the Neoliberal Consensus?

Podcast Summary

• Shift from monetary to fiscal policy: Potential policy shift could lead to higher rates, inflation, wages, and employment, but uncertainty remains due to ongoing political debates

  We are witnessing a potential shift in economic policy, moving from monetary policy dominance towards more active fiscal policy. This change could lead to various outcomes, including higher rates, inflation, wages, and employment. It's important to remember that the current economic system is the result of political choices, and these choices can change. The ongoing debate around the $1.9 trillion stimulus package in the US adds to the uncertainty of this potential policy shift. We will be discussing this topic further with Skanda Amarnath from Employ America and Mike Consell, author of "Freedom from the Market: America's Fight to Liberate Itself from the Grip of the Invisible Hand," on the Odd Lots podcast.

• Understanding Neoliberalism: A Skepticism of Democratic Power and a Reliance on Markets and Technocracy: Neoliberalism is a political ideology that advocates for limiting government and relying on markets and experts, but its meaning can be ambiguous and it's important to recognize that neoliberals saw their project as an affirmative role of the state to subordinate democracy to the market and protect it from democratic challenges.

  The term "neoliberalism" is often used without a clear understanding of its meaning, but it generally refers to a skepticism of democratic power and a reliance on markets and technocracy for organizing society. The historical roots of neoliberalism can be traced back to figures like Milton Friedman and Charles Peters, who advocated for limiting the role of government and relying more on markets and experts. The Federal Reserve's role in macroeconomic policy making is an example of this approach. However, it's important to note that the term can be misunderstood due to its ambiguous meaning in the US context, where it is sometimes used interchangeably with "liberal" to refer to big government programs. Neoliberals saw their project as an affirmative role of the state to subordinate democracy to the market and protect it from democratic challenges. While markets can be effective in certain areas, the idea of a neoliberal solution that worked without any public involvement or democratic oversight is a complex one.

• Shift towards market dependency and decreased government intervention in the 1980s: The election of Reagan and distrust in democratic governance led to the Fed wielding more power, resulting in a focus on monetary policy and decreased role of the state in economic matters, impacting healthcare and economics.

  The shift towards market dependency in healthcare and economics, marked by the 1980s, brought about significant changes in the role of institutions like the Federal Reserve and the nature of macroeconomic policy. Prior to this period, fiscal policy and democratic governance played a more central role. However, with the election of Reagan and the subsequent distrust in democratic forms of governance, the Fed began to wield more power, leading to a focus on monetary policy and a decrease in the role of the state in economic matters. This shift towards market dependency and decreased government intervention has had lasting impacts on healthcare and economics.

• Challenges to the Federal Reserve's control over the economy: The financial crisis of 2008-2009 challenged the belief that the Federal Reserve could control the economy through short-term interest rates alone. Post-virus, a shift towards more comprehensive macro policy and less reliance on the Fed is possible, along with a changing political consensus on fiscal policy.

  The economic consensus that the Federal Reserve could control the economy through short-term interest rates alone, a belief that emerged during the era of the Great Moderation, was significantly challenged during the financial crisis of 2008-2009. The discussion suggests that the trend towards relying on the Fed for macroeconomic stabilization has evolved, and the post-virus period may mark a shift towards a more comprehensive macro policy that is less reliant on the Fed. The political consensus around fiscal policy and its role in the economy is also changing, potentially signaling a handoff from monetary to fiscal policy. The speakers express that this moment, following the Georgia runoffs and the insurrection at the Capitol, may be a turning point for macroeconomic policy.

• Shift in political landscape makes large-scale fiscal policy more likely: The consensus has shifted from monetary policy and deficit reduction to large-scale fiscal policy due to the political landscape, making historic packages like the American Rescue Plan possible.

  The political and legislative landscape has shifted significantly since the last economic crisis in 2008, making large-scale fiscal policy more likely to be implemented and successful. In the aftermath of the 2016 election, there was a belief that fiscal policy would be a priority under the Trump administration, but the results were underwhelming. However, with the current consensus among Democrats in control of both the Senate and the White House, there is a greater likelihood of passing and implementing aggressive fiscal policies. This is a departure from the previous consensus that monetary policy and deficit reduction were the primary solutions. The recent passing of the American Rescue Plan is a historic and potentially replicable example of this shift in thinking. The success of this policy will depend on how people perceive its impact on their lives and whether it creates a political incentive for continued fiscal intervention. The conditions in place in 2020, including the historic nature of the package and the alignment of political stars, have made this potential shift possible. Unlike in 2009, the current crisis is not being met with widespread popular outrage, but rather a recognition of the need for bold action from the center-left technocracy.

• Perceptions of deficits and unemployment have evolved: The belief that deficits can be an investment and low unemployment can persist for an extended period has become more accepted, as shown by the discrediting of the idea that deficits are an existential threat and the surprise of prolonged low unemployment.

  During the 2009 White House administration, there was a center-left technocracy that viewed the deficit as an existential threat to the economy, with concerns of a bond market bubble and long-term debt impeding short and medium-term processes. This mindset, which saw the deficit as a catastrophic issue, has been largely discredited. Conversely, in 2016, many center-left technocrats believed unemployment could not go below 5%, but were proven wrong when it fell below 4% for two years. These two instances show how perceptions of deficits and unemployment have evolved, with the idea that deficits can be an investment and that low unemployment can persist for an extended period becoming more accepted. These shifts in perspective, rooted in the experiences of the 2010s and the desire to replicate the successes of the 1990s, have significant implications for economic policy.

• The debate around fiscal policy and economic recovery: The belief in deficit reduction for economic recovery has been questioned, with the 2010s showing a decrease in deficits but slow recovery. Importance of avoiding obstructionism and realizing some economic frameworks may not be easily replicable.

  The belief that deficit reduction is necessary for a robust economic recovery has been challenged in recent years. The 2010s saw a decrease in the deficit but a slow recovery, leading some economists to reconsider their views. The debate around fiscal policy has become more open, with voices from various backgrounds contributing to the conversation. The financial crisis of 2008 marked the beginning of this trend, with amateur financial experts turning to the blogosphere for real-time understanding. The Biden administration's recruitment of prominent Twitter voices for policy further underscores this shift. The lessons learned from the 2010s include the importance of avoiding obstructionism and the realization that some economic frameworks from the 1990s may not be easily replicable in different economic scenarios.

• Online platforms facilitate a more responsive economic discourse: Online platforms like Twitter and Substack enable quicker revision of priors and a wider range of voices for economic discussions, particularly on topics that don't fit traditional academic research or markets. Effective democratic governance is necessary for addressing complex economic issues.

  Online platforms like Twitter and Substack are filling a gap in the economic discourse by allowing for a more responsive, evolving argument with quicker revision of priors. This is particularly important for topics that don't fit well within the traditional academic research process or the market. The meritocracy of these platforms allows for a wider range of voices and perspectives, including those that challenge established experts. The ability to recognize and respond to changing circumstances is a strength of both online discourse and markets, but it requires certain political structures and democratic governance to effectively address complex economic issues. The open and deliberative discourse on social media, while not without its challenges, offers a space for fact-checking and challenging claims, contributing to a more informed and responsive economic conversation.

• New economic policies during the crisis: Bold policy actions, such as rescue packages and UI/PPP provisions, have shown success in mitigating the economic impact of the crisis, potentially challenging traditional economic theories and models

  The ongoing economic crisis has led to new policy solutions being implemented and tested, with the success of these policies potentially changing people's perceptions about the effectiveness of fiscal stimulus. Examples of successful policies include the rescue package and certain provisions of the CARES Act, such as UI and PPP. The reduction of poverty during the crisis and the Fed's intervention in credit markets are also significant changes. If the economy recovers by the end of next year, it could disprove the theory of hysteresis and challenge traditional economic models. Overall, the ongoing crisis has shown that bold policy action is necessary, and the success or failure of these policies could shape future economic debates.

• Significant shifts in fiscal and monetary policy: The American Recovery Plan focuses on repairing balance sheets and opening new opportunities, while the Fed shifts focus from specific unemployment rates to employment improvement, allowing for more flexibility and effective responses to economic downturns.

  There are significant shifts happening in both fiscal and monetary policy. The American Recovery Plan aims to address long-term political problems by repairing balance sheets, opening up new opportunities. Meanwhile, the Fed has undergone an intellectual evolution, moving away from targeting specific unemployment rates and instead focusing on employment improvement. This shift in the Fed's framework allows for more flexibility and a willingness to let the economy show its potential, rather than trying to control every aspect of it. Chairman Powell's statements since the framework review have emphasized the importance of Congress' spending authority in shaping economic outcomes. These developments mark a departure from the economic thinking of previous decades and could lead to more effective responses to economic downturns and challenges.

• Fed's stance on fiscal policy and inflation shifts: The Fed acknowledges the need for congressional cooperation and flexibility, learning from past experiences like Greenspan's rate hikes and bond market vigilantes. Market anticipates robust growth from ambitious fiscal policy and uncertainty about achieving employment and inflation goals leads to yield increase, but rates remain low.

  The Federal Reserve's stance towards fiscal policy and inflation has shifted, showing a recognition of the need for congressional cooperation and flexibility. This shift is a response to the lessons learned from the past, such as the contrast between Greenspan's rate hikes and warnings about bond market vigilantes in the 1990s. The recent increase in bond yields may be a result of the market's anticipation of robust growth from ambitious fiscal policy and the uncertainty surrounding the timeline for achieving the Fed's goals of maximum employment and 2% inflation. The market's repricing of these factors is an appropriate response, and despite the recent increase in yields, interest rates remain historically low.

• Restoring Domestic Semiconductor Manufacturing through Industrial Policy: Historical underutilization of high-tech equipment capacity was revived due to strong demand from aggressive fiscal policies, highlighting the importance of government intervention to ensure manufacturing capacity and purchasing power for a stable and scalable economic boom.

  Industrial policy can play a crucial role in restoring domestic semiconductor manufacturing and unlocking hidden supply and capacity in the economy. The discussion highlighted the historical underutilization of high-tech equipment capacity since 2000, which was not recovered on its own despite low investment and weak productivity arguments. The US, and other countries, implementing aggressive fiscal policies during the coronavirus response led to historically strong demand for high-tech equipment and the revival of underutilized capacity. The stability and scalability of demand require government intervention to ensure manufacturing capacity and purchasing power, as coordination and certainty are harder to replicate in the private sector alone. This economic boom could lead to significant changes in economic policymaking, enabling the productive frontier of the economy to advance in tandem with strong labor demand, rather than during periods of weak labor demand and power. The Chamber of Commerce's endorsement of a massive stimulus program, as mentioned in the conversation, underscores the potential shift in neoliberal economic thinking.

• A consensus for policy-led economic solutions during the pandemic: The 2020 recession's unique nature led to more policy-focused economic responses, popularizing stimulus measures and potentially lasting changes in politics around fiscal expansion and industrial policy.

  The unusual nature of the 2020 recession, which was largely policy-led due to government restrictions, created a unique political environment that allowed for more policy-focused economic solutions. This shift was facilitated by a consensus that the recession was not anyone's fault and that businesses and individuals deserved support during the pandemic. The popularity of stimulus measures, such as expanded unemployment benefits and direct payments to individuals, further reinforced this trend. This experience could potentially lead to a lasting change in politics around fiscal expansion and industrial policy, making future downturns more responsive to government intervention. Additionally, the widespread distribution of social safety net benefits during the pandemic may help reduce the stigma around such programs, making them more accepted and potentially leading to more robust support for them in the future.

• Discussing the potential end of neoliberalism with the passing of a new bill: The passing of a new bill could mark the end of neoliberalism and lead to significant political changes, potentially shifting the political landscape for the next 40 years.

  Learning from this episode of the Odd Lots podcast is that the passing of a new bill could potentially mark the end of neoliberalism and lead to significant political changes. The speakers, Tracy Alloway and Joe Weisenthal, along with their guests, discussed the potential implications of the bill and how it could shift the political landscape. While it's always risky to label major turning points, they believe that this theme will be a topic of conversation in 40 years. Additionally, they mentioned a new podcast called Money Stuff, where Matt Levine and Katie Greifeld will discuss finance and Wall Street news every Friday. And finally, Popeyes introduced a new honey lemon pepper wing, encouraging listeners to try it out.