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The neoliberal era was not pro-market enough

Richard Hanania · · ·20 min read
Commentary by Hex Index staff

Richard Hanania delivers a provocative counter-narrative to the prevailing economic consensus: the neoliberal era didn't fail because it went too far, but because it didn't go far enough. While critics point to slower growth rates compared to the post-war boom, Hanania argues that the real story is a persistent, bloated state that never truly retreated, stifling the very market dynamism it claimed to champion. For listeners navigating a complex economic landscape, this piece offers a sharp, data-driven challenge to the idea that high taxes and heavy regulation are the keys to prosperity.

The Growth Gap and the European Mirage

Hanania begins by dismantling the argument that the high-tax, high-regulation era of the 1950s and 60s was superior. He directly confronts the view held by prominent left-wing economists like Paul Krugman, who have argued that the shift toward low taxes and deregulation resulted in "living standards for most Americans rose fitfully at best." Hanania acknowledges the data Krugman cites is technically correct regarding historical growth rates but argues the comparison is misleading because the European model, which Krugman favors, has underperformed the US in recent decades.

The neoliberal era was not pro-market enough

He points out a critical divergence: "In 2010, Krugman wrote 'the European economy works; it grows; it's as dynamic, all in all, as our own.'" Yet, as Hanania notes, the US has continued to pull ahead. Between 2010 and 2024, US GDP per capita growth averaged 1.7%, compared to just 1.31% in Europe. Hanania emphasizes that while this gap seems small, the compounding effect is massive. "If you imagine two countries that start out equal in wealth, with one growing at 1.7% a year while the other grows at 1.31%, both for 50 years, the fast growing country will be about 21% richer within two generations."

This analysis is strengthened by the context of the European Single Market. While the EU aimed to harmonize regulations, Hanania notes that EU legislation has actually increased over 700% since 1994, often "gold-plated" by national legislatures, creating a floor of regulation that hinders the very dynamism the single market was supposed to foster. Hanania suggests that if Krugman's own logic holds—that fragmentation hurts productivity—then Europe needs more market freedom, not less.

"No one tries to compare the European economic model favorably to that of the US anymore."

Critics might argue that comparing GDP per capita ignores quality of life factors like leisure time, which Hanania addresses by noting that Americans are free to work fewer hours if they choose. However, the data suggests the structural incentives in Europe, driven by tax and regulation, actively discourage the work and innovation that drive wealth creation.

The Myth of Shrinking Government

The most striking claim in Hanania's piece is the assertion that the neoliberal era did not actually shrink the government. He challenges the common perception that the 1980s and 90s marked a decisive turn toward small government. "Despite some important changes in that direction, governments across the developed world in the neoliberal era were larger and doing more than they were in the mid-twentieth century," he writes.

Hanania presents hard numbers to support this: non-defense federal government spending in the US rose from less than 10% of GDP in the 1950s to around 20% today. Furthermore, the volume of regulation exploded. Before the 1960s, the federal government published about 20,000 pages of new regulations annually; by 1980, that number had surged to over 87,000. He cautions that not all regulations are equal, noting that the immediate aftermath of the Airline Deregulation Act of 1978 saw a shift toward pro-market rules. Yet, the sheer volume of new rules over subsequent decades indicates that Washington's power did not recede.

This persistence of big government explains why growth slowed. Hanania argues that the crises of the 1970s, including the stagflation caused by faulty monetary management and price controls, were only partially addressed. "If neoliberalism did indeed fail, it is for this reason – it did not go far enough in creating freer markets." He contrasts the US with Sweden, where government spending peaked at 69% of GDP in 1993 before stabilizing, and the UK, which hit a high in the early 1980s and has since hovered around 40%, but never returned to pre-1970s norms.

The political reality, Hanania suggests, is a status quo bias. Leaders like Reagan and Thatcher faced an electorate that supported existing welfare programs while resisting new expansions. "Yesterday's government programs are the ones we are used to and go to those like us, while new ones benefit the wrong kinds of people and are fiscally irresponsible," he observes. This dynamic prevented a true rollback of the state, leaving a hybrid system that retains the worst of both worlds: high spending and high regulation.

What Was Actually Achieved?

Despite the failure to shrink the state, Hanania argues that neoliberalism did achieve specific, vital victories by dismantling the most distortionary economic forces. He highlights the removal of price controls, which became "unthinkable at the national level" after President Nixon's attempts led to severe shortages and stagflation. He also points to the deregulation of transportation, specifically the Airline Deregulation Act of 1978, which ended the rigid controls of the Civil Aeronautics Board, and the Motor Carrier Act of 1980, which reduced the Interstate Commerce Commission's grip on trucking.

Perhaps most significantly, Hanania credits the decline of labor unions as a major accomplishment. He argues that unions "hinder technological innovation – the main basis of economic growth – and function as price floors across wide swaths of the economy." Through incremental laws in the UK and the rise of right-to-work laws in the US, the bargaining power of unions was curbed, allowing market forces to operate more freely. "As with containing the growth of government, neoliberalism likely did a great service by simply maintaining the status quo and not trying to rescue organized labor as it brought down firms and industries in which it was powerful."

However, Hanania notes a troubling reversal in trade policy. "The victory on tariffs is unfortunately being reversed by the Trump administration," he writes, pointing out that the effective tariff rate, which had been cut by half between the mid-1960s and 2010, is now rising again. This undermines the broader neoliberal project of opening markets.

"You did not fall out of a coconut tree."

Hanania uses this aphorism to illustrate the difficulty of remaking society from scratch. Even leaders with strong pro-market convictions cannot undo decades of state expansion. "Ronald Reagan believed more in free markets than did LBJ. Nonetheless, Reagan left behind a much larger and more expansive federal government than Johnson did," he notes. This historical inertia is a crucial insight for understanding why current economic policies often feel stuck.

The Limits of Cross-Era Comparison

Finally, Hanania warns against the fallacy of comparing growth rates across different eras. He suggests that the rapid rise in living standards in the first half of the 20th century was due to "low-hanging fruit" in innovation—the widespread adoption of electricity, running water, and central heating. "The rapid rise in living standards of the first half of the twentieth century up to the 1960s may have been, as the economist Robert Gordon has argued, due to there being a great deal of low-hanging fruit in terms of new innovations and their applications," he writes.

This context is vital. It implies that the slower growth of the neoliberal era may not be a failure of policy, but a natural consequence of moving from easy, foundational innovations to harder, frontier technologies. While Hanania acknowledges that slower growth is a statistical fact, he argues that it doesn't invalidate the classical liberal approach. Instead, it suggests that the path forward requires even more market freedom to unlock the next wave of innovation.

Bottom Line

Hanania's strongest argument is his data-driven refutation of the idea that the neoliberal era successfully shrank the state; instead, it merely halted its growth while leaving a legacy of high spending and regulation that stifles potential. The piece's greatest vulnerability lies in its reliance on GDP per capita as the sole metric of success, potentially overlooking non-economic dimensions of well-being that European models prioritize. As the debate over trade and regulation intensifies, the question remains: can the executive branch and legislatures overcome the status quo bias to finally deliver the freer markets Hanania argues are still necessary for growth.

Deep Dives

Explore these related deep dives:

  • Airline Deregulation Act

    The article specifically mentions Carter signing this act as an example of pro-market reform. Understanding this landmark 1978 legislation—its origins, implementation, and effects on the airline industry—provides concrete context for what 'deregulation' actually looked like in practice during the neoliberal era.

  • Stagflation

    The article references 'economic crises resulting from faulty management of the monetary system' and crises of the mid-1970s that neoliberalism responded to. Stagflation—the combination of stagnant growth and high inflation that plagued the 1970s—was the specific crisis that discredited Keynesian economics and opened the door to monetarist and supply-side reforms.

  • European single market

    Krugman blames 'fragmentation across European markets' for Europe's productivity lag, and the article argues this suggests Europe needs more neoliberalism. The European single market—its history, scope, and remaining barriers—directly explains what 'fragmentation' means and why market integration remains incomplete despite decades of EU policy.

Sources

The neoliberal era was not pro-market enough

by Richard Hanania · · Read full article

In response to my article arguing that neoliberalism worked, some have pointed out that growth was actually slower in the neoliberal era, compared to the 1950s and 1960s. This view has had support among some prominent left-wing economists. Writing in 2010, Paul Krugman argued that:

Basically, US postwar economic history falls into two parts: an era of high taxes on the rich and extensive regulation, during which living standards experienced extraordinary growth; and an era of low taxes on the rich and deregulation, during which living standards for most Americans rose fitfully at best.

As previously argued, neoliberalism is now a term of abuse, in part because of the extent to which it dominated the intellectual life of a previous era. There is no going back to neoliberalism, since it was formulated to deal with the problems of a different time, including economic crises resulting from faulty management of the monetary system. Nonetheless, the Krugman quote shows that the debate over pro-market reforms continues, sometimes in the guise of discourse over neoliberalism. From that perspective, it is worth looking at the arguments of critics who say that the reforms of the 1970s and 1980s failed. We will see that they did not, and there is in fact every reason to believe that classical liberalism is still relevant today, providing a guide to policy going forward.

Krugman’s presentation of the data is correct. The chart below portrays average annual growth in four- or five-year intervals in six major economies: the US, UK, France, Canada, Spain and Italy. Data is from the World Bank.

Unfortunately for Krugman’s argument, in the fifteen years since he wrote the words above, the US has diverged more from Europe and large red states have seen a boom relative to blue states. While it is true that no major advanced country has returned to the growth rates of the 1950s and 1960s, the European Union in terms of tax and regulation policy is much closer to Krugman’s preferences than the US is. And yet things have not worked out nearly as well there.

In 2010, Krugman wrote “the European economy works; it grows; it’s as dynamic, all in all, as our own.” He noted that while the US grew at an average of 3% since 1980 compared to 2.2% in Europe, when you looked at per capita rates, the US lead was only 1.93% a year to ...