Since the 2008 global financial crisis discredited the old liberal orthodoxy, the door has been open for simplistic policies, in part because most people tend to focus only on a policy’s first-order effects. Unfortunately, everyone will have to learn the hard way why such policies fell out of favor in the first place.
CHICAGO – Even in the best of times, policymakers find it difficult to explain complex issues to the public. But when they have the public’s trust, the ordinary citizen will say, “I know broadly what you are trying to do, so you don’t need to explain every last detail to me.” This was the case in many advanced economies before the global financial crisis, when there was a broad consensus on the direction of economic policy. While the United States placed greater emphasis on deregulation, openness, and expanding trade, the European Union was more concerned with market integration. In general, though, the liberal (in the classical British sense) orthodoxy prevailed.
So pervasive was this consensus that one of my younger colleagues at the International Monetary Fund found it hard to get a good job in academia, despite holding a PhD from MIT’s prestigious economics department, probably because her work showed that trade liberalization had slowed the rate of poverty reduction in rural India. While theoretical papers showing that freer trade could have such adverse effects were acceptable, studies that demonstrated the phenomenon empirically were met with skepticism.
The global financial crisis shattered both the prevailing consensus and the public’s trust. Clearly, the liberal orthodoxy had not worked for everyone in the US. Now-acceptable studies showed that middle-class manufacturing workers exposed to Chinese competition had been hit especially hard. “Obviously,” the accusation went, “the policymaking elites, whose friends and family were in protected service jobs, benefited from cheap imported goods and could not be trusted on trade.” In Europe, the free movement of goods, capital, services, and people within the single market were seen as serving the interests of the EU’s unelected bureaucrats in Brussels more than anyone else.
CHICAGO – Even in the best of times, policymakers find it difficult to explain complex issues to the public. But when they have the public’s trust, the ordinary citizen will say, “I know broadly what you are trying to do, so you don’t need to explain every last detail to me.” This was the case in many advanced economies before the global financial crisis, when there was a broad consensus on the direction of economic policy. While the United States placed greater emphasis on deregulation, openness, and expanding trade, the European Union was more concerned with market integration. In general, though, the liberal (in the classical British sense) orthodoxy prevailed.
So pervasive was this consensus that one of my younger colleagues at the International Monetary Fund found it hard to get a good job in academia, despite holding a PhD from MIT’s prestigious economics department, probably because her work showed that trade liberalization had slowed the rate of poverty reduction in rural India. While theoretical papers showing that freer trade could have such adverse effects were acceptable, studies that demonstrated the phenomenon empirically were met with skepticism.
The global financial crisis shattered both the prevailing consensus and the public’s trust. Clearly, the liberal orthodoxy had not worked for everyone in the US. Now-acceptable studies showed that middle-class manufacturing workers exposed to Chinese competition had been hit especially hard. “Obviously,” the accusation went, “the policymaking elites, whose friends and family were in protected service jobs, benefited from cheap imported goods and could not be trusted on trade.” In Europe, the free movement of goods, capital, services, and people within the single market were seen as serving the interests of the EU’s unelected bureaucrats in Brussels more than anyone else.