US economists turn away from neoliberalism and see more room for public spending

American economists have changed their views on the role of public spending and income distribution for the well-being of the country, in a move that represents a shift in thinking in this area in the largest economy on the planet.

In a period of approximately three decades, the concept of fiscal austerity has been replaced by a new approach, in which government policies are seen as necessary to guarantee well-being and growth, fight monopolies and mitigate the impact of climate change and social problems.

There is a growing appreciation that public spending is not necessarily a problem, and support for government policies that mitigate income inequality is growing.

Economists also show a positive outlook on issues such as immigration, minimum wages and capital controls, and are not sure whether the United States offers enough opportunities for social mobility.

The conclusions are part of the article “Consensus among economists 2020”, a survey of 1,436 members of the American Economic Association carried out in December 2020 and January 2021.

The online questionnaire brings 46 economic propositions. Of these, 33 are the same as the surveys carried out in 2000 and 2011; and 22 were also applied in 1990, the year in which the work, which began in the 1970s, became a practice carried out every decade.

Among the interviewees, 67% declare themselves to be academics, 13% are in the business area, 11.5% are part of public bodies and 8.5% indicated that they work in other areas. Only 21% are women.

The level of consensus around each theme is calculated using various technical criteria by researchers Doris Geide-Stevenson (also responsible for the 2000 and 2011 research) and Alvaro La Parra Perez, both from Weber State University, Utah (USA) .

Many of the new topics included in the 2020 questionnaire achieved “strong consensus” among participants.

These include assertions that immigration generally has a net positive impact on the US economy, that climate change poses a major economic risk to the country, and that addressing biases in individuals and institutions can improve equity and efficiency.

There is also strong agreement that corporate economic power has become very concentrated, and the percentage of those who consider it necessary to apply competitive measures vigorously has increased.

There is “substantial” consensus, one notch below “strong”, for the claim that differences in economic outcomes between whites and blacks are largely due to discriminatory norms.

Overall, the work shows that the number of issues on which there is strong consensus among economists has grown, from around 10% to 15% from 1990 to 2011 to over 30% in 2020.

Among the major consensuses are some topics dear to liberal economic thinking, such as support for floating exchange rate policies and trade liberalization.

But there were important changes in the view on the fiscal issue. For 63%, a properly designed spending policy can increase the long-term rate of economic growth, up from 52% in 2011.

There is also now strong disagreement that management of the business cycle should be left to the US central bank (the Federal Reserve), through monetary policy, and that active fiscal policy should be avoided.

Support for the view that a large budget hole has an adverse effect on the economy has dropped from 86% in 1990 to 61% in 2020. The percentage of those who believe that income redistribution is a legitimate government role has also grown (from 74% in 1990 to 86%).

“Economists now embrace the role of fiscal policy in a way that was not obvious in previous research and are largely supportive of government policies that mitigate income inequality,” the researchers say.

The two say that further work is needed to arrive at an explanation of these changes, but cite as a hypothesis that this may be related to new research and advances in the economic literature.

Professor André Biancarelli, director of the Institute of Economics at Unicamp (State University of Campinas), states that the survey reflects a change that has been taking place since the great financial crisis of 2008 in the thinking of economists best positioned in the debate, not only in the academic, but also in the interaction with economic policy and in multilateral institutions.

During this period, the major economies bet on very low, or even negative, interest rate policies, but the monetary stimulus was not enough to recover growth.

The pandemic reinforced this perception, as can be seen in the speeches of the IMF (International Monetary Fund) and in government actions in the US and Europe, says Biancarelli.

“Governments resorted to what is available in the state of the art of the economic discussion, and it was discovered that the most influential economists no longer thought in such a rigid way, that it is necessary to cut expenses, concerned only with sustainability”, he says. .

“The dominant intellectual environment in the US and Europe in relation to fiscal policy had already changed before Covid. The pandemic has exposed this in practice.”

José Francisco de Lima Gonçalves, a professor at the Department of Economics at FEA-USP (Faculty of Economics, Administration and Accounting at USP), says that the survey shows the recovery of some overlooked issues in the economic debate since the 1970s.

“You leave that environment of fiscalism of the 1990s, of the Washington Consensus, and walk towards a questioning of these themes, mainly in fiscal and monetary policies and in environmental, competition and inequality issues”, he says.

“That wasn’t on the agenda in the 1980s. Today, it’s impossible not to. What I see most interesting in this research is that these topics are now being examined in a richer way. More humble, at least.”

Biancarelli and José Francisco affirm that one cannot speak of the end of the predominance of a more orthodox economic vision, generally classified as liberal or neoliberal. They also say that care is needed in labeling the new view as Keynesian or developmental.

The director of Unicamp’s Institute of Economics sees “some more Keynesian inspiration”, in the sense that fiscal policy can help growth in a low-interest environment, provided it is judiciously focused on income distribution and investment in increasing productive capacity.

José Francisco, from FEA, says he still sees an interdicted debate, especially in Brazil, that would allow for a deeper change in economic policies. He also says that the global environment of high inflation favors those who advocate a greater emphasis on the role of monetary policy and limits to action in the fiscal area.

“I have no illusions that this richer environment of opportunity for reflection will not happen this year. As it did not happen in the 2020 US elections.”