Scott Sumner on Growth and Economic Policy

Episode Summary

Executive Summary: Russ Roberts and Scott Sumner debate whether the post-1980 shift toward “neoliberal” policies—lower marginal tax rates, deregulation, freer trade, and privatization—helped explain stronger long-run growth. Sumner argues most developed countries moved away from statism and that reform-friendly, civic-minded societies reformed fastest. Roberts presses doubts about measurement, culture, and whether the U.S. truly became less interventionist.

Main Topics: Defining classical liberalism, modern liberalism, and neoliberalism (Priority: 5/5): Sumner distinguishes limited-government classical liberalism, more interventionist modern liberalism, and neoliberalism as a mix of freer markets with a substantial welfare state. The post-1970s policy shift away from statism (Priority: 5/5): The discussion argues that many countries reduced explicit market distortions after the late 1970s: deregulation, lower top tax rates, trade liberalization, and privatization. Privatization and deregulation across countries (Priority: 4/5): Roberts and Sumner discuss transportation, banking, communications, schools, utilities, and other sectors where state ownership or regulation declined, especially outside the U.S. Nordic countries as a model of ‘neoliberalism’ and good governance (Priority: 5/5): Sumner argues Denmark and its neighbors combine high taxes and social insurance with very free markets, low corruption, and strong civic norms, contrary to the stereotype that they are simply socialist. Culture, corruption, and institutional performance (Priority: 5/5): The speakers examine how civic-mindedness, trust, and corruption affect both the design and effectiveness of policy regimes, including whether reforms can work in different societies. Growth comparisons, historical trends, and causality (Priority: 4/5): They debate how to interpret growth since 1980 versus the 1960s, whether the global slowdown is due to policy or other factors, and how to compare countries fairly over time. Income distribution, hours worked, and measurement issues (Priority: 3/5): Roberts raises concerns about quintiles, household composition, informal economies, and whether lower measured European labor supply reflects leisure or home production.

Key Arguments: Sumner argues that the world moved broadly away from statism after the late 1970s, even if welfare states remained large. He claims four major neoliberal reforms in the U.S. were deregulation, sharp cuts in marginal tax rates, freer trade, and welfare reform. He contends that many developed countries, including the Nordic ones, privatized major sectors and reduced price controls and barriers to entry. Sumner says Denmark is a key example of a high-tax but highly market-oriented economy, combining social insurance with low corruption and strong property rights. He argues culture matters: countries with more civic-minded citizens reform faster and can sustain more trust-based welfare systems. Roberts argues that the U.S. experience is mixed: some sectors deregulated, but others saw more state involvement, such as health care, education, finance, and consumer regulation. Roberts emphasizes measurement problems: GDP, quintiles, hours worked, and underground activity can make policy comparisons misleading. Sumner says neoliberal reforms worked best where societies had enough civic virtue to support them and where powerful rent-seekers were less able to block change. He argues that the economic success of countries like Britain, Chile, Denmark, and parts of Europe is more consistent with market-oriented reforms than with anti-market critiques. Roberts suggests that demographics, divorce, household formation, and informal production may explain some of the apparent economic shifts as much as policy did.

Data Points: Interview date: June 10, 2010 - Opening of the EconTalk episode U.S. top marginal tax rate: about 90% to about 40% - Sumner cites the decline in top marginal rates since the late 1970s/early 1980s Government share of GDP: hasn't really changed dramatically since the 1970s - Sumner argues welfare-state size stayed relatively stable even as statism fell Countries reforming away from statism: almost all developed countries - Sumner describes a broad international trend toward deregulation and privatization Countries getting more statist after 1980: 4 out of roughly 100 to 200 countries - Sumner references a list showing the global direction of change U.S. and Britain growth comparison: U.S. would grow as fast as Japan and faster than Europe over 20 years; Britain would overtake Germany and France over 28 years - Sumner describes his counterfactual prediction from 1980 Latin American example: Chile ranked 10th most free market - Used as evidence that aggressive neoliberal reform can succeed North/Western Europe income comparison: roughly 20% to 25% below U.S. per capita income - Sumner says smaller neoliberal European countries still lag the U.S. overall Denmark corruption ranking: 1st on Transparency International honesty measure; 2nd on survey of willingness to cheat government - Used to illustrate Denmark’s high civic-mindedness Greece corruption ranking: dead last out of 32 developed countries - Contrasted with Denmark on honesty and governance China growth context: still much poorer than Mexico - Sumner argues China’s growth reflects movement away from Mao-era non-market policies Great Society/1960s comparison: 1960s often treated as a golden growth era - Roberts challenges whether post-1980 growth was really superior to earlier decades Typical European work hours: lower than the United States - Sumner and Roberts discuss labor supply differences and tax/subsidy effects

Pivotal Quotes: "I distinguish between what I call classical liberalism, which is sort of a belief in small government in an economic sense, and modern liberalism, which is more socialist in orientation, and then neoliberalism, which I see as sort of a postmodern synthesis of the two." — Scott Sumner: Sumner defines the core policy framework at the start of the discussion "What I found is if you looked at how idealistic countries are, that also explained the rate of change in their reform process between 1980 and 2005." — Scott Sumner: Sumner explains his main empirical finding on why some countries reformed faster than others "The world is much more free market oriented than it was back in the 70s." — Scott Sumner: Sumner summarizes his historical view of the post-1970s policy shift

Implications: The conversation suggests that growth debates require separating welfare spending from market distortion, and that culture and governance shape whether reforms succeed. For listeners, the key lesson is to compare countries carefully and avoid attributing all growth differences to one policy lever.