The End of the Neoliberal Era
By Dr. Ed McKenna
Neoliberalism can be broadly defined by 2 tenets:
- Capital should be permitted to flow globally in markets unhampered by government regulation, and
- When government intervention is required (largely to protect private property) it should be the result of decisions arrived at through a democratic process.
This view has dominated world thinking since the 1970s, and especially so since the collapse of the Soviet Union in 1991. But there are increasing signs that this dominance is now coming to an end. The rise of China has raised serious questions as to whether capitalist economic systems coupled with authoritarian political regimes might not perform at least as well as democratic capitalism. More ominously, the rise of authoritarian regimes in countries such as Poland, Hungary, and Turkey has raised the issue of whether democracy itself might be in decline. Serious scholars have raised the question of whether even the United States, the wellspring of Neoliberalism, might be in danger of becoming an authoritarian state. The possible decline of Neoliberalism stems from a number of factors. At the most practical level, neoliberalism has failed to produce the economic security that its adherents promised. This failure, in turn, has led to a deeper understanding of how markets actually work, an understanding that seriously challenges the view that unregulated market outcomes will benefit even a majority of people, much less everyone.
The publication of Thomas Piketty’s book Capitalism in the 21st-Century provides overwhelming evidence that income and wealth inequality is greatly increasing in advanced capitalist economies. The importance of his work is not simply the documentation of increased inequality, but rather the convincing argument he advances that such inequality is the result of the normal processes of a capitalist economy. Put succinctly, real-world capitalist economies inevitably develop into extremely unequal societies. Indeed, except for the 1914-1945 time-period, inequality inexorably rose in all of the economies for which data was available. Why did inequality decline in the 1914-45 timeframe? Because the two world wars and the Great Depression led to government policies (such as progressive taxation, minimum wage laws, and the regulation of housing rents) that severely hampered the ability of the wealthy to maintain their shares of income and wealth. The conclusion appears to be that except for catastrophic times, extreme inequality is the natural result of capitalist processes.
A recent publication by Piketty, Saez, and Zucman exhaustively demonstrates that the growth of inequality continues in the United States. Since 1980 (up until 2014, which is the latest period for which data exists), the share of market- determined income for the bottom 50% of the population has declined by roughly 11%. Where has this decreasing share gone? To the top 10% of the population, which has seen its share increase by roughly the same 11%. As a result, the middle income group (the 50th to 90th% of the population) has seen its share remain constant over this time frame. While income for the entire United States has grown between 1980 and 2014, growth for the bottom 50% of the population has been zero since 1980! For those in the top 10%, income has more than doubled. For those in the top 5%, it has tripled. And for those in the top .001%, income has increased by an amazing 636%!
The rise in inequality certainly helps to explain why life is becoming increasingly difficult for a majority of United States citizens. But the cost of inequality does not stop here. Economic inequality and political inequality are deeply and simultaneously interconnected. The work of Gilens and Bartels has revealed the extent to which the passage of laws is controlled by the wealthy elite. Their studies indicate that whenever there is a conflict between the interests of the wealthy and the non-wealthy, in terms of legislation, then the interests of the wealthy almost always prevail. While the general public may not pay great attention to political science research, it is nevertheless true that the public has basically given up the belief that government will play any positive role in alleviating economic concerns. Gallup polls consistently reveal that the approval rating for Congress is less than 20%. Surveys of Trump supporters indicate that while they knew full well that he was lacking in both courage and competence, they nevertheless were willing to take the chance that his destructive behavior might somehow improve their economic (and cultural) condition.
This loss of belief in both markets and the government on the part of the public is why the supremacy of the Neoliberal view is now threatened. The public’s experience since the financial crisis in 2008 has clearly revealed the extent to which government serves the interests of the wealthy. The crisis, which was the result of both poor economic choices and corruption on the part of financial institutions, not only created a situation in which no one was willing to make new loans, but also one in which everyone who had made loans in the past wanted repayment. This meant that the demand for bonds, which are just a type of loan, plummeted, resulting in the value of financial assets cascading towards zero. Almost all major financial institutions, which were holding these assets, became insolvent almost overnight.
Now it is certainly true that a total collapse of the financial system would have resulted in another Great Depression. A lack of finance, i.e., an unwillingness on the part of lenders to provide finance, would have meant that businesses would have been unable to acquire the loans necessary to carry out their production processes. It would also have meant that consumers would have been unable to obtain loans necessary for purchasing automobiles, education, etc. The drop in demand and supply would have led to an enormous increase in the rate of unemployment. So, the financial system had to be bailed out.
But, there was more than one method for such a bailout to occur. The Government could have required corporations to which it provided support, to alter compensation packages to ensure that top executives did not make million-dollar bonuses. More importantly, the Federal Reserve, which essentially saved financial institutions by buying the financial assets, assets whose value had fallen to near zero, at prices much above zero in order to provide new capital for the financial institutions, could have carried this out by replacing the owners of the banks. There are many ways in which this could have been accomplished. The easiest would have been for the Federal Reserve to stipulate that those who had lent money to the banks would become the new owners. By converting loans into capital, the banks would have been instantaneously re-capitalized. And, the original owners would not have any justified complaint, for the value of what they had owned would have been zero in the absence of Federal Reserve bailouts. But the Federal Reserve chose not to do this. Instead, they bailed out both the banks and the original owners of the banks, i.e., the wealthy elite.
Subsequent behavior of both the government and the Federal Reserve only compounded this initial error. The Federal Reserve could also have bailed out the millions of homeowners who lost their homes as a result of the financial crisis. But the Fed chose not to. And, when the government passed a program that was intended to help homeowners, the implementation of the program was so poor that only a small percentage of homeowners were ever actually helped. And, this poor implementation was probably not due to incompetence. As the Treasury Secretary later admitted, implementation of the program was to be done only in a fashion that would benefit the banks! Moreover, the Department of Justice under the Obama administration made a deliberate choice to not prosecute any of the top executives of the financial institutions responsible for the crisis, in spite of ample evidence that corruption was rampant both in the lead up to the crisis and in the subsequent efforts on the part of financial institutions to avoid losses Although the government subsequently passed the Dodd–Frank bill, a bill that was meant to rein in excessively risky practices of financial institutions, the bill has not to this day been fully implemented—the result of lobbying efforts on the part of the financial institutions. Indeed, the bill has already been amended in a fashion that helps increase the average size of banks. Amazingly, the financial institutions that were deemed too big to fail during the crisis are now larger than they were prior to the crisis!
None of this has been lost on the public. Understanding this history makes it possible to understand a shared characteristic of the supporters of Bernie Sanders and Donald Trump, the fact that they revile the financial institutions. Moreover, this history also helps us to understand a surprising characteristic of the run up to this year’s elections. The only legislative accomplishment of Trump and the Republicans has been the passage of a tax cut bill. In earlier times, this would have been viewed as a major accomplishment and it would have formed the basis for re-election efforts. But not this year! The Republicans are not even attempting to run on the basis of a tax cut. And why is this the case? Because the public has caught on to the fact that such tax cuts only benefit corporations and the wealthy (and the owners of corporations tend to be the wealthy).
But this presents both a danger and an opportunity. History reveals that just when people feel their very existence is threatened, they are also most vulnerable to the call of the authoritarian who claims to be their (only) salvation. And this is exactly what we see in so many places in the world. In the absence of an alternative, an alternative that preserves economic security and justice in a manner consistent with people’s own choices, people will accept the rule of the authoritarian. We are living in very dangerous times. We can hope to find the strength and wisdom to avoid the authoritarian solution. We can also act, together.