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What the heck do "Liberal" and "NeoLiberal" mean?
I'm going to go out on a limb here and guess that you don't know.
Nor do most folks speaking about "liberals" and "conservatives" in a political context. Because in an ECONOMIC context, as offered below, "liberals" are actually "conservatives." And, in my way of thinking, pretty nasty ones at that. This is the label pasted on economists--"liberal" or "neoliberal"-- when they:
- Believe in "free markets"
- Believe in eliminating all "social programs" or "social safety nets."
- Believe in reducing or eliminating labor unions.
- Believe in having absolutely no regulation, no tariffs, no constraints on their "monetary behavior".
- Believe in the rich having ultimate power over the poor.
- Believe in "privatizing" every last little scrap of a penny's-worth of any nation's natural and human resources.
- But believe that, when they really screw up, they deserve to be rescued from the harsh dialectic they have forced upon the rest of the world after they have, by hook and by crook(s), done their damnedest to make dead certain (literally, too often) that the impoverished classes have NO CHANCE WHATSOEVER TO CHOOSE WHETHER THIS IS THE ECONOMIC SYSTEM WE MIGHT WISH TO HAVE.
Let's hope that Barrack Hussein Obama can change this profoundly unbalanced and unfair, confiscatory (or thieving) system and return some semblance of equilibrium to a system in which "the profit is privatized and the risk, socialized," Or, "Heads, I win; Tails, you lose. [sucker!]"
Oh, how fervently we could all wish that there were indeed a real mechanism for "clawback," to get back the ill-gotten money our financial sector has extracted from all of our pockets already, and the $700 billion to $1 trillion (that's "rillion" with a "t"!) of our money that our uncontrollable government is printing up and giving to these pigs. I say pigs, as George Orwell's Animal Farm comes to mind: "All animals are equal. But some animals are more equal than others."
To hear the persona of a Sarah Palin proclaim it, "liberals" describes those who would "spread the wealth around." As a bad thing.
To hear an economist describe it -- such as my now favorite dead war criminal, Nobel economics laureate Milton Friedman -- "liberals" and "neoliberals" are for the law of the economic jungle, where the rich get richer and the poor get poorer. (Friedman was the guy who "consulted" with pretty much all of the despots who took over South American countries by murdering their elected leaders, murdering all social activists, union leaders, critics of the draconian economic measures and crimes against humanity, selling off all of their public businesses (the water works, the trains, the power companies, the mines, etc.). See The Shock Doctrine for details.)
All with the help of our very own CIA, I might add, but this book doesn't go into that. See Whiteout and Legacy of Ashes and The Shock Doctrine for those details. (Whiteout nicely sets up the profound foolishness the so-called "war on drugs" is. The more fools we, the taxpayers, are paying for the CIA to run drugs all over the civilized world and, at the same time, are paying the DEA, drug enforcement administration, to "interdict" the drugs. It's a fool's errand. Only legalizing and taxing these chemicals makes sense to me.
Speaking of chemicals--did you know that John D. Rockefeller and his clan were perfervid--well, not perfervid--more like coldly calculating--supporters of the 19th Amendment--Prohibition? And why was that, you might ask? Because, according to David Blume's Alcohol Can Be A Gas, Henry Ford made all his Model T's and Model A's with adjustable carburetors so farmers could use their own field waste and orchard waste and such to ferment their own motor fuel. It was just like holistic or sustainable agriculture. But if anyone could "got me a copper kettle, got me a copper coil," and make his own motor fuel as he "lay there in the juniper, while the moon is high"--or in broad daylight, as it was denatured alcohol, what kind of gasoline monopoly would poor ol' John D. have?
So how come the CIA hasn't won a Nobel Peace Prize, I wonder. As a group, the CIA has probably brought "the peace that passeth understanding" to hundreds and hundreds of thousands of human beings all over the globe since it got really rolling in 1947. That is, they killed them, trained others to kill them, put the feedbags on the the mounts of the Four Horsemen of the Apocalypse — War, Famine, Pestilence and Death. At the same time, they've boldly helped to reduce global warming, by eliminating all those carbon footprints. What a TEAM! And those they haven't murdered--directly or indirectly--they've provided all manner of psychotropic drugs for, from farmers' fields all over the world: heroin from Afghanistan, cocaine and crack-cocaine from Columbia, etc., heroin from "the Golden Triangle" in Southeast Asia. You've just gotta read Legacy of Ashes and Whiteout. I mean, the CIA has been getting away with this stuff since at least 1947. Maybe we should just relocate "The Company" to our Guantanamo gulag, en masse. And we know that our CIA gang is "the worst of the worst," for darned certain--jeez, I wonder if convicted-and-then-reversed John Poindexter's Total Information Awareness illegal NSA, DIA, CIA, etc. data-mining PROMIS system--is it still that "Prosecutor's Management Information System" I wonder? will flag my posts and cancel my identity. The one I carry in my ancient skin-sack. )
We are seeing this played out again in the Great Economic Bailout Con-Game of 2008, where the casting off of the most minimal controls on corporations and the "financial sector" (what a great euphemism for robber barons, thieves with fountain pens, and so on) in the terms of office of Reagan, Bush-1, Clinton-1 and Bush-2 has led to a terrorist attack on the world's economy. From which the rich are getting, if not richer, their collective asses saved by you and me--though I don't pay much in taxes anymore, now that I'm keepin' alive on Social Security--diminished by 12 years of running my own company--and by Bush-2, the Fed (not Greenspan now, but Bernanke), yet another "treasury secretary" from Goldman Sachs (Hank Paulson)--and Rober(t) Rubin, a prior Goldman Sachs alum and treasury secretary.
I can tell you that if you want to save yourself a lot of trouble OCRing and correcting a chapter of a book like this, search first on Google. I didn't. The first chapter is there, as linked below. I'm not going to take more time formatting this, as the nicely formatted version is on googlebooks. Op cit.
But I think I will add a bold emphasis or two--I'll prefix them with a 3-# string, like this ### so you can search for them.
Iit was a good exercise to very carefully go over the book word by word--I found a few more typos in the original as I was fixing my OCR output.
Meanwhile, back at the ranch:
CHAPTER ONE
Neoliberal Consensus:
Clinton, Bush, Greenspan, IMF
The disposition to admire, and almost to worship, the rich and the powerful, and to despise, or, at least, to neglect persons of poor and mean condition, though necessary both to establish and to maintain the distinction of ranks and the order of society, is, at the same time, the great and most universal cause of the corruption of our moral sentiments.
— ADAM SMITH, THEORY OF MORAL SENTIMENTS
In July 2002, the cover article of the leading economics newsweekly The Economist blared out: "American Capitalism Takes a Beating." This was amid the collapse of the U.S. stock market bubble, the recession, and the wave of corporate accounting scandals. But as The Economist cover suggested, the tribulations of that moment were not simply confirmed to a few failing corporations, dishonest accountants, overzealous market speculators, or the normal bruises of a recession. Deeper vulnerabilities were being exposed, problems of American capitalism itself-the system as a whole.
Such headlines in the serious mainstream press would have been unthinkable only 18 months earlier, when Bill Clinton stepped down from the presidency with a lofty 65 percent approval rating. Then, the press was awash with reports about a New Economy, turbodriven by the Internet, globalization and business-friendly government policies in the U.S. and throughout the world. The Clinton administration had generated three straight years of fiscal surpluses between 1998—2000, a feat that the U.S. government had not previously accomplished since the Harry Truman ad-
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4 CONTOURS OF DESCENT
What happened in the ensuing 18 months? Of course, George W. Bush replaced Bill Clinton as President, and the U.S. was attacked by terrorists on September 11, 2001. These were both important for understanding the beating American capitalism was taking as of mid-2002. From its first days in office, the Bush administration pursued an unwavering agenda favoring big business and the rich. This overarching Bush commitment prevented him from advancing anything close to a serious program for either preventing a recession or shifting the economy toward a healthy growth track once the recession had begun. Bush did regularly offer proposals for fighting the economic downturn, but these lacked credibility. His most ambitious such initiative, announced only one month into his term of office, was a program
of tax cuts, in which 65 percent of the cuts went to the richest 20 percent of households and a full 45 percent went to the richest one percent, while, at the same time, none of the cuts were to take effect in 2001, the year when the recession was taking place.
But the Bush administration cannot be held responsible for the severe financial imbalances that had been building throughout the 1990s, or the recession that had actually begun before Bush took office. We also cannot blame Bush alone for the accounting scandals and other fraudulent corporate practices that began coming to light after the high flying Texas energy company Enron collapsed in disgrace in the fall of 2001, taking their Big Five accounting firm Arthur Andersen with them. The Enron scandal was followed in quick succession by the similarly ignominious demise of World Com, Global Crossing, Tyco International and other major U.S. corporations. The fact is that the loose accounting standards that led to these scandals were widely known and broadly accepted throughout the 1990s market bubble. Thus, a Business Week cover story in October 1998 titled "Earnings Hocus-Pocus," documented how, with the assistance of creative accounting firms, "companies come up with the numbers they want." This is exactly what Dick Cheney himself was referring to when, as Chairman of
another Texas energy firm, Halliburton, before becoming Vice President, he said in a 1996 promotional video for the Arthur Andersen accounting firm "I get good advice … over and above the just sort of normal by-the-book audit-ing arrangement.” 1 ### These same loose accounting standards were responsible for George W. Bush, as a private citizen, being let off the hook by government regulators for his illegal insider trades as a director of yet another Texas energy company, Harken Energy Corporation, in July 1990. The point is that shady accounting was standard operating procedure throughout the 1990s bubble economy, and neither Wall Street nor the regulators under Clinton much cared as long as the market continued rising. The market's collapse caused the accounting scandals, in other words, not the other way around. [By the way, you may not remember it but the Harvard University endowment fund, largest one in the world, lost a few million bucks on this Harken Energy adventure. George did, of course, attend Harvard B. School, but still, does Harvard really invest in little dinky outfits run by alumni? Did it invest in Neil's Silverado S&L? Hmm. Might be worth checking out. And what about Florida Jeb? Any Harvard U. endowment funds in any Jeb Bush activities?]
The September 11 terrorist attacks were a horrible human tragedy that also created immediate economic costs to the travel and tourism industries while also spreading a sense of vulnerability among investors. At the same time, the increase in military spending at the federal level, and, even more so, in civil defense spending at the state and local government levels, injected around $100 billion of additional demand into the economy in 2001. This provided a major counterforce to the collapse of private investment spending associated with the recession. On balance, American capitalism's economic beating as of mid-2002 was not being inflicted by Osama bin Laden.
More than anything else, the causes of the stock market collapse, corporate scandals and recession were the result of economic imbalances that had been built during the Clinton years. Clinton and his supporters claimed to have pursued a new direction in economic policy — what Clinton himself termed a "Third Way'" between "those who said government was the enemy and those who said government was the solution" — an information-age government that "must be smaller, must be less bureaucratic, must be fiscally disciplined and focused on being a catalyst for new ideas." 2 But in fact, Clinton's government in most respects represented a conventional center-right agenda, akin — as Clinton himself once put it — to an Eisenhower Republican stance updated to the post Cold-war epoch. Clinton's administration was defined by across-the-board reductions in government spending as a
share of the economy's total spending, virtually unqualified enthusiasm for free trade, only tepid, inconsistent efforts to assist working people in labor markets, and the deregulation of financial markets — with Alan Greenspan providing crucial leadership in granting to financial traders the leeway they had long sought to freely speculate with other people's money.
Moreover, U.S. economic performance under Clinton was far more mixed than acknowledged by boosters of his "Third Way." The overall figures on GDP and productivity growth for the full Clinton presidency were middling in comparison with the Kennedy-Johnson, Nixon-Ford, Carter and Reagan-Bush years (as needed for clarification, we will refer to the presidency of Bush the father as Bush-1). Unemployment and inflation did both fall, but this was due in large measure to the declining ability of workers to secure wage increases even at low unemployment rates. Finally, the real gains in investment and productivity that occurred in the second half of the Clinton presidency rested on what many observers even at the time could see was a fragile foundation — a stock market in which prices had exploded beyond any previous historical experience, inducing an enormous expansion of, first, private consumption spending, then investment spending. But because neither household incomes nor corporate profits rose at anywhere near the pace of the stock market boom, the result was unprecedented borrowing to pay for the spending spree. The springs of economic growth under Clinton
came from a levitating stock market setting off a debt-financed spending boom. It should have been no surprise when this all began unraveling even before Clinton left office.
In addition, a fair evaluation of economic performance under Clinton,
or any other recent U.S. president, cannot focus only on the U.S. economy. Especially as regards the less developed economies of Latin America, Africa and Asia, the parameters of acceptable economic policy are established in Washington D.C., no matter which political grouping happens to hold office within a given country. This generalization applies even to such large and diverse less developed countries as Argentina, South Africa and Indonesia. The U.S. government exerts its influence both directly — through its policies on government spending, financial markets, international trade, labor stan-
NEOLIBERAL CONSENSUS 7
dards and immigration — and at one step removed, through its control over the International Monetary Fund and World Bank. The IMF and World Bank are physically located across the street from each other in Washington, and the U.S. government controls the major voting bloc at both institutions. The late Rudi Dornbusch of MIT, arguably the most influential international economist of his generation, summarized the relationship between the IMF and U.S. government aptly in saying, ### "The IMF is a toy of the United States to pursue its economic policy offshore.” 3
Not surprisingly therefore, both the IMF and World Bank have aggressively supported a policy agenda very similar to that practiced by the Clinton administration in the U.S., including free trade, a smaller government share of the economy and the deregulation of financial markets. Indeed, it was during the Clinton years that the term "Washington Consensus" began circulating to designate the common policy positions of the U.S. administration along with the IMF and World Bank. This policy approach has also become widely known as neoliberalism, a term which draws upon the classical meaning of the word liberalism.
Classical liberalism is the political philosophy that embraces the virtues of free market capitalism and the corresponding minimal role for government interventions, especially as regards measures to promote economic equality within capitalist societies. Thus, a classical liberal would favor minimal levels of government spending and taxation, since private individuals, rather than governments, should be "free to choose" as the Nobel Prize winning classical liberal economist Milton Friedman puts it, how they spend their income. Moreover, as private individuals, we spend our own money in a much more efficient way than when the government spends on our behalf, since a government cannot possibly care as much as we do about how to make the best use of what we earn.
A classical liberal would correspondingly favor minimal levels of government regulation over the economy, including financial and labor markets. Businesses should be free to operate as they wish, and to succeed or fail as such in a competitive marketplace. Meanwhile, consumers rather than governments should be responsible for deciding which businesses produce goods and services that are of sufficient quality as well as reasonably priced. Busi-
NEOLIBERAL CONSENSUS 8
nesses that provide over-expensive or low-quality products will then be out competed in the marketplace regardless of regulatory standards established by governments. Similarly, if businesses offer workers a wage below what the worker is worth, then a competitor firm will offer this worker a higher wage. The firm unwilling to offer fair wages would not survive over time in the competitive marketplace.
This same reasoning also carries over to the international level. Classical liberals favor free trade between countries rather than countries operating with tariffs or other barriers to the free flow of goods and services between countries. Restrictions on the free movement of products and money between countries only protects uncompetitive firms from market competition, and thus holds back the economic development of countries that choose to erect such barriers.
Neoliberalism, and the Washington Consensus dominant within the U.S. government as well as the IMF and World Bank, are contemporary variants of this longstanding political and economic philosophy. The major difference between classical liberalism as a philosophy and contemporary neoliberalism as a set of policy measures is with implementation. Washington Consensus policy makers are committed to free market policies when they support the interests of big business, as, for example, with lowering regulations at the workplace. But these same policy makers become far less insistent on free market principles when invoking such principles might damage big business interests. Federal Reserve and IMF interventions to bail out wealthy asset holders during the frequent global financial crises in the 1990s are obvious violations of free market precepts.
Broadly speaking, the effects of neoliberalism in the less developed countries over the 1990s reflected the experience of the Clinton years in the U.S. A high proportion of less developed countries were successful, just in the manner of the U.S. under Clinton, in terms of reducing inflation and government budget deficits, and creating a more welcoming climate for foreign trade, multinational corporations, and financial market investors. At the same time, most of Latin America, Africa and Asia - with China being the one major exception - experienced deepening problems of poverty and inequality in the 1990s, along with slower growth and fre-
NEOLIBERAL CONSENSUS 9
quent financial market crises, which in turn produced still more poverty and inequality.
The administration of George W. Bush also follows an essentially neoliberal agenda of less government management of the capitalist marketplace, both for less developed countries and with respect to the U.S. itself. To the extent that Bush-2 continues to succeed in delivering massive tax cuts for the rich, it follows that funds to support government social programs will disappear, especially given that Bush is also intent on spending without restraint on his diplomatic doctrine of preemptive attacks against hostile regimes. Alan Greenspan still runs monetary policy under Bush, just as he did under Clinton, Bush-1 and Reagan. The Washington Consensus still holds at the International Monetary Fund and World Bank under Bush, and this also means that neoliberal policies are being applied selectively.
### As one glaring example of selective application, the Bush administration, through the IMF, refused to provide Argentina with emergency loans in 2001, but provided a $30 billion bailout for Brazil only months later, reversing its own stated policies for Brazil itself in doing so. As the New York Times explained, "American banks like Citigroup, FleetBoston and J.P. Morgan Chase have much greater exposure to Brazilian loans than to Argen-tine ones. Brazil has also been a big magnet for American industrial investment … and a Brazilian meltdown would turn those into white elephants, (8/9/02, p. C1)."
Of course, even making allowances for flexibility in the application of neoliberal principles, significant differences do exist between Clinton and Bush. The general requirement of product differentiation in an electoral market entails that at the margin any Democratic President will offer more social concessions than a Republican of the same cohort. Unlike Clinton, Bush is unabashed in his efforts to mobilize the power of government to serve the wealthy. But we should be careful not to make too much of such differences in the public stances of these two figures, as against the outcomes that prevail during their terms in office. It was under Clinton that the distribution of wealth in the U.S. became more skewed than it had been at any previous time in the previous forty years — with, for example, the ratio of wages for the average worker to the pay of the average CEO rising astronomically from 113 to 1 in 1991 under Bush-1 to 449 to 1 when Clinton left office in 2001. 4
CONTOURS OF DESCENT 10
Plan for the book
Thus, the basic issue for understanding both the beating taken by American capitalism in 2002 and the more punishing economic travails of the less developed countries is not the Clinton program per se, the Bush program per se, or the IMF agenda for the less developed countries. It is rather the common set of neoliberal policy assumptions that constitutes the center of gravity for policy formation in all three cases. This book is an attempt to excavate that center of gravity. It does so through describing how increasing inequality and instability have resulted from the specific policy choices advanced under both Clinton and Bush and through the implementation of neoliberalism in various less developed countries.
Chapter 2 provides an overview of the economic experience under the team of Clinton and Greenspan, examining both the main policy measures and the economy's performance under Clinton. The discussion ends, as did the Clinton years themselves, just as the economic boom began unraveling and the descent into recession had begun. In Chapter 3, I then examine in more depth the three extraordinary economic developments under Clinton: the attainment of balance, and then a surplus, in the Federal Budget; the simultaneous declines in unemployment and inflation, in direct contradiction to the predictions of mainstream economic theory; and the historically unprecedented stock market boom. Explaining these three developments is central for understanding how the Clinton economy could have appeared to be performing so well even as problems of inequality and financial instability were deepening.
Because I am writing only a bit more than two years into Bush's term of office, it is impossible to provide a full evaluation such as that in Chapters 2 and 3 for Clinton. But as far as possible, Chapter 4 tells the story of how, under Bush, American capitalism was taking a beating through 2002 without clear signs as to when exactly this beating would end. Of course, a major element of this story is the stock market collapse, and the implications of the market's collapse for more fundamental concerns about the health of the real, tangible economy of business investments, jobs and wages, and the viability of the public sector. Because the stock market boom was
crucial to growth under Clinton, the basic Bush problem was finding some alternative engine of economic growth. Alan Greenspan attempted to move the economy forward through interest rate cuts, but these proved insufficient, in no small part because he was operating within a highly speculative, deregulated financial market that he helped create. As we discuss, the only serious contenders Bush offers as a growth agenda is to lower taxes for corporations and the rich, or to increase spending for the military, to pay for wars against Al Queda, Iraq, and perhaps other countries within what Bush terms the "axis of evil."
Chapter 5 is about neoliberalism in the less developed countries. I present both general patterns regarding economic growth, inequality and poverty under neoliberalism, and some specific experiences. The specific stories include the tragic pattern of mass suicides among destitute farmers in India, the financial collapse and depression in Argentina, and the spread of sweatshop working conditions throughout the less developed countries. I also consider the situation with international aid to poor countries. Of course the poor countries would benefit substantially through an increase in foreign aid to a level that reached even half the amount that that the rich countries had pledged back in the early 1970.. The rock star Bono, lead singer of the group U2, deserves credit for bringing much greater attention to the efforts of the United Nations and activists around the world as they try to increase the amount of foreign aid provided by the rich countries. But I also show that, even if foreign aid were to increase to something approximating that level of generosity supported by the United Nations, Bono and other activists, its positive effects are still more than countered by the regime of slow economic growth fostered by neoliberalism.
Overall then, these chapters attempt to do just what the subtitle of the book suggests: to delineate both the root causes of U.S. economic fractures under Clinton and Bush as well as the landscape of austerity in the less developed world. But these chapters also aim to provide some useful guideposts for constructing a renewed viable egalitarian policy framework, which I sketch in the book's closing Chapter 6. This chapter briefly considers policies in three crucial areas: macroeconomic interventions targeted at increasing opportunities for decent jobs, rather than simply
The overall approach
As with all works of political economy, this book proceeds from a fairly simple set of underlying ideas. These ideas will form the basis for my critique of neoliberal policies in both the U.S. and developing countries. It will be helpful to sketch these ideas at the outset just as I have briefly outlined the basic tenets of classical liberalism and neoliberalism. To begin with, there is no question in my view that free markets create powerful incentives for people to work hard and innovate, just as the classical liberal view would suggest. The leaders of the ex-Soviet Union and other Communist governments made a massive historical error by denying or repressing this fact. The market system achieves these important aims through two simple means. The first is to allow people to pursue their own self-interest in their working lives. The second is that this self-interested behavior will be held in check by competition in the market — that is, even if a baker wants to charge $10 for a loaf of bread, she will not be able to do so because her competitors down the street will get all of her business by charging $1 a loaf. These two simple market forces, self-interest and competition, are wellsprings for the prodigies of effort and material abundance that are so evident in the United States and other advanced capitalist countries.
However, if free market capitalism is a powerful mechanism for creating wealth, why then does a neoliberal policy approach, whether pursued by Clinton, Bush or the IMF, also produce severe difficulties in terms of in-
equality and financial instability, which in turn diminish the market mechanism's ability to even promote economic growth? It will be helpful to consider this in terms of three fundamental problems that result from a freemarket system, which I term "the Marx problem," "the Keynes problem" and "the Polanyi problem." Let us take these up in turn. 5
The Marx problem
Does someone in your family have a job and, if so, how much does it pay? For the majority of the world's population, how one answers these two questions determines, more than anything else, what one's standard of living will he. But how is it decided whether a person has a job and what their pay will he? Getting down to the most immediate level of decision making, this occurs through various types of bargaining in labor markets between workers and employers. Karl Marx argued that, in a free market economy generally, workers have less power than employers in this bargaining process because workers cannot fall back on other means of staying alive if they fail to get hired into a job. Capitalists gain higher profits through having this relatively stronger bargaining position. But Marx also stressed that workers' bargaining power diminishes further when unemployment and underemployment are high, since that means that employed workers can be more readily replaced by what Marx called "the reserve army" of the unemployed outside the office, mine, or factory gates.
Neoliberalism has brought increasing integration of the world's labor markets through reducing barriers to international trade and investment by multinationals. For workers in high-wage countries such as the United States, this effectively means that the reserve army of workers willing to accept jobs at lower pay than U.S. workers expands to include workers in less developed countries. It isn't the case that businesses will always move to less developed countries or that domestically produced goods will necessarily be supplanted by imports from low-wage countries. The point is that U.S. workers face an increased credible threat that they can be supplanted. If everything else were to remain the same in the U.S. labor market, this would then mean that global integration would erode the bargaining power of U.S. workers and thus tend to bring lower wages.
But even if this is true for workers in the U.S. and other rich countries, shouldn't it also mean that workers in poor countries have greater job opportunities and better bargaining positions? In fact, there are areas where workers in poor countries are gaining enhanced job opportunities through international trade and multinational investments. But these gains are generally quite limited. This is because a long-term transition out of agriculture in poor countries continues to expand the reserve army of unemployed and underemployed workers in these countries as well. Moreover, when neoliberal governments in poor countries reduce their support for agriculture — through cuts in both tariffs on imported food products and subsidies for domestic farmers — this makes it more difficult for poor farmers to compete with multinational agribusiness firms. This is especially so when the rich countries maintain or increase their own agricultural supports, as has been done in the U.S. under Bush. In addition, much of the growth in the recently developed export-oriented manufacturing sectors of poor countries has failed to significantly increase jobs even in this sector. This is because the new export-oriented production sites frequently do not represent net additions to the country's total supply of manufacturing firms. They rather replace older firms that were focused on supplying goods to domestic markets. The net result is that the number of people looking for jobs in developing countries grows faster than the employers seeking new workers. Here again, workers' bargaining power diminishes.
This does not mean that global integration of labor markets must necessarily bring weakened bargaining power and lower wages for Workers. But it does mean that unless some nonmarket forces in the economy, such as government regulations or effective labor unions, are able to counteract these market processes, workers will indeed continue to experience weakened bargaining strength and eroding living standards.
The Keynes problem
In a free market economy, investment spending by businesses is the main driving force that produces economic growth, innovation and jobs. But as John Maynard Keynes stressed, private investment decisions are also unavoidably risky ventures. Businesses have to put up money without knowing
whether they will produce any profits in the future. As such, investment spending by business is likely to fluctuate far more than, say, decisions by households as to how much they will spend per week on groceries.
But investment fluctuations will also affect overall spending in the economy, including that of households. When investment spending declines, this means that businesses will hire fewer workers. Unemployment rises as a result, and this, in turn, will lead to cuts in household spending. Declines in business investment spending can therefore set off a vicious cycle: the investment decline leads to employment declines, then to cuts in household spending and corresponding increases in household financial problems, which then brings still more cuts in business investment and financial difficulties for the business sector. This is how capitalist economies produce mass unemployment, financial crises and recession.
Keynes also described a second major source of instability associated with private investment activity. Precisely because private investments are highly risky propositions, financial markets have evolved to make this risk more manageable for any given investor. Through financial markets, investors can sell off their investments if they need or want to, converting their office buildings, factories and stock of machinery into cash much more readily than they could if they had to always find buyers on their own. But Keynes warned that when financial markets convert long-term assets into short-term commitments for investors, this also fosters a speculative mentality in the markets. What becomes central for investors is not whether a company's products will produce profits over a long term, but rather whether the short-term financial market investors think a company's fortunes will be strong enough in the present and immediate future 10 drive the stock price up. Or, In be more precise, what really matters for a speculative investor is not what they think about a given company's prospects per se, but rather what they think other investors are thinking, since that will be what determines where the stock price goes in the short term.
Because of this, the financial markets are highly susceptible to rumors, fads and all sorts of deceptive accounting practices, since all of these can help drive the stock price up in the present, regardless of what they accomplish in the longer term. Thus, if U.S. stock traders are convinced that Alan
Greenspan is a maestro, and if there is news that he is about to intervene with some kind of policy shift, then the rumor of Greenspan's policy shift can itself drive prices up, as the more nimble speculators try to keep one step ahead of the herd of Greenspanphiles.
Still, as with the Marx problem, it does not follow that the inherent instability of private investment and speculation in financial markets are uncontrollable, leading inevitably to persistent problems of mass unemployment and recession. But these social pathologies will become increasingly common through a neoliberal policy approach committed to minimizing government interventions to stabilize investment.
The Polanyi problem
Karl Polanyi wrote his classic book The Great Transformation in the context of the 1930s depression, World War II and the developing worldwide competition with Communist governments. He was also reflecting on the 1920s, dominated, as with our current epoch, by a freemarket ethos. Polanyi wrote of the 1920s that "economic liberalism made a supreme bid to restore the selfregulation of the system by eliminating all interventionist policies which interfered with the freedom of markets.” 6
Considering all of these experiences, Polanyi argued that for market economies to function with some modicum of fairness, they must be embedded in social norms and institutions that effectively promote broadly accepted notions of the common good. Otherwise, acquisitiveness and competition the two driving forces of market economies — achieve overwhelming dominance as cultural forces, rendering life under capitalism a Hobbesian "war of all against all." This same idea is also central for Adam Smith himself, as should be evident from the quotation that opens this chapter. Smith showed how the invisible hand of self-interest and competition will yield higher levels of individual effort that increases the wealth of nations, but that it will also produce the corruption of our moral sentiments unless the market is itself governed at a fundamental level by norms of solidarity.
In the post-World War II period, various social democratic movements within the advanced capitalist economies adapted the Polanyi perspective. They argued in favor of government interventions to achieve
tive to achieve three basic ends: stabilizing overall demand in the economy at a level that will provide for full employment; creating a financial market environment that is stable and conducive to the effective allocation of investment funds; and distributing equitably the rewards from high employment and a stable investment process. ### There were two basic means of achieving equitable distribution: relatively rapid wage growth, promoted by labor laws that were supportive of unions, minimum wage standards and similar interventions in labor markets; and welfare state policies, including progressive "taxation and redistributive programs such as Social Security. The political ascendancy of these ideas was the basis for a dramatic increase in the role of government in the post-World War II capitalist economies. As one indicator of this, total government expenditures in the United States rose from 8 percent of GDP in 1913, to 21 percent in 1950, then to 38 percent by 1992. The International Monetary Fund and World Bank were also formed in the mid-1940s to advance such policy ideas throughout the world — that is, to implement policies virtually the opposite of those they presently favor. John Maynard Keynes himself was a leading intellectual force contributing to the initial design of the International Monetary Fund and World Bank.
But the implementation of a social democratic capitalism, guided by a commitment to full employment and the welfare state, did also face serious and persistent difficulties, and we need to recognize them as part of a consideration of the Marx, Keynes and Polanyi problems. In particular, many sectors of business opposed efforts to sustain full employment because, following the logic of the Marx problem, full employment provides greater bargaining power for workers in labor markets, even if it also increases the economy's total production of goods and services. Greater worker bargaining power can also create inflationary pressures because businesses will try to absorb their higher wage costs by raising prices. In addition, market-inhibiting financial regulations limit the capacity of financial market players to diversify their risk and speculate.
As we discuss further in Chapter 6, corporations in the U.S. and West,'rn Europe were experiencing some combination of these problems associated with social democratic capitalism. In particular, they were faced with
rising labor costs associated with low unemployment rates, which then led to either inflation, when corporations had the ability to pass on their higher labor costs to consumers; or to a squeeze on profits, when competitive pressures prevented corporations from raising their prices in response to the rising labor costs. These pressures were compounded by the two oil price "shocks" initiated by the Oil Producing Exporting Countries (OPEC) — an initial fourfold increase in the world price of oil in 1973 then a second four-fold price spike in 1979.
These were the conditions that by the end of the 1970s led to the decline of social democratic approaches to policymaking and the ascendancy of neoliberalism. The two leading signposts of this historic transition were the election in 1979 of Margaret Thatcher as Prime Minister of the United Kingdom and in 1980 of Ronald Reagan as President of the United States. Indeed, it was at this point that Mrs. Thatcher made her famous pronouncement that "there is no alternative" to neoliberalism.
This brings us to the contemporary era of smaller government, fiscal stringency and deregulation, i.e. to neoliberalism under Clinton, Bush and throughout the less developed world. It is worth emphasizing again that the issue is not a simple juxtaposition between either regulating or deregulating markets. Rather it is that markets have become deregulated to support the interests of business and financial markets, even as these same groups still benefit greatly from many forms of government support, including investment subsidies, tax concessions and rescue operations when financial crises get out of hand. At the same time, the deregulation of markets that favors business and finance is correspondingly the most powerful regulatory mechanism limiting the demands of workers, in that deregulation has been congruent with the worldwide expansion of the reserve army of labor and the declining capacity of national governments to implement full-employment macroeconomic policies — thereby exacerbating both the Marx and Keynes problems. The aim of this book, in short, is to show in specific ways how the Marx, Keynes and Polanyi problems have deepened under Clinton, Bush and neoliberal policies in the less developed countries, and to propose an alternative policy path that can reverse the contours of descent that we observe.
Economic growth, distribution and the environment
One major economic issue that I do not attempt to tackle in this book is the environment, even though the environmental policies of Clinton, Bush and, In the less developed economies, the World Bank, have produced severe problems. The main reason for not addressing environmental issues is that it is simply beyond the range of topics that I am able to reasonably handle.
But insofar as the book criticizes policies that lead to slower economic growth and advances proposals for accelerating growth, it would seem that, at a minimum, I should briefly acknowledge the environmental issues associated with growth. Of course, to begin with, any acceleration in the rate at which economies grow will produce environmental costs. But it is also true that such environmental costs could be greatly reduced through conscious policy initiatives — in particular, if governments recognize the process of accelerated economic growth as an opportunity to replace existing, dirtier production and transportation methods with cleaner technologies. As an obvious example, expanding urban transportation systems based on rail technologies rather than clogging the already overcrowded major cities with still more private cars would promote both economic growth and a cleaner environment.
But there is an additional important consideration here, which has been emphasized by the pioneering work of my University of Massachusetts colleague James Boyce, among others — that a more equal distribution of the rewards from growth will itself contribute to a more environmentally benign growth path. The basic argument Boyce makes is straightforward: most of the benefits of degrading the environment accrue to the wealthy, while must of the costs are borne by the middle class and, especially, working people and the poor. As one important case of this, Boyce considers the experience in the Philippines under President Ferdinand Marcos:
During the two decades of Marcos' rule, the Philippines' rich tropical hardwood forests were rapidly felled for timber, with little effort to minimize the environmental impacts of deforestation. Exports of logs and lumber ranked among the country's top foreign-exchange
But the Bush administration cannot be held responsible for the severe financial imbalances that had been building throughout the 1990s, or the recession that had actually begun before Bush took office. We also cannot blame Bush alone for the accounting scandals and other fraudulent corporate practices that began coming to light after the high flying Texas energy company Enron collapsed in disgrace in the fall of 2001, taking their Big Five accounting firm Arthur Andersen with them. The Enron scandal was followed in quick succession by the similarly ignominious demise of World Com, Global Crossing, Tyco International and other major U.S. corporations. The fact is that the loose accounting standards that led to these scandals were widely known and broadly accepted throughout the 1990s market bubble. Thus, a Business Week cover story in October 1998 titled "Earnings Hocus-Pocus," documented how, with the assistance of creative accounting firms, "companies come up with the numbers they want." This is exactly what Dick Cheney himself was referring to when, as Chairman of
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NEOLIBERAL CONSENSUS 5
another Texas energy firm, Halliburton, before becoming Vice President, he said in a 1996 promotional video for the Arthur Andersen accounting firm "I get good advice … over and above the just sort of normal by-the-book audit-ing arrangement.” 1 ### These same loose accounting standards were responsible for George W. Bush, as a private citizen, being let off the hook by government regulators for his illegal insider trades as a director of yet another Texas energy company, Harken Energy Corporation, in July 1990. The point is that shady accounting was standard operating procedure throughout the 1990s bubble economy, and neither Wall Street nor the regulators under Clinton much cared as long as the market continued rising. The market's collapse caused the accounting scandals, in other words, not the other way around. [By the way, you may not remember it but the Harvard University endowment fund, largest one in the world, lost a few million bucks on this Harken Energy adventure. George did, of course, attend Harvard B. School, but still, does Harvard really invest in little dinky outfits run by alumni? Did it invest in Neil's Silverado S&L? Hmm. Might be worth checking out. And what about Florida Jeb? Any Harvard U. endowment funds in any Jeb Bush activities?]
The September 11 terrorist attacks were a horrible human tragedy that also created immediate economic costs to the travel and tourism industries while also spreading a sense of vulnerability among investors. At the same time, the increase in military spending at the federal level, and, even more so, in civil defense spending at the state and local government levels, injected around $100 billion of additional demand into the economy in 2001. This provided a major counterforce to the collapse of private investment spending associated with the recession. On balance, American capitalism's economic beating as of mid-2002 was not being inflicted by Osama bin Laden.
More than anything else, the causes of the stock market collapse, corporate scandals and recession were the result of economic imbalances that had been built during the Clinton years. Clinton and his supporters claimed to have pursued a new direction in economic policy — what Clinton himself termed a "Third Way'" between "those who said government was the enemy and those who said government was the solution" — an information-age government that "must be smaller, must be less bureaucratic, must be fiscally disciplined and focused on being a catalyst for new ideas." 2 But in fact, Clinton's government in most respects represented a conventional center-right agenda, akin — as Clinton himself once put it — to an Eisenhower Republican stance updated to the post Cold-war epoch. Clinton's administration was defined by across-the-board reductions in government spending as a
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6 CONTOURS OF DESCENT
share of the economy's total spending, virtually unqualified enthusiasm for free trade, only tepid, inconsistent efforts to assist working people in labor markets, and the deregulation of financial markets — with Alan Greenspan providing crucial leadership in granting to financial traders the leeway they had long sought to freely speculate with other people's money.
Moreover, U.S. economic performance under Clinton was far more mixed than acknowledged by boosters of his "Third Way." The overall figures on GDP and productivity growth for the full Clinton presidency were middling in comparison with the Kennedy-Johnson, Nixon-Ford, Carter and Reagan-Bush years (as needed for clarification, we will refer to the presidency of Bush the father as Bush-1). Unemployment and inflation did both fall, but this was due in large measure to the declining ability of workers to secure wage increases even at low unemployment rates. Finally, the real gains in investment and productivity that occurred in the second half of the Clinton presidency rested on what many observers even at the time could see was a fragile foundation — a stock market in which prices had exploded beyond any previous historical experience, inducing an enormous expansion of, first, private consumption spending, then investment spending. But because neither household incomes nor corporate profits rose at anywhere near the pace of the stock market boom, the result was unprecedented borrowing to pay for the spending spree. The springs of economic growth under Clinton
came from a levitating stock market setting off a debt-financed spending boom. It should have been no surprise when this all began unraveling even before Clinton left office.
In addition, a fair evaluation of economic performance under Clinton,
or any other recent U.S. president, cannot focus only on the U.S. economy. Especially as regards the less developed economies of Latin America, Africa and Asia, the parameters of acceptable economic policy are established in Washington D.C., no matter which political grouping happens to hold office within a given country. This generalization applies even to such large and diverse less developed countries as Argentina, South Africa and Indonesia. The U.S. government exerts its influence both directly — through its policies on government spending, financial markets, international trade, labor stan-
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dards and immigration — and at one step removed, through its control over the International Monetary Fund and World Bank. The IMF and World Bank are physically located across the street from each other in Washington, and the U.S. government controls the major voting bloc at both institutions. The late Rudi Dornbusch of MIT, arguably the most influential international economist of his generation, summarized the relationship between the IMF and U.S. government aptly in saying, ### "The IMF is a toy of the United States to pursue its economic policy offshore.” 3
Not surprisingly therefore, both the IMF and World Bank have aggressively supported a policy agenda very similar to that practiced by the Clinton administration in the U.S., including free trade, a smaller government share of the economy and the deregulation of financial markets. Indeed, it was during the Clinton years that the term "Washington Consensus" began circulating to designate the common policy positions of the U.S. administration along with the IMF and World Bank. This policy approach has also become widely known as neoliberalism, a term which draws upon the classical meaning of the word liberalism.
Classical liberalism is the political philosophy that embraces the virtues of free market capitalism and the corresponding minimal role for government interventions, especially as regards measures to promote economic equality within capitalist societies. Thus, a classical liberal would favor minimal levels of government spending and taxation, since private individuals, rather than governments, should be "free to choose" as the Nobel Prize winning classical liberal economist Milton Friedman puts it, how they spend their income. Moreover, as private individuals, we spend our own money in a much more efficient way than when the government spends on our behalf, since a government cannot possibly care as much as we do about how to make the best use of what we earn.
A classical liberal would correspondingly favor minimal levels of government regulation over the economy, including financial and labor markets. Businesses should be free to operate as they wish, and to succeed or fail as such in a competitive marketplace. Meanwhile, consumers rather than governments should be responsible for deciding which businesses produce goods and services that are of sufficient quality as well as reasonably priced. Busi-
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nesses that provide over-expensive or low-quality products will then be out competed in the marketplace regardless of regulatory standards established by governments. Similarly, if businesses offer workers a wage below what the worker is worth, then a competitor firm will offer this worker a higher wage. The firm unwilling to offer fair wages would not survive over time in the competitive marketplace.
This same reasoning also carries over to the international level. Classical liberals favor free trade between countries rather than countries operating with tariffs or other barriers to the free flow of goods and services between countries. Restrictions on the free movement of products and money between countries only protects uncompetitive firms from market competition, and thus holds back the economic development of countries that choose to erect such barriers.
Neoliberalism, and the Washington Consensus dominant within the U.S. government as well as the IMF and World Bank, are contemporary variants of this longstanding political and economic philosophy. The major difference between classical liberalism as a philosophy and contemporary neoliberalism as a set of policy measures is with implementation. Washington Consensus policy makers are committed to free market policies when they support the interests of big business, as, for example, with lowering regulations at the workplace. But these same policy makers become far less insistent on free market principles when invoking such principles might damage big business interests. Federal Reserve and IMF interventions to bail out wealthy asset holders during the frequent global financial crises in the 1990s are obvious violations of free market precepts.
Broadly speaking, the effects of neoliberalism in the less developed countries over the 1990s reflected the experience of the Clinton years in the U.S. A high proportion of less developed countries were successful, just in the manner of the U.S. under Clinton, in terms of reducing inflation and government budget deficits, and creating a more welcoming climate for foreign trade, multinational corporations, and financial market investors. At the same time, most of Latin America, Africa and Asia - with China being the one major exception - experienced deepening problems of poverty and inequality in the 1990s, along with slower growth and fre-
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quent financial market crises, which in turn produced still more poverty and inequality.
The administration of George W. Bush also follows an essentially neoliberal agenda of less government management of the capitalist marketplace, both for less developed countries and with respect to the U.S. itself. To the extent that Bush-2 continues to succeed in delivering massive tax cuts for the rich, it follows that funds to support government social programs will disappear, especially given that Bush is also intent on spending without restraint on his diplomatic doctrine of preemptive attacks against hostile regimes. Alan Greenspan still runs monetary policy under Bush, just as he did under Clinton, Bush-1 and Reagan. The Washington Consensus still holds at the International Monetary Fund and World Bank under Bush, and this also means that neoliberal policies are being applied selectively.
### As one glaring example of selective application, the Bush administration, through the IMF, refused to provide Argentina with emergency loans in 2001, but provided a $30 billion bailout for Brazil only months later, reversing its own stated policies for Brazil itself in doing so. As the New York Times explained, "American banks like Citigroup, FleetBoston and J.P. Morgan Chase have much greater exposure to Brazilian loans than to Argen-tine ones. Brazil has also been a big magnet for American industrial investment … and a Brazilian meltdown would turn those into white elephants, (8/9/02, p. C1)."
Of course, even making allowances for flexibility in the application of neoliberal principles, significant differences do exist between Clinton and Bush. The general requirement of product differentiation in an electoral market entails that at the margin any Democratic President will offer more social concessions than a Republican of the same cohort. Unlike Clinton, Bush is unabashed in his efforts to mobilize the power of government to serve the wealthy. But we should be careful not to make too much of such differences in the public stances of these two figures, as against the outcomes that prevail during their terms in office. It was under Clinton that the distribution of wealth in the U.S. became more skewed than it had been at any previous time in the previous forty years — with, for example, the ratio of wages for the average worker to the pay of the average CEO rising astronomically from 113 to 1 in 1991 under Bush-1 to 449 to 1 when Clinton left office in 2001. 4
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CONTOURS OF DESCENT 10
Plan for the book
Thus, the basic issue for understanding both the beating taken by American capitalism in 2002 and the more punishing economic travails of the less developed countries is not the Clinton program per se, the Bush program per se, or the IMF agenda for the less developed countries. It is rather the common set of neoliberal policy assumptions that constitutes the center of gravity for policy formation in all three cases. This book is an attempt to excavate that center of gravity. It does so through describing how increasing inequality and instability have resulted from the specific policy choices advanced under both Clinton and Bush and through the implementation of neoliberalism in various less developed countries.
Chapter 2 provides an overview of the economic experience under the team of Clinton and Greenspan, examining both the main policy measures and the economy's performance under Clinton. The discussion ends, as did the Clinton years themselves, just as the economic boom began unraveling and the descent into recession had begun. In Chapter 3, I then examine in more depth the three extraordinary economic developments under Clinton: the attainment of balance, and then a surplus, in the Federal Budget; the simultaneous declines in unemployment and inflation, in direct contradiction to the predictions of mainstream economic theory; and the historically unprecedented stock market boom. Explaining these three developments is central for understanding how the Clinton economy could have appeared to be performing so well even as problems of inequality and financial instability were deepening.
Because I am writing only a bit more than two years into Bush's term of office, it is impossible to provide a full evaluation such as that in Chapters 2 and 3 for Clinton. But as far as possible, Chapter 4 tells the story of how, under Bush, American capitalism was taking a beating through 2002 without clear signs as to when exactly this beating would end. Of course, a major element of this story is the stock market collapse, and the implications of the market's collapse for more fundamental concerns about the health of the real, tangible economy of business investments, jobs and wages, and the viability of the public sector. Because the stock market boom was
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NEOLIBERAL CONSENSUS 11
crucial to growth under Clinton, the basic Bush problem was finding some alternative engine of economic growth. Alan Greenspan attempted to move the economy forward through interest rate cuts, but these proved insufficient, in no small part because he was operating within a highly speculative, deregulated financial market that he helped create. As we discuss, the only serious contenders Bush offers as a growth agenda is to lower taxes for corporations and the rich, or to increase spending for the military, to pay for wars against Al Queda, Iraq, and perhaps other countries within what Bush terms the "axis of evil."
Chapter 5 is about neoliberalism in the less developed countries. I present both general patterns regarding economic growth, inequality and poverty under neoliberalism, and some specific experiences. The specific stories include the tragic pattern of mass suicides among destitute farmers in India, the financial collapse and depression in Argentina, and the spread of sweatshop working conditions throughout the less developed countries. I also consider the situation with international aid to poor countries. Of course the poor countries would benefit substantially through an increase in foreign aid to a level that reached even half the amount that that the rich countries had pledged back in the early 1970.. The rock star Bono, lead singer of the group U2, deserves credit for bringing much greater attention to the efforts of the United Nations and activists around the world as they try to increase the amount of foreign aid provided by the rich countries. But I also show that, even if foreign aid were to increase to something approximating that level of generosity supported by the United Nations, Bono and other activists, its positive effects are still more than countered by the regime of slow economic growth fostered by neoliberalism.
Overall then, these chapters attempt to do just what the subtitle of the book suggests: to delineate both the root causes of U.S. economic fractures under Clinton and Bush as well as the landscape of austerity in the less developed world. But these chapters also aim to provide some useful guideposts for constructing a renewed viable egalitarian policy framework, which I sketch in the book's closing Chapter 6. This chapter briefly considers policies in three crucial areas: macroeconomic interventions targeted at increasing opportunities for decent jobs, rather than simply
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CONTOURS OF DESCENT 12
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targeting inflation; labor market regulations also aimed at improving conditions for working people and the poor; and financial market regulations aimed at controlling financial speculation and channeling credit to productive uses. This chapter builds from many of the concerns that have been raised effectively in recent years by progressive political movements around the world, including the living wage movement in the U.S. and elsewhere, the movement to tax and regulate speculative currency markets (the "Tobin Tax" movement), and, more generally, the movement fighting global neoliberalism under the bracing idea that "another world is possible."
The overall approach
As with all works of political economy, this book proceeds from a fairly simple set of underlying ideas. These ideas will form the basis for my critique of neoliberal policies in both the U.S. and developing countries. It will be helpful to sketch these ideas at the outset just as I have briefly outlined the basic tenets of classical liberalism and neoliberalism. To begin with, there is no question in my view that free markets create powerful incentives for people to work hard and innovate, just as the classical liberal view would suggest. The leaders of the ex-Soviet Union and other Communist governments made a massive historical error by denying or repressing this fact. The market system achieves these important aims through two simple means. The first is to allow people to pursue their own self-interest in their working lives. The second is that this self-interested behavior will be held in check by competition in the market — that is, even if a baker wants to charge $10 for a loaf of bread, she will not be able to do so because her competitors down the street will get all of her business by charging $1 a loaf. These two simple market forces, self-interest and competition, are wellsprings for the prodigies of effort and material abundance that are so evident in the United States and other advanced capitalist countries.
However, if free market capitalism is a powerful mechanism for creating wealth, why then does a neoliberal policy approach, whether pursued by Clinton, Bush or the IMF, also produce severe difficulties in terms of in-
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NEOLIBERAL CONSENSUS 13
The Marx problem
Does someone in your family have a job and, if so, how much does it pay? For the majority of the world's population, how one answers these two questions determines, more than anything else, what one's standard of living will he. But how is it decided whether a person has a job and what their pay will he? Getting down to the most immediate level of decision making, this occurs through various types of bargaining in labor markets between workers and employers. Karl Marx argued that, in a free market economy generally, workers have less power than employers in this bargaining process because workers cannot fall back on other means of staying alive if they fail to get hired into a job. Capitalists gain higher profits through having this relatively stronger bargaining position. But Marx also stressed that workers' bargaining power diminishes further when unemployment and underemployment are high, since that means that employed workers can be more readily replaced by what Marx called "the reserve army" of the unemployed outside the office, mine, or factory gates.
Neoliberalism has brought increasing integration of the world's labor markets through reducing barriers to international trade and investment by multinationals. For workers in high-wage countries such as the United States, this effectively means that the reserve army of workers willing to accept jobs at lower pay than U.S. workers expands to include workers in less developed countries. It isn't the case that businesses will always move to less developed countries or that domestically produced goods will necessarily be supplanted by imports from low-wage countries. The point is that U.S. workers face an increased credible threat that they can be supplanted. If everything else were to remain the same in the U.S. labor market, this would then mean that global integration would erode the bargaining power of U.S. workers and thus tend to bring lower wages.
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CONTOURS OF DESCENT 14
But even if this is true for workers in the U.S. and other rich countries, shouldn't it also mean that workers in poor countries have greater job opportunities and better bargaining positions? In fact, there are areas where workers in poor countries are gaining enhanced job opportunities through international trade and multinational investments. But these gains are generally quite limited. This is because a long-term transition out of agriculture in poor countries continues to expand the reserve army of unemployed and underemployed workers in these countries as well. Moreover, when neoliberal governments in poor countries reduce their support for agriculture — through cuts in both tariffs on imported food products and subsidies for domestic farmers — this makes it more difficult for poor farmers to compete with multinational agribusiness firms. This is especially so when the rich countries maintain or increase their own agricultural supports, as has been done in the U.S. under Bush. In addition, much of the growth in the recently developed export-oriented manufacturing sectors of poor countries has failed to significantly increase jobs even in this sector. This is because the new export-oriented production sites frequently do not represent net additions to the country's total supply of manufacturing firms. They rather replace older firms that were focused on supplying goods to domestic markets. The net result is that the number of people looking for jobs in developing countries grows faster than the employers seeking new workers. Here again, workers' bargaining power diminishes.
This does not mean that global integration of labor markets must necessarily bring weakened bargaining power and lower wages for Workers. But it does mean that unless some nonmarket forces in the economy, such as government regulations or effective labor unions, are able to counteract these market processes, workers will indeed continue to experience weakened bargaining strength and eroding living standards.
The Keynes problem
In a free market economy, investment spending by businesses is the main driving force that produces economic growth, innovation and jobs. But as John Maynard Keynes stressed, private investment decisions are also unavoidably risky ventures. Businesses have to put up money without knowing
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NEOLIBERAL CONSENSUS 15
But investment fluctuations will also affect overall spending in the economy, including that of households. When investment spending declines, this means that businesses will hire fewer workers. Unemployment rises as a result, and this, in turn, will lead to cuts in household spending. Declines in business investment spending can therefore set off a vicious cycle: the investment decline leads to employment declines, then to cuts in household spending and corresponding increases in household financial problems, which then brings still more cuts in business investment and financial difficulties for the business sector. This is how capitalist economies produce mass unemployment, financial crises and recession.
Keynes also described a second major source of instability associated with private investment activity. Precisely because private investments are highly risky propositions, financial markets have evolved to make this risk more manageable for any given investor. Through financial markets, investors can sell off their investments if they need or want to, converting their office buildings, factories and stock of machinery into cash much more readily than they could if they had to always find buyers on their own. But Keynes warned that when financial markets convert long-term assets into short-term commitments for investors, this also fosters a speculative mentality in the markets. What becomes central for investors is not whether a company's products will produce profits over a long term, but rather whether the short-term financial market investors think a company's fortunes will be strong enough in the present and immediate future 10 drive the stock price up. Or, In be more precise, what really matters for a speculative investor is not what they think about a given company's prospects per se, but rather what they think other investors are thinking, since that will be what determines where the stock price goes in the short term.
Because of this, the financial markets are highly susceptible to rumors, fads and all sorts of deceptive accounting practices, since all of these can help drive the stock price up in the present, regardless of what they accomplish in the longer term. Thus, if U.S. stock traders are convinced that Alan
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CONTOURS OF DESCENT 16
Still, as with the Marx problem, it does not follow that the inherent instability of private investment and speculation in financial markets are uncontrollable, leading inevitably to persistent problems of mass unemployment and recession. But these social pathologies will become increasingly common through a neoliberal policy approach committed to minimizing government interventions to stabilize investment.
The Polanyi problem
Karl Polanyi wrote his classic book The Great Transformation in the context of the 1930s depression, World War II and the developing worldwide competition with Communist governments. He was also reflecting on the 1920s, dominated, as with our current epoch, by a freemarket ethos. Polanyi wrote of the 1920s that "economic liberalism made a supreme bid to restore the selfregulation of the system by eliminating all interventionist policies which interfered with the freedom of markets.” 6
Considering all of these experiences, Polanyi argued that for market economies to function with some modicum of fairness, they must be embedded in social norms and institutions that effectively promote broadly accepted notions of the common good. Otherwise, acquisitiveness and competition the two driving forces of market economies — achieve overwhelming dominance as cultural forces, rendering life under capitalism a Hobbesian "war of all against all." This same idea is also central for Adam Smith himself, as should be evident from the quotation that opens this chapter. Smith showed how the invisible hand of self-interest and competition will yield higher levels of individual effort that increases the wealth of nations, but that it will also produce the corruption of our moral sentiments unless the market is itself governed at a fundamental level by norms of solidarity.
In the post-World War II period, various social democratic movements within the advanced capitalist economies adapted the Polanyi perspective. They argued in favor of government interventions to achieve
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NEOLIBERAL CONSENSUS 17
tive to achieve three basic ends: stabilizing overall demand in the economy at a level that will provide for full employment; creating a financial market environment that is stable and conducive to the effective allocation of investment funds; and distributing equitably the rewards from high employment and a stable investment process. ### There were two basic means of achieving equitable distribution: relatively rapid wage growth, promoted by labor laws that were supportive of unions, minimum wage standards and similar interventions in labor markets; and welfare state policies, including progressive "taxation and redistributive programs such as Social Security. The political ascendancy of these ideas was the basis for a dramatic increase in the role of government in the post-World War II capitalist economies. As one indicator of this, total government expenditures in the United States rose from 8 percent of GDP in 1913, to 21 percent in 1950, then to 38 percent by 1992. The International Monetary Fund and World Bank were also formed in the mid-1940s to advance such policy ideas throughout the world — that is, to implement policies virtually the opposite of those they presently favor. John Maynard Keynes himself was a leading intellectual force contributing to the initial design of the International Monetary Fund and World Bank.
But the implementation of a social democratic capitalism, guided by a commitment to full employment and the welfare state, did also face serious and persistent difficulties, and we need to recognize them as part of a consideration of the Marx, Keynes and Polanyi problems. In particular, many sectors of business opposed efforts to sustain full employment because, following the logic of the Marx problem, full employment provides greater bargaining power for workers in labor markets, even if it also increases the economy's total production of goods and services. Greater worker bargaining power can also create inflationary pressures because businesses will try to absorb their higher wage costs by raising prices. In addition, market-inhibiting financial regulations limit the capacity of financial market players to diversify their risk and speculate.
As we discuss further in Chapter 6, corporations in the U.S. and West,'rn Europe were experiencing some combination of these problems associated with social democratic capitalism. In particular, they were faced with
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CONTOURS OF DESCENT 18
These were the conditions that by the end of the 1970s led to the decline of social democratic approaches to policymaking and the ascendancy of neoliberalism. The two leading signposts of this historic transition were the election in 1979 of Margaret Thatcher as Prime Minister of the United Kingdom and in 1980 of Ronald Reagan as President of the United States. Indeed, it was at this point that Mrs. Thatcher made her famous pronouncement that "there is no alternative" to neoliberalism.
This brings us to the contemporary era of smaller government, fiscal stringency and deregulation, i.e. to neoliberalism under Clinton, Bush and throughout the less developed world. It is worth emphasizing again that the issue is not a simple juxtaposition between either regulating or deregulating markets. Rather it is that markets have become deregulated to support the interests of business and financial markets, even as these same groups still benefit greatly from many forms of government support, including investment subsidies, tax concessions and rescue operations when financial crises get out of hand. At the same time, the deregulation of markets that favors business and finance is correspondingly the most powerful regulatory mechanism limiting the demands of workers, in that deregulation has been congruent with the worldwide expansion of the reserve army of labor and the declining capacity of national governments to implement full-employment macroeconomic policies — thereby exacerbating both the Marx and Keynes problems. The aim of this book, in short, is to show in specific ways how the Marx, Keynes and Polanyi problems have deepened under Clinton, Bush and neoliberal policies in the less developed countries, and to propose an alternative policy path that can reverse the contours of descent that we observe.
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NEOLIBERAL CONSENSUS 19
Economic growth, distribution and the environment
One major economic issue that I do not attempt to tackle in this book is the environment, even though the environmental policies of Clinton, Bush and, In the less developed economies, the World Bank, have produced severe problems. The main reason for not addressing environmental issues is that it is simply beyond the range of topics that I am able to reasonably handle.
But insofar as the book criticizes policies that lead to slower economic growth and advances proposals for accelerating growth, it would seem that, at a minimum, I should briefly acknowledge the environmental issues associated with growth. Of course, to begin with, any acceleration in the rate at which economies grow will produce environmental costs. But it is also true that such environmental costs could be greatly reduced through conscious policy initiatives — in particular, if governments recognize the process of accelerated economic growth as an opportunity to replace existing, dirtier production and transportation methods with cleaner technologies. As an obvious example, expanding urban transportation systems based on rail technologies rather than clogging the already overcrowded major cities with still more private cars would promote both economic growth and a cleaner environment.
But there is an additional important consideration here, which has been emphasized by the pioneering work of my University of Massachusetts colleague James Boyce, among others — that a more equal distribution of the rewards from growth will itself contribute to a more environmentally benign growth path. The basic argument Boyce makes is straightforward: most of the benefits of degrading the environment accrue to the wealthy, while must of the costs are borne by the middle class and, especially, working people and the poor. As one important case of this, Boyce considers the experience in the Philippines under President Ferdinand Marcos:
During the two decades of Marcos' rule, the Philippines' rich tropical hardwood forests were rapidly felled for timber, with little effort to minimize the environmental impacts of deforestation. Exports of logs and lumber ranked among the country's top foreign-exchange
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CONTOURS OF DESCENT 20
Boyce's point is that if the benefits of timber exports in the Philippines had been more equitably distributed — as opposed to being hoarded by Marcos and his ruling clique — those benefits, for any given group, would not have been so large as to completely outweigh the costs of deforestation. The long term imperatives of environmental protection would then have outweighed the immediate income gains through deforestation.
More generally, this example shows that there are ways through which accelerating economic growth, increasing equality and environmental sustainability can become convergent — and even mutually reinforcing— policy goals. Of course, there remains the rather large question of getting from here to there. This book does not pretend to answer that question in toto. But we at least attempt some small steps in the right direction.
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CHAPTER TWO
"Watch what we do, not what we say."—JOHN MITCHELL, ATTORNEY GENERAL UNDERPRESIDENT RICHARD NIXON.
[I put this page in mostly for the John Mitchell Quote. And the final quote from that Wascally Wall Street Wobber Wabbit Wobby Wubin.
[ I've been haranguing (by e-mail) as many 4th Estaters, particularly those in the wHite hOuse cOrrespondents cOrps (HOOO, by my new acronymn), who waste so much of their time listening to the White House flack. As the August Mitchell said hisownself, right up there in the previous paragraph, "Watch what we do, not what we say." As a 1960s era refrain asks, "When will they ever learn? When Will They Ever Learn?" But now back to your regularly scanned text.]
"It’s the economy, stupid," was the one memorable slogan to have emerged out of Bill Clinton's successful first run at the Presidency in 1992, and it became the overarching theme of his full eight years in office. Clinton came into office pledging to end the economic stagnation that had enveloped the last two years of the Bush-1 administration and advance a program of "Putting People First" through large investments in job training, education and rebuilding the country's public infrastructure.
But Clinton's economic program changed drastically even during the two-month interregnum between his November election and his inaugural in January, 1993, as Bob Woodward of the Washington Post documented in compelling detail in his first Washington insider book on economic policy, The Agenda. As reported by Woodward, Clinton himself acknowledged only weeks after winning the election that "We're Eisenhower Republicans here…. We stand for lower deficits, free trade, and the bond market. Isn't that great?" Clinton further conceded during this same rime period that with his new policy focus "we help the bond market and we hurt the people who voted us in.” 1
Clinton never abandoned the idea that "it's the economy, stupid" should remain the watchwords of his Presidency. It was just that the "Putting People First" agenda of his 1992 campaign would have to yield top priority to the prerogatives of the financial markets and the wealthy. How could Clinton have undergone such a lightening reversal from the program on which he /page 22/ was elected to office? The answer was straightforward, and explained with unvarnished candor by Robert Rubin, who had been Co-Chair of the premier Wall Street firm Goldman Sachs before joining the Clinton administration and who was to be come Clinton’s most influential economic advisor and Treasury Secretary. Still, during the interregnum before Clinton’s first inauguration, Rubin pointed out to members of the more populist camp within the newly forming administration that the rich “are running the economy and make the decisions about the economy.” 2 (Woodward; The Agenda, @ p. 239, it says here.)
ERRATA:
Here's my little list of typos and such (I've spent too long as a copy-editor, no doubt, but these little lapses, altogether too human by half, of course, frequently manage to distract the reader, and don't do justice to the author's hard work.
I have something of a review/preview at my blather-site, http://www.inkywretch.com.
Typos, subject/number disagreements, etc., on pgs:
16 spelling: minimimizing, and aquisitiveness (should be minimizing, and acquisitiveness)
31 "the 1994-45 Mexico and 1997-98" should be 1994-95 Mexico...
41 "But the 3.7 percent rate..." should it be 3.6% rate? 3.7 d/n make sense
52 "models ... that ... incorporates..." Should be models that incorporate--but it's a tortured sentence and very hard to figure out whether the antecedent is "hunch" or "models," as it seems to be.
80 A prior reader caught this one--mislabeled X axis on bar-chart. 1st entry is 2001.1, 2nd, 3rd and 4th read "2000.2, 2000.3, 2000.4" for "quarterly GDp growth during 2001 (shd be 2001.2, etc.)
84 "injected some modicum of sanity amid the rampaging herds"? Waaay awkward. "some" and "modicum" are redundant. Shd be "a modicum" or "some tiny amount". As to "injecting" any single member of a "rampaging herd," hmmm. You'd likely get a bent needle for your trouble.
But there's a totally, totally great J.K. Galbraith quote on the topic of undiscovered monetary malfeasance: "At any given time there exists an inventory of undiscovered embezzlement. This inventory -- it should perhaps be called the bezzle -- amounts at any moment to many millions of dollars. ... In good times people are relaxed, trusting and money is plentiful. But even though money is plentiful, there are always people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and bezzle increases rapidly. In depression all of this is reversed." What a sardonic kicker!
88 "...expect private investors to themselves return the economy to high-growth path." Shd be either "A high-growth path" or "high-growth pathS"
108 "...both the virtues and dangers with federal deficits." I'd go with "dangers OF federal deficits". can't remember if it's a transitive/intransitive thing, or just my idiom needle twitching.
136 "The poverty figures discussed earlier for the US combines both factors." Shd be "combine"--no plural. Poverty figures...combine. Or perhaps it's "poverty figure...combines. But there are plural figures.
141 "...many of the pesticides were spurious, so much so that there were numerous cases of peasants who attempted suicide by drinking pesticide, but still survived." I'd prefer "adulterated" or maybe even counterfeit instead of "spurious." And in the phrase "pesticide, but still survived." "still" is redundant.
181 a) "left to their own devises..." Archaic, OK, but not consistent w/ author's style. I'd go with "devices" b). "Because the contemporary regulatory system has become so complex and nimble in its capacity to circumvent regulations, ..." I don't think the author means to say that the "regulatory system circumvents regulations," but, rather, that either "the financial system has become so complex that the players in the "financial sector" have become so nimble that they can circumvent regulation". Or perhaps that "the regulatory system has become so complex that even the most muscle-bound bull could nimbly step through them without leaving a hoof print. Or something that doesn't have regulations circumventing regulations. Or I just don't get it. Altogether too possible.
Sphere: Related Content
Typos, subject/number disagreements, etc., on pgs:
16 spelling: minimimizing, and aquisitiveness (should be minimizing, and acquisitiveness)
31 "the 1994-45 Mexico and 1997-98" should be 1994-95 Mexico...
41 "But the 3.7 percent rate..." should it be 3.6% rate? 3.7 d/n make sense
52 "models ... that ... incorporates..." Should be models that incorporate--but it's a tortured sentence and very hard to figure out whether the antecedent is "hunch" or "models," as it seems to be.
80 A prior reader caught this one--mislabeled X axis on bar-chart. 1st entry is 2001.1, 2nd, 3rd and 4th read "2000.2, 2000.3, 2000.4" for "quarterly GDp growth during 2001 (shd be 2001.2, etc.)
84 "injected some modicum of sanity amid the rampaging herds"? Waaay awkward. "some" and "modicum" are redundant. Shd be "a modicum" or "some tiny amount". As to "injecting" any single member of a "rampaging herd," hmmm. You'd likely get a bent needle for your trouble.
But there's a totally, totally great J.K. Galbraith quote on the topic of undiscovered monetary malfeasance: "At any given time there exists an inventory of undiscovered embezzlement. This inventory -- it should perhaps be called the bezzle -- amounts at any moment to many millions of dollars. ... In good times people are relaxed, trusting and money is plentiful. But even though money is plentiful, there are always people who need more. Under these circumstances the rate of embezzlement grows, the rate of discovery falls off, and bezzle increases rapidly. In depression all of this is reversed." What a sardonic kicker!
88 "...expect private investors to themselves return the economy to high-growth path." Shd be either "A high-growth path" or "high-growth pathS"
108 "...both the virtues and dangers with federal deficits." I'd go with "dangers OF federal deficits". can't remember if it's a transitive/intransitive thing, or just my idiom needle twitching.
136 "The poverty figures discussed earlier for the US combines both factors." Shd be "combine"--no plural. Poverty figures...combine. Or perhaps it's "poverty figure...combines. But there are plural figures.
141 "...many of the pesticides were spurious, so much so that there were numerous cases of peasants who attempted suicide by drinking pesticide, but still survived." I'd prefer "adulterated" or maybe even counterfeit instead of "spurious." And in the phrase "pesticide, but still survived." "still" is redundant.
181 a) "left to their own devises..." Archaic, OK, but not consistent w/ author's style. I'd go with "devices" b). "Because the contemporary regulatory system has become so complex and nimble in its capacity to circumvent regulations, ..." I don't think the author means to say that the "regulatory system circumvents regulations," but, rather, that either "the financial system has become so complex that the players in the "financial sector" have become so nimble that they can circumvent regulation". Or perhaps that "the regulatory system has become so complex that even the most muscle-bound bull could nimbly step through them without leaving a hoof print. Or something that doesn't have regulations circumventing regulations. Or I just don't get it. Altogether too possible.
