The Cost of Neo-Liberalism
To understand the term “neoliberalism” and its role in American politics, as well as to critique its effects on wealth and inequality in the United States, it is crucial to first understand the meaning of ‘liberalism’ in the economic sense. Not to be confused with political liberalism which the Oxford English Dictionary defines as a political and social philosophy advocating for “ individual rights, civil liberties, and reform tending towards individual freedom, democracy, or social equality”, economic liberalism preaches minimal intervention in a free market economy and believes that regulation should be left up to the ‘individual’ or consumer . “Neoliberalism” or the ‘new’ liberalism simply means to return to this concept-- essentially, smaller government, a laissez faire market and greater freedom for the individual. This growth of neoliberal policies has inexorably hurt intergenerational mobility in America, otherwise known as killing the ‘American Dream’.
In more ways than one, the legacy of neoliberalism regarding America has been one of a counter-revolutionary nature. The political nature of the American left in the 1960s and the 1970s, was such that trade unions had strong influence in Congress leading to anti-corporate reforms, namely the Environmental Protection Agency, consumer protections, Occupational Safety and Health Administration and several other pro-labor pieces of legislation. It was the era of Brandeis-Democrats, imbued with an arguably healthy distrust of corporations and their ‘big money’. It was generally agreed, albeit reluctantly by some quarters, that if left to its own devices, the free market could wreak havoc and lack the capacity to provide a socially optimum equilibrium. Keynes’ idea of boom-and-bust cycles were hugely popular and his recommendation that governments must spend money in times of crisis to stimulate the economy were regarded highly. There was little dissent against the idea that the state had a role to play in providing services that the free market could not. The classic example of this would be the development of Social Security, minimum wage regulations, and so on.
Perhaps the definitive beginning of the Neo-Liberal rise could be seen as, David Harvey argues, Lewis Powell’s memorandum to the US Chamber of Commerce in 1971. Entitled ““Attack on American Free Enterprise System,” it functions as a call to arms to conservative elements against critiques of capitalism by “the college campus, the pulpit, the media, the intellectual and literary journals,”, which attacked the ideas of the likes of Ralph Nader, an opponent of big business. This was followed by the popularization of neoliberal policies by J.K. Galbraith in the left, which led to the adoption of repackaged monetarist ideas given a leftist spin.
President Carter began the path towards deregulation beginning with trucking, banking and the airline industries. This was of course, followed by the heavily right-wing era of Reaganomics, which extended tax cuts, increased the national defense budgets, continued with financial deregulation and enlarged the financial trade deficit. Perhaps Democratic strategist Frank Dutton put it best in 1971, when he claimed that the Democrats had shunned workers because they had become the “principal group arrayed against the forces of change”. More tellingly, Carter’s adviser Alfred Kahn wrote, “I’d love the Teamsters to be worse off. I’d love the automobile workers to be worse off...I want to eliminate a situation in which certain protected workers in industries insulated from competition can increase their wages much more rapidly than the average.” This led to neoliberalism taking on the role of a strong counter-culture to mainstream progressive economic ideas.
In the 1980s, Reaganomics embodied the height of this counterculture, which experienced an explosion in popularity. Historian Daniel Stedman Jones argues that the stagflation of the 1970s prompted formerly left-leaning governments to adopt ‘monetarist’ policies, which now sound commonplace to any American in the modern age. The general consensus of the eighties was that ‘trickle down economics’ was effective; that cutting taxes on the rich and decreasing social welfare would provide impetus for economic growth, due to greater job creation . Congress even cut the federal income tax rate to 25% in 1981, which was made possible by the cooperation of social conservatives in the Republican party with neoliberal economists to form a unified front in terms of economic policy.
Even post-Reaganomics, neoliberalist tendencies were still entrenched within American politics. This is evident even under governments that are not identified as ‘conversative’, such as the Clinton government. Under the Taxpayer Relief Act of 1997, which was one of the largest tax reduction acts in U.S. history, the top marginal long term capital gains rate fell from 28% to 20%. This clearly demonstrates the pervasiveness of neoliberal tendencies. Clinton also contributed to a further deregulation of the financial industry in 1999 under the Gramm-Leach-Biley Act. It repealed part of the Glass-Steagall Act of 1993, which allowed the merging of an institution to act as an investment bank, a commercial bank as well as an insurance company.
The problem of neoliberalist policies is apparent; every single measure of economic prosperity shows the economy did worse under ‘Reagonomics’ than when Keynesian economic policies were applied. Most importantly and most tragically, income growth of middle class households was minimal under supply side policies; income only increased 1.1% in the 2000s and 1.2% in the 1980s while it increased 2.3% in the 1990s under a Democratic presidency, according to the Bureau of Labor Statistics. Even worse, the aforementioned tax cuts were accompanied by deregulation and a sizable reduction in public expenditure in areas like education and healthcare. This allowed the market to have increasing autonomy through reducing wages by curtailing workers’ bargaining power through de-unionizing and abolishing price controls. Policies such as protective tariffs and robust pro-labor laws are important, but progressive taxation ensures the circulation of wealth from the rich to the working class. In fact, not only were neoliberal policies detrimental to the health of the economy, but it caused investment growth to actually lag behind in the 1980s and 2000s (1.4% and 6.7%) as compared to the 1990s with a rate of 10.5%.
The worst result of neoliberal economic policies were the vast wealth inequalities between the 1% and the 99% of America that still persist today. Economists Thomas Picketty, Emmanuel Saez and Gabriel Zucman found that the ultra-rich today earn an average of $1.3 million a year, nearly thrice the amount in the 1980s, where the rich made $428,000 on average. Meanwhile, wages for the bottom 50% of Americans have remained stagnant, due to, among other things, the increasing influence of corporations in politics.
Undoubtedly, the deregulation of the financial sector by Clinton in the 1990s paved the way for the catastrophic depression of 2008-2010. The banking system was allowed to churn out subprime mortgages with the help of the credit rating agencies leading to the needlessly painful bailout suffered by American middle class taxpayers while the heads of investment banks such as Goldman Sachs walked free.
It is astounding that millennials born in the 1980s only stand a 50% chance of earning more money than their parents did. For now, the American Dream is dying and it’s neoliberalism that killed it.