|Understanding the effects of U.S. neoliberalism
An important new book by the U.S. economist Robert Pollin exposes the
elements and effects of neoliberal economic policies in the United
States under Bill Clinton and George W. Bush, and points to viable
President George Bush with his predecessor Bill Clinton. A file picture.
FOR many observers, the U.S. economy retains an aura that has more to it
than simply the effects of being the world's only hegemonic power. There
is no doubt that the recent past of this economy has been a remarkable
one, possibly unprecedented in the history of mature capitalism. The
1990s were characterised by a heady mix of rapid growth, low
unemployment, low government deficits and inflation control. The causes
for this exceptional combination are still much debated, but by the turn
of the decade there was an (inevitable) end to that prolonged boom.
This bust brought in its wake some spectacular corporate collapses that
exposed the hollowness and accounting chicanery associated with the
earlier success. But it also intensified the austerity being imposed on
workers, which was already very much part of the earlier phase of
economic expansion. The most recent period has brought huge swings in
the U.S. government's fiscal stance, as George Bush has sought to revive
the economy through massive tax cuts and increases in military spending.
What happens in the U.S. economy, and the effects of the policy stance
of the U.S. administration, are of much more than academic interest. We
are all of us, everywhere in the world, affected by even the smallest
changes in interest rates, public expenditure patterns, trade policies,
investment practices and even labour markets in the U.S.
Given this unfortunate but currently inevitable process of ripple
effects upon all other economies, there is really inadequate
understanding of the economic processes within the U.S. economy: the
political economy of government policies, the causes of the recent
expansion and recession, the likely effects of current U.S. economic
strategy. This lack of understanding tends to be compounded by the
mainstream literature, which typically fails to identify the essential
forces, and often misleads because of its slavish acceptance of the
basic neoliberal economic paradigm.
Confusions are multiplied because of the miasma created by adherents of
the "new economy" argument as well as those who assert the benefits of
deregulation. Until only a couple of years ago, we were told by many
mainstream economists that the IT (Information Technology) revolution
implied a complete change in economic mechanisms, such that productivity
growth in the U.S. would forever be higher, and business cycles would be
a thing of the past. The collapse of the dotcom bubble has muted some of
these voices. But, meanwhile, the proponents of deregulation of all
markets as the impetus to more economic activity, have grown in number,
and added many developing country policy makers to their tribe.
Fortunately, a major new book by the eminent U.S. economist Robert
Pollin (Contours of Descent: U.S. economic fractures and the landscape
of global austerity, Verso Books, London, 2003) does an excellent job of
demystifying the true nature of boom and bust in the U.S. and clearly
identifying the effects on different sections of U.S. society as well as
on the rest of the world. In addition to this critical assessment,
Robert Pollin goes beyond analysis in seriously putting forward
alternative economic policies. What is even more important is that he
manages to do all this in a lucid and highly readable style, which makes
the book very approachable for the non-economist.
Pollin's analysis begins by identifying three types of problems that
mean that the market mechanism's ability to promote sustained economic
growth (not to mention stable and egalitarian growth) is severely
limited. He describes these as "the Marx problem", "the Keynes problem"
and "the Polanyi problem".
The Marx problem, according to Pollin, is that capitalist profitability
requires strong bargaining power vis-a-vis labour, which in turn
requires a reserve army of labour, in the form of unemployment or
underemployment. The global economic integration brought about by
neoliberalism has eroded the position of U.S. workers, even as it has
also undermined the bargaining power of workers in developing countries,
where remunerative jobs have not increased with the increases in labour
The Keynes problem relates to the inherent instability of private
investment activity, which generates the mass unemployment, financial
crises and recessions associated with capitalism. Financial markets, in
particular, are prone to speculative behaviour, and neoliberal policies
that minimise government intervention to stabilise investment and
regulate finance, have contributed to such social pathologies.
The Polanyi problem is that markets that are not "embedded" in social
norms and institutions that refer to some notions of fairness and the
common good, will give unfettered play to acquisitiveness and
competition as dominating cultural forces. This does more than create an
unpleasant society; the excessive promotion of private greed tends to
encourage lawlessness and make the market system itself dysfunctional.
Attempts to resolve these problems gave rise to the emergence of
different forms of social democratic capitalism and reliance on the
welfare state, in the second half of the 21th century. Pollin recognises
these systems as having serious and persistent difficulties. But the
social and political backlash against such difficulties generated a
reversal towards the cruder forms of free market capitalism, which have
brought all these problems back in a much more dramatic way.
POLLIN uses this background to uncover the true nature of the "hollow
boom" associated with the Clinton years. In its fundamentals,
Clintonomics was broadly similar to the earlier Reagan-Bush policies.
Trade policy was similar in terms of proclaiming the universal virtues
of free trade. Little was done to advance the interests of organised
labour or working people in general. The tax policies did reduce to some
extent the regressive effects of the Reagan-Bush tax policies, but not
The supposed advantages of the "peace dividend" after the end of the
Cold War were not used by the Clinton administration to increase welfare
spending. Instead, the focus of monetary and fiscal policies became
deficit reduction. Stringent expenditure control led to the emergence of
federal government budget surpluses over 1998-2000. Monetary policies
involved a combination of large bailouts (Mexico 1995, Long Term Capital
Management 1998), the repeal of earlier acts governing the financial
sector such as the Glass-Steagall Act, wide-ranging financial
deregulation, and avoidance of any action to curb financial speculation.
The economic growth performance of the Clinton years was certainly
superior to that of the Reagan-Bush era, although less successful than
the 1960s. Overall rates of growth were higher, and unemployment and
inflation were lower. Furthermore, no recession occurred during
Clinton's presidency. The rate of productivity growth - the source of
all the "new economy" claims - did increase to more than 2 per cent per
annum, which was higher than the 1.5 per cent rate of 1973-94, but still
lower than the 1960s.
Pollin concludes that the boom years of the Clinton presidency were
fuelled first by sustained increase in private consumption, and second
by a private investment boom. But what caused the consumption explosion
in the first place? Here the transformation of the U.S. financial
structure by the stock market boom and associated economic shifts,
played a major role. Household debt rose to more than 97 per cent of
disposable income, and was collateralised by rising asset values rather
than income. Even the heavy corporate debt was collateralised on the
basis of the stock market boom.
The extraordinary "Wall Street levitation" of the 1990s was, therefore,
not just historically unique, it enabled changing patterns of
consumption and investment that created the real economic expansion of
the period. The factors behind that bubble are still being explored.
While Pollin recognises the role of corporate fraud and of expectations
created by the Internet, he suggests that three other interconnected
factors were crucial. They were: first, policy influences, including
both financial deregulation and the actions of the central bank (the
Federal Reserve), which effectively encouraged the bubble; second, the
rise in inequality and corporate profitability; and third, changes in
the stock market itself involving a contraction in the supply of shares
along with an increase in the demand for them.
The wealth effect of the stock market boom on consumption has been
widely discussed. But the actual effect was much more limited to certain
categories of households. Pollin produces data to show that the bottom
40 per cent of households actually reduced their consumption ratios
(consumption as per cent of disposable personal income) over 1992-2000,
while the middle group's consumption ratio remained much the same. The
big change was in the consumption ratio of the top 20 per cent of
households, which increased dramatically from 95 per cent to more than
104 per cent. So the increase in consumption spending, which was central
to the Clinton boom, was driven almost entirely by the huge increase in
consumption by the richest households, associated with the formidable
increase in their wealth because of the stock market boom.
These changes in the stock market pushed the growth process, which in
turn involved less of a trade-off between inflation and unemployment,
because of changes in the balance of forces between capital and labour.
Greater integration into the world economy increased the difficulty of
U.S. firms getting price increases and U.S. workers getting wage
increases, so that inflation did not accelerate even at low unemployment
rates. The heightened sense of job insecurity, because of credible
threats of job loss or relocation by employers, was a major part of the
economic legacy of the Clinton era.
Similarly, the changed fiscal stance under Clinton reflected the
economic growth of the period, which increased government revenues,
including capital gains taxes which increased as a by-product of the
stock market bubble. But there was also a significant fall in government
spending relative to GDP (gross domestic product), which accounted for
more than half of the fiscal turnaround. By making fiscal stringency and
balanced budgets the policy obsession, the Clinton administration pushed
major cuts onto the public in the form of reduced public services or
Of course, the subsequent administration of George W. Bush proved to be
even more comprehensively disastrous in terms of affecting the
conditions of life and work of ordinary U.S. people. The end of the
Clinton era coincided with the termination of the stock market bubble
just before Bush took over.
Just as the stock market was the primary force pushing the U.S. economy
upward in the 1990s, the stock market collapse was the primary force
pushing it down in 2001-02. The pricking of the bubble left the usual
detritus in the form of businesses saddled with excess capacity and
diminished enthusiasm for U.S. assets from foreign investors.
THE new Bush regime sought to deal with these complex results through a
straightforward agenda of massive tax cuts designed to benefit the
wealthy, and further cuts in state spending for the people at large.
Interestingly, Bush never wavered from this agenda even after the
situation of national emergency caused by the September 2001 attacks.
Pollin estimates the effects of three rounds of Bush tax cuts on
different categories of households and corporates, and shows how they
were comprehensively oriented towards large capitalists and the richest
Meanwhile, the big increase in spending was obviously on the military,
because of the need to finance the wars against and continuing
occupation of Afghanistan and Iraq. The fiscal reversal associated with
this was a sudden and massive increase in government deficits. But these
contributed much less to the growth process than is suggested by the
sheer size of the fiscal stance. Pollin correctly points out that there
is nothing inherently good or bad about fiscal deficits per se; the
macroeconomic effects depend upon the context, the nature of the
deficit, and the implications for private economic activity.
Certainly, the U.S. economy under Bush needs deficit spending -
especially, according to Pollin, to finance a large increase in
assistance to state and local governments for their spending programmes.
However, Pollin argues that the likely pattern as long as Bush remains
President, would be ensuring his real priorities (tax cuts for the rich
and increased military spending) and possibly abandoning increased
spending on health, education and other social services. The Bush regime
would also intensify the already aggressive attacks on labour, and
continue the process of financial deregulation that has already had such
Pollin goes on to show how the neoliberal agenda has more international
ramifications, in particular in moving away from the notion of the
developmental state across the less developed world. This has led to
increased global inequality as well as greater inequities within
countries and slower rates of poverty reduction. He provides three case
studies to indicate the effects of global neoliberalism and the
withdrawal of state protection in the developing world. The first, the
case of peasant farmers in Andhra Pradesh being driven to suicide
because of inability to repay debt given the reduced viability of
cultivation, is well known to Indian readers. The second, the
spectacular implosion of Argentina following its recent financial
crisis, is also notorious by now.
Finally, Pollin described the case of sweatshop manufacturing production
for exports across the developing world, often as part of large
multinational chains. He is careful in his critique, recognising that
lack of productive employment opportunities is the basic problem, which
gives rise to these unsavoury working conditions as well. However, he
argues forcefully that the spread of sweatshop working conditions need
not be considered as an inevitable, or only available, mechanism for job
creation. More effective, sustainable and socially desirable employment
generation can emerge from systematic government policies designed to
promote development and economic activity, along the lines of an
accountable and democratic developmental state.
Pollin also makes the important case in this context that well-meaning
northern citizens who argue for more aid to poor countries may be
missing the point. The point is that neoliberal policies have destroyed
the capacity of many of these countries to achieve anything like the
growth rates of even their own past, and a return to some of the
strategies associated with developmental states would be far more
significant in improving the conditions of the poor.
Indeed, while Pollin does not make this point, it could be argued that
foreign aid in itself can act as a constraint on autonomous growth. The
recent experience of aid-driven economies such as Cambodia or Bangladesh
suggests that the combination of neoliberal trade and macro policies
with aid inflows that push up the exchange rate, have rendered many
domestic economic activities uncompetitive, such that these countries
experience huge losses in terms of foregone income, in return for
relatively little per capita aid.
THIS analysis already indicates the lines on which Pollin's alternative
strategy will operate. One of the underlying concerns is the distinction
Pollin makes between trade protection and social protection. He argues
that the absence of social protection (which can be most effectively
accomplished through macroeconomic policies along with financial and
labour market regulation) is what creates a defensible case for
otherwise undesirable trade protection. Therefore, the need is for
employment-targeted government spending programmes.
These would have to be buttressed by new forms of regulation of labour
markets, as in the "living wage" proposals and by strengthening the
legal rights of workers including for unions. He argues that a strong
system of social protection in the U.S. will have positive ramifications
for workers in the rest of the world as well.
Regulation of financial markets is also necessary - Pollin mentions
Tobin-tax-style proposals as well as asset-based reserve requirements,
which would curb speculation to some extent. Curiously, he does not
mention actual controls on capital movement, which many would argue are
the first prerequisite for embarking on any other progressive domestic
economic policy measures.
For developing countries, Pollin agrees that the policy requirements
would be different and probably more comprehensive. Directed credit,
control over capital flows, regulating financial markets, regulating
trade patterns, infant industry protection - all of these have been
essential for any economy that has achieved developed status. Growth
also has to be more focussed on domestic markets in the case of large
countries. While labour protection laws are hampered by the process of
informalisation of work in developing countries and growing significance
of self-employment, Pollin argues that the complementary effects of a
job expansion programme and enhanced labour market regulations would
have positive effects.
Clearly, this is an impressive and comprehensive work that deserves to
be widely known. As a critique of the implications of neoliberal
policies it is thorough, and it also lays bare many of the fallacies
that abound in mainstream economic thinking today. What is especially
important for readers in developing countries is that he exposes the
myth that everyone in the U.S. benefited from the boom or can ride
through the subsequent collapse. The class nature of economic policies
comes out starkly.
Interestingly, Pollin makes no mention of imperialism, although there is
implicitly an understanding of its effects in his discussion. But
neoliberalism is only the current expression of a particularly virulent
form of imperialism that we are confronted with today; the broader
ramifications of imperialism remain significant and still have to be
Examples of the broader effects of imperialism, as opposed to pure
neoliberalism, are perhaps more deadly for people in most developing
countries today. Thus, while U.S. governments (Clinton and Bush alike)
have paid lip service to the notion of free trade, they have been
conspicuously lax in practising it themselves while imposing it
relentlessly upon other countries.
Unilateralism remains the most significant trade instrument for the U.S.
administration. The U.S. signs "free trade agreements" with less
powerful countries that force huge concessions upon them and provide
major protection for its own large companies, while refusing to allow
its own agriculture sector and related issues even to be considered in
Countries that have experienced huge terms of trade losses and
deindustrialisation are being affected not only by "free trade", but by
the systematic manipulation of markets by large multinational companies
systematically aided by the U.S. or European governments. People who are
being denied life-saving medicine because of high monopolistic prices,
are feeling the effects of international property rights regimes that do
not allow "free trade" in such products to occur, again supported by
developed country governments such as the U.S.
This is not to underestimate the crucial negative role that neoliberal
policies have played in worsening conditions for ordinary people across
the world, or not to recognise the importance of presenting viable
alternatives. Especially for people in developing countries, the move
away from neoliberal economic policies is the first and necessary step
towards changing lives for the better. But it still remains to confront
the larger problem of imperialism, which continues to distort the world
we live in.