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| Contours
of Descent |
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| Author:
Robert Pollin |
Review
by: Jayati Ghosh |
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Click to Enlarge
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Understanding
the Effects of US Neoliberalism
An important new book exposes the elements and
effects of neoliberal economic policies in the
US under Clinton and George W. Bush, and points
to viable alternative strategies.
For many observers, the US 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 which 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 US 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 US economy, and the effects
of the policy stance of the US 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 US.
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 US economy: the
political economy of government policies; the
causes of the recent expansion and recession;
and the likely effects of the current US 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 revolution implied a complete change
in economic mechanisms, such that productivity
growth in the US 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 US
economist Robert Pollin ("Contours of Descent:
US 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 US and clearly identifying
their effects on different sections of US 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 which 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-à-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 US 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 force.
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 which 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 twentieth 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 completely.
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 a 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 US 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 US firms getting
price increases and US 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, 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 foregone opportunities.
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 US 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 US 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 US 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
households. 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 US 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 adverse effects.
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 US 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
movements, 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 US benefited from the
boom or can ride through the subsequent collapse.
The class nature of economic policies comes out
very 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 contended
with.
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 US 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 US administration. The US 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 the agreements.
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 US or EU governments. People who
are being denied life-saving medicines 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 US.
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. |
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| February 23, 2004. |
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