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 alternative strategies.
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 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 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 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 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 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 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 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 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 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 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 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 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 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 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.