The second installation of this three-part series looks at the history of institutionalized neoliberalism and its relationship to inequality.
From Whether to Why
In today’s age, globalization has manifested itself as the determining driving force for change – economically, politically, and, consequently, socially. Driven by an expansion of international investment and aid, and assisted by the spread of information technology, governments, companies, and people of different nations are becoming increasingly more integrated.
Social justice, which we will define as the equitable distribution of wealth, opportunities, and privileges, has, in many ways, been used as a moral compass in today’s world. However, neoliberalism, the economic driving force of globalization, has been butting heads with this notion of social justice since the 1980s.
The first part of this series argued that neoliberalism and liberalism are not the same thing, and that we can do away with the former while remaining true to the principles of the latter. In this segment, we will look at neoliberalism’s troubling relationship with socioeconomic inequality, ultimately determining that neoliberalism is fundamentally at odds with social justice. This is a cause for concern, both economically and morally.
So let us pivot this discussion of neoliberalism away from whether the world’s economic priorities must be reconsidered, to why these priorities must be reconsidered. In order to tackle these concerns, let us review the history of the implementation of neoliberal policies.
A Brief History of Rising Inequality
Although neoliberal concepts date to the 19th century, the implications that are felt today can be traced to the early 1980s. Throughout the 1970s, much of the Western world was dealing with the pernicious effects of stagflation, the condition of slow economic growth, relatively high unemployment, and rising inflation. Keynesian economic theory could not explain this combination of economic systems, and was increasingly regarded as dated. Consequently, policymakers began orientating themselves towards the Chicago School of Economics and its neoliberal prescriptions.
Ronald Raegan and Margaret Thatcher are generally regarded as the pioneers of institutionalizing neoliberalism. Trumpeting the virtues of deregulation and supply-side economics, they enacted policies that favored capital expansion and eroded the system of regulation and social safety nets that had been in place since the 1930s. Taxes plummeted, unions were attacked on all sides (most famously, Reagan destroyed the air traffic controllers’ union), and industry after industry was deregulated in the name of “free” markets.
A worrying trend began to appear. In 1984, Raegan cut the top marginal tax rate from 70% to 28%, causing the portion of incomes going to the top 1% to rise from 8% to 18%, more than doubling, between 1980 and 2008. Similarly, across the pond, Thatcher granted a tax cut of 23% to the same income group: the portion of incomes going to the top 1% jumped from 6.5% to 13% in the same time period. This is to say that the percentage of income wealth of these two economic superpowers began to increasingly concentrate itself among the wealthiest 1% of their populations. This represented the beginning of our current age of socio-economic inequalities.
These policies continued into the 1990s and deregulation coupled with corporate tax cuts became mainstream economic policy. Needless to say, Wall Street metastasized. As the financial sector swelled, banks and other allies – Republicans and Democrats alike – chipped away at the financial safeguards instituted during the New Deal of 1933. The 1999 repeal of the Glass-Steagall Act, a law separating commercial and investment banking, formally certified the revolution that had already occurred. The rich now had a growing impact on legislation, thanks to increased expenditures on lobbying and campaign contributions. Political inequalities were rising as fast as socio-economic inequalities.
Moreover, these neoliberal developments were not contained to the Western world, but took root internationally as well. The International Monetary Fund (IMF) has played a significant role in aggressively shifting the economic priorities of developing countries to accommodate the intensely capitalist systems of the West. The IMF’s structural adjustment programs have emphasized deregulating developing markets in order to increase economic growth by making capital more accessible and, ultimately, enabling debt repayment. Despite the IMF’s aims of creating “investment opportunities” and opening new consumer markets, there is still a trend of divergence in terms of living standards between developed and developing countries, signaling growing inequality worldwide.
But what do all these rising inequalities mean in our globalized world and in what ways are they harmful if they persist?
The Good, the Bad, and the Ugly
Over the past 30 years, in the context of a more-globalized world, neoliberalism has had several positive impacts. For example, its emphasis on foreign direct investment has been a vehicle for the transfer of technology and know-how to developing economies. In addition to this benefit, the privatization of state-owned enterprises has, in many cases, led to more efficient provision of services and lowered the fiscal burden on governments. However, most neoliberal policies have been relatively short-sighted and the theories behind them, rather questionable.
First, there are several theories used by neoliberals that are considerably exaggerated in their construction. One of these theories is the marginal productivity theory, which maintains that, due to competition, everyone participating in the production process is compensated equal to her or his marginal productivity, i.e., what they add to the economy. This theory associates higher incomes with a greater contribution to society, which proponents of neoliberal policies use to justify, for instance, preferential tax treatment for the rich. These notions, however, have been countered by economists like Joseph Stiglitz.
Stiglitz argues that many owners of financial institutions do not contribute as much as they receive in terms of income. In the United States the ratio of CEO pay to that of the average worker increased from around 20 to 1 in 1965 to 300 to 1 in 2013. This lack of correlation between managerial pay and firm performance can be an example of a serious market failure, a situation in which the allocation of goods and services is inefficient. This became evident during the Panama Papers scandal, wherein many of the wealthiest individuals and companies hid their wealth in offshore havens around the world. Developing countries are said to have lost $7.8 trillion dollars between 2004 and 2013 as a result of global tax evasion. It is partly because of these significant leakages in the economy that international economic growth may not achieve its full potential. Even the IMF, despite its role in institutionalizing neoliberalism, has begun to reevaluate its policies.
In a paper released in 2015, three IMF economists concede that “since both openness and austerity are associated with increasing income inequality, this distributional effect sets up an adverse feedback loop. The increase in inequality engendered by financial openness and austerity might itself undercut growth, the very thing that the neoliberal agenda is intent on boosting. There is now strong evidence that inequality can significantly lower both the level and the durability of growth.”
Additionally, with the rising inequality, we are effectively eradicating a large portion of the middle class. Personal consumption constitutes the largest part of US GDP, amounting to almost 70%. Broad-based prosperity, with a middle class that can spend money, is necessary for a thriving economy, given our consumption-based model of capitalism. This disintegration of the middle class was especially noticeable during the Great Recession of 2007-2008. A report released by the New Economics Foundation describes how inequality laid the path for the 2008 crash, depressing demand while middleclass households were increasingly relying on debt to finance their lifestyles, and how it threatens to do the same again.
The Great Recession shed light on the moral hazard involved in privatizing social services. Given that health, transport, and banking services are too crucial for society and cannot be allowed to fail, private companies operating in these sectors are allowed to behave recklessly. This became evident in 2007-2008 with banks that were (and are) ‘too big to fail’- i.e., when financial institutions are so large and interconnected that their failure would be disastrous to the greater economic system and are, therefore, supported by the government in times of potential failure. Job losses, home foreclosures, lost savings, and costs to taxpayers hit the lower classes especially hard.
The Great Recession is just one example that exposes the adverse relationship between neoliberalism and social justice. Having the right to get an affordable university education, to be covered by healthcare when ill, to join the labor force and expect to find a job, or to have decent unemployment benefits when looking for a job are basic economic freedoms that all citizens should enjoy. Many distinguished economists, like Joseph Stiglitz, Thomas Piketty, and Paul Krugman, have recognized the malpractices of the neoliberal agenda in terms of social justice, but too few have acted.
The Great Recession may have damaged neoliberalism’s moral legitimacy, but it did not diminish its hold on power. Politicians may have ceased spouting the virtues of privatization and deregulation, but policies remain largely the same as before 2007. So the question remains: how can we change our economic priorities so we may continue to live in a globalized world while providing political, economic, and social opportunities to a broader base of society?
This is the subject of the final installment of this three-part series, which returns to the debate between central planners and market-orientated economists and asks how we may achieve social justice in a borderless society.