Winner of the New Statesman SPERI Prize in Political Economy 2016

Friday, 21 October 2016

Neoliberalism and austerity

I like to treat neoliberalism not as some kind of coherent political philosophy, but more as a set of interconnected ideas that have become commonplace in much of our discourse. That the private sector entrepreneur is the wealth creator, and the state typically just gets in their way. That what is good for business is good for the economy, even when it increases monopoly power or involves rent seeking. Interference in business or the market, by governments or unions, is always bad. And so on. As long as these ideas describe the dominant ideology, no one needs to call themselves neoliberal.

I do not think austerity could have happened on the scale that it did without this dominance of this neoliberal ethos. Mark Blyth has described austerity as the biggest bait and switch in history. It took two forms. In one the financial crisis, caused by an under regulated financial sector lending too much, led to bank bailouts that increased public sector debt. This leads to an outcry about public debt, rather than the financial sector. In the other the financial crisis causes a deep recession which - as it always does - creates a large budget deficit. Spending like drunken sailors goes the cry, we must have austerity now.

In both cases the nature of what was going on was pretty obvious to anyone who bothered to find out the facts. That so few did so, which meant that the media largely went with the austerity narrative, can be partly explained by a neoliberal ethos. Having spent years seeing the big banks lauded as wealth creating titans, it was difficult for many to comprehend that their basic business model was fundamentally flawed and required a huge implicit state subsidy. On the other hand they found it much easier to imagine that past minor indiscretions by governments were the cause of a full blown debt crisis.

You might point out that austerity was popular, but then so was bashing bankers. We got austerity in spades, while bankers at worst got lightly tapped. You could say that the Eurozone crisis was pivotal, but this would be to ignore two key facts. The first is that austerity plans were already well laid on the political right in both the UK and US before that crisis. The second is that the Eurozone crisis went beyond Greece because the ECB failed to act as every central bank should: as a sovereign lender of last resort. It changed its mind two years later, but I do not think it is overly cynical to say that this delay was partly strategic. Furthermore the Greek crisis was made far worse than it should have been because politicians used bailouts to Greece as a cover to support their own fragile banks. Another form of bait and switch.

While in this sense austerity might have been a useful distraction from the problems with neoliberalism made clear by the financial crisis, I think a more important political motive was that it appeared to enable the more rapid accomplishment of a key neoliberal goal: shrinking the state. It is no coincidence that austerity typically involved cuts in spending rather than higher taxes: the imagined imperative to cut the deficit was used as a cover to cut government spending. I call it deficit deceit. In that sense too austerity goes naturally with neoliberalism.

All this suggests that neoliberalism made 2010 austerity more likely to happen, but I do not think you can go further and suggest that austerity was somehow bound to happen because it was necessary to the ‘neoliberal project’. For a start, as I said at the beginning, I do not see neoliberalism in those functionalist terms. But more fundamentally, I can imagine governments of the right not going down the austerity path because they understood the damage it would do. Austerity is partly a problem created by ideology, but it also reflects incompetent governments that failed to listen to good economic advice.

An interesting question is whether the same applies to right wing governments in the UK and US that used immigration/race as a tactic for winning power. We now know for sure, with both Brexit and Trump, how destructive and dangerous that tactic can be. As even the neoliberal fantasists who voted Leave are finding out, Brexit is a major setback for neoliberalism. Not only is it directly bad for business, it involves (for both trade and migration) a large increase in bureaucratic interference in market processes. To the extent she wants to take us back to the 1950s, Theresa May’s brand of conservatism may be very different from Margaret Thatcher’s neoliberal philosophy.



29 comments:

  1. You excellently encapsulate neoliberalism with the motto " That what is good for business is good for the economy, even when it increases monopoly power or involves rent seeking. " -I'd add that it CAN be good for an individual country's economy in a zero-sum way because terms of trade can be so much improved if a country provides lucrative investment opportunities due to rent seeking being streamlined. It may be bad for the global economy and yet good for us at the expense of people elsewhere. We import real goods in exchange for foreign oligarchs holding stakes in our inflating land prices.

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    1. Sorry Mr or Mrs Ms Stone what good for business is bad for all economies,simply what you do to one side of the equation you must do to the other,by favouring on side of the equation you must corrupt the other side ,Hence stagnation,QE,Nirp,Zirp,negative.rates /bonds etc etc,nothing they do will fix the problem until they trade fairly,the two side of the equation are intrinsically too each other,even Helicopter money unless it is targeted at those who have lost out in this what is good for business then it will achieve nothing it can't

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  2. You forgot the financiers funding the Tory Party in the 2010 and 2015 elections, so using philosophical conservatism's hatred of those on benefits and immigrants to deflect from investment bankers and hedge funds' once in 300 years incompetence.

    Then, in 2015, contrary to financiers' wishes, a referendum is promised for 2016, and subsequently lost.

    Will the financiers keep funding the UKIP-Tories?

    Will the Leave group fund the UKIP-Tories instead?

    Will May keep talking about the 'national interest' as she, in Bentham's phrase, 'chains the living to the dead' with a Brexit the under-50s and better educated never wanted?

    Will the woman I saw puzzling over the drop in the exchange rate on the Friday after the vote ever go on holiday abroad again?

    Tune in next time...

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  3. We got austerity in spades, while bankers at worst got lightly tapped.

    Paging Daniel Davies...

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  4. What is the formal definition of austerity, a cut in spending, a cut compared to trend, a decrease in the deficit, something else?

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    1. You aren't supposed to ask awkward questions like that. The important thing about the word "neoliberalism" is that it sounds technical and has no less than SEVEN syllables - which is impressive. Using the word cows your opposition into submission...:-)

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  5. I worry that neoliberalism amounts to a cashing out and unraveling of the broad based prosperity previously built up by social democracy. Current account deficits are willingly funded by investors using rent seeking opportunities to extract from the UK population. But when its all wrung dry that's the end of it.

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  6. http://steigan.no/2016/07/16/the-problem-of-the-neoliberal-left/

    Keeping a clear mind this is actually a very good read too.

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  7. Slavoj Zizek sees this as a crisis in capitalism. We were willing to bail out banks to save it, but let Greeks suffer under austerity.

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    1. YESS a crisis in capitalism. That's why I have always been astounded at the claims that "Obama is a socialist" "The US government is taking over the economy" post 2008 crisis. Yes, government stepped in to protect capital as much as it was able to do so.

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  8. SWL's usual left-wing stuff.

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  9. I find criticisms of neo-liberalism by mainstream economists odd and incredibly hypocrticial. When neo-liberals were king, such as during the 1990s, and they could show that free trade and free and deregulated markets (goods financial and labour markets) were so good, economists were only too happy to show how this was exactly what their theories showed.

    Now when it is less fashionable, they say, well we knew that all the time. Well why weren't you saying this during the 1990s and up to 2007?

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    1. Anonymous Understand where any cycle is,is very important in real terms there was a vast potential untapped locked into Western economies,which for sometime worked because that is what the economy need to re-balance & go forward,however some felt that that was a linear utopia when it was a cylindrical & was already turning into a strain on the other side of the equation,with previous downturns,that if they realised what was going on would have stopped it.
      However because they were taught the earth was flat they never understood the gravity of their actions.All they ever did was re-balance the economies of the seventies only to push them into being un-balanced in the other direction by the 90's & since then it's been downhill all the way.

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    2. The thing to do is this: list the things you don't like, and then blame 'neo-liberalism'.
      A bit like the Guardian used to do with 'capitalism'.

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  10. I am quite unclear what Mrs May's "brand of conservatism" is.
    I have seen it persuasively argued that the party's basic purpose for the last century has been to keep Labour out of office.
    Considering how varied the approaches of successive post-WWII Tory administrations have been it seems fair to characterize their policies as eclectic.
    I have an idea what MacMillan and Thatcher stood for; what does May stand for?
    I have no idea.

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    1. The 1950s, as Simon correctly notes.

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    2. "I have seen it persuasively argued that the party's basic purpose for the last century has been to keep Labour out of office."

      When it comes to "years in power" the Conservatives have a considerable lead over Labour.

      By the time of 2020 election, 75 years will have passed since 1945 when the UK elected its first-ever majority Labour government.

      In that time we will have had 18 months of Con/ConDem government for every 12 months of Lab/LibLab.

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  11. This seems like a weak caricature of neoliberalism in need of serious citations.

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    1. No Brett it's a very good description of what happened & how the mentality of flat earth economist paved the path to ruin.

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  12. Culture, culture, culture. We have to build an anti-neoliberal culture. How? Unions, unions, unions.

    Full scale re-unionization (I don't say "massive" which implies extraordinary -- what is extraordinary is 5% union density in private business; that's like 20/10 BP) will create a broad and deep consensus for (let's call it what it is) normal, grownup economics.

    [cut-and-paste]
    States can add to federal labor protections but not subtract (e.g., minimum wage). In the absence of actually working protection of organizing (not just organizers) states should feel free to impose certification elections where labor market warping is found.

    Union busting should be a felony (taken at least as seriously as taking a movie in the movies ;-]) — but mandating elections could be the most direct remedy for union blocking.

    Intimidating union organizing is illegal everywhere — and nowhere/nowhere practicably. If caught firing an organizer, then, at most you must rehire her. Doesn’t matter if you fully compensate her income loss and never fire her again — you got away with the real bank robbery money; you barred the certification election.

    Remedy that would make the clearest economic logic: a finding of union busting should lead to a mandatory certification election. Most would expect this sanction needs to take place at the federal level (NLRB preemption). This could be possible if Hillary pulls enough reps and senators with her. Perfect issue to attract Donald's AND BERNIE'S blue collar workers.

    I believe this sanction could be done at the state level because the federal setup protects organizers (in theory if not so much in reality) but offers no protection for the act of organizING itself (except for categorizing it as illegal). If there is no DIRECT protection for organizing to preempt (not in any SUBSTANTIVE way), then I would argue that the states could mandate an election (upon the finding union blocking).

    There may even be a tricky (as in convoluted) First Amendment argument: the federal setup cannot constitutionally void state protection of the First Amendment right to associate commercially by the imposition of a setup that provides no (as in zero) protection of it's own.

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  13. This is just an aside. I am not an economist. I took a bunch of economics classes in college but I didn't do particularly well because at least then I wasn't so great at graphical reasoning not to mention higher mathematics.

    But I definitely learned about the difference between macro and micro economics, and about Keynesian economics and how the government "should" "step in" and spend when the economy is failing.

    I understand the general neoliberalism paradigm.

    But somehow there is a major failure in economics understanding/education if it is the case that most of us who took some classes in it (especially all those VSPs and the educated people who read newspapers etc.) would reflexively support the application of microeconomic responses ("austerity," "getting your household finances in order" the household being the national government) to macroeconomic problems.

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  14. “the financial crisis, caused by an under regulated financial sector lending too much”
    I can’t believe there is still so much ignorance about what happened and is happening.

    Do you think totally unregulated banks could have leveraged their equity over 50 times? Of course not! They did so because regulators concocted the risk weighted capital requirements with which 2004 Basel II allowed banks to leverage their equity, and the support they received from society, 62.5 times to 1, if the asset only had an AAA to AA rating.

    And frankly to talk about neoliberalism, and not of non-transparent statism, when since the Basel Accord in 1988, the risk weight for the sovereign were set at 0% and for We the People at 100%, is ludicrous.

    Below an aide memoire on some of the monstrosities of such regulations. objections.
    http://perkurowski.blogspot.com/2016/04/here-are-17-reasons-for-why-i-believe.html

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  15. You wrote above: ..... the Eurozone crisis went beyond Greece because the ECB failed to act as every central bank should: as a sovereign lender of last resort.....
    I would put it differently. The European crisis was caused by net importing countries within the Eurozone, like Greece, and to less extent Portugal and Spain, that financed their imports by taking loans from the exporting countries. Most of this loans went to consumption and white elephant projects. This had to blow up one day. So it happened in 2009. The question is after it became obvious that it can't go on forever, what next? Should be the debts annulated, and creating a precedent, that there is no obligation to repay the debts? Or should be cleare to certain extent, that debts have to be repaid even if partly, and when the time of repayment comes, it will be very tough.

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  16. I'd argue that neoliberalism is fairly coherent and very authoritarian, an element you've omitted from your description. David Harvey describes it well. I'd agree with the rest of your analysis though. Austerity was more opportunistic than instrumental: a case of not letting a good crisis go to waste; a form of scorched-earth policy. You're also right about May which is why I predict she'll be out of office in a year's time: she isn't a neoliberal and the party donors won't like that. It would appear that she's been a very dark horse all these years.

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  17. For a broader definition of neoliberalism that takes identity and subjectivity into account read this:

    http://averypublicsociologist.blogspot.fi/2016/10/theresa-may-and-thatcherism.html

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  18. I think you've got the wrong end of the stick: it is the pro-state control lot that are keen on monopolies. Liberals (neo and otherwise) are keen on markets and competition.
    The area where liberals like monopolies is in the support of property ownership, particularly intellectual property. A patent is a 20-year, legally enforceable monopoly on an invention. This is provided in exchange for sharing the knowhow and protects the incentive to innovate.

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    1. "Liberals" are a fan of private armies then? There is a reason the government has a monopoly on monopoly. So that the elected bodies are the 'big man' in the country, not anybody else.

      It's not the sector the company/organisation is in that is the issue. It's down to how old and moribund the organisational structure is.

      As to patents, the state can fund whatever research is required, and then issue the results on an open patent.

      There is no need for private sector like large pharma companies and private intellectual property. In fact as certain things (giving example of drug development again as it is a good one) gets more and more risky inevitably it will have to be socialised.

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    2. Liberals have always identified a role for the state and other public institutions. So, no, private armies have never been part of a liberal political philosophy.
      I am sure that writers, film-makers, musicians etc would disagree with the notion that there is no need for private intellectual property. Creativity is rather hard, copying it is quite easy.
      All patents are 'open' to read and learn from, that is the point. Again, invention is hard and copying is easy.
      Of course, if you really want to experience state economic control, you are free to leave our liberal democracy, though there are few places you could move to. When people have the choice, state control over everything really isn't popular.

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