In Defense of Neoliberalism
Since the 2008 Financial Crisis, and the ensuing Great Recession, there has been a rise of populist rhetoric on both the Left and the Right sides of the political spectrum denouncing the perceived "Wealth and Income Inequality" in the United States. Within this debate, various documents, graphs, and statistics are produced--often with no context or opposing opinions--that are then used to create a sudden urgency for "radical" policy changes that would create a more "fair" system. Often times, these narratives rely on dubious historical narratives. For the left, this includes such things as romanticization of the New Deal Coalition, Left-leaning autocracies, the Nordic Model, and a complete misunderstanding of Marxism, while also encouraging a demonization of "Reaganomics" and the supposed "Tax Cuts for the Rich"/"Trickle Down Economics", the entire financial sector, and, on occasion, Capitalism in general. Often, these debates conflate terms, such as Democratic Socialism with Social Democracy, Corporatism with Capitalism, and Neoliberalism with Neocolonialism. For the Right, there is a similar fetish for isolationism, nativism, autarky, racialism, and authoritarian populism, with basically no comprehension of the history of any of these policies in action, and with disastrous consequences.
Since I've found that very few of these ideas actually permeate the echo chambers of the blogosphere (twittersphere?) in general (and TWC in particular), I figured that I would start a regular schedule of posts to dissect issues that I think are important and open them up for debate. This is partly because I would like to compile all of the more technical analyses I come into contact with, as well as to stop clogging up the various Discord channels I frequent with random, unhinged rants.
Starting in 2010, there was an increased interest among the left across North America and Europe with a perception of "Wealth and Income" Inequality. Between the early 1990s and the late 2000s, far leftist politics had fallen completely out of favor. Marxism, and its various splintering factions, had been thoroughly discredited firstly with the increasingly obvious failures of Communism within the Eastern Bloc. Within the West, the Center-Left had been dominated by Keynesian thought since the Great Depression. This included nationalization of key industries in the West, with Public Utilities in the United States, nationalized industries in the United Kingdom, and the Dirigisme system of Degaulism in France. Many of these states encouraged high marginal tax rates and expansive social networks. Additionally, most industries were tightly regulated, mimicking war-time production and price controls that became popular among policy planners following the Second World War. Less known, but perhaps far more influential, the United States strongly emphasized an international monetary standard based on gold known as the Bretton Woods Agreement, which pegged many European currencies to both the Gold Standard and the US Dollar. While John Maynard Keynes certainly was a major influence on many variations of these economic policies, he repeatedly criticized the increasing growth of this type of control. However, his untimely and premature death limited his impact, and influence in Keynesian economics began to be overshadowed by various permutations on Keynesianism.
By the time of the late 1970s, many of these post-War policies had begun to break down for various reasons. For example, the 1973 Arab Oil Embargo caused a supply shock to cascade across the West, which in turn caused asymmetric price inflation. Price controls created significant gas shortages that affected wages and induced inflation. Part of this was also the result of an expansionary monetary policy by the Federal Reserve. At that time, microfoundations were uncommon and economists relied upon highly aggregated data to effectively eye-ball the economy and make sweeping economic decisions based upon them. The discovery of the Philips Curve in 1967, which implied that with higher levels of inflation you could get lower levels of unemployment, convinced some policy makers at the United States Federal Reserve that easy money could permanently resolve inflation. Both of these factors led to the stagflation of the late 1970s, which completely plagued Western European economies with malaise, and near completely discredited classic Keynesian Economics. Now, this is somewhat unfair to Keynesianism, since they did possess models that could account for this, and John Maynard Keynes did warn against this. However, the popular and political impression was that this was a breakdown of government intervention in general and Keynesianism in particular. This rapidly became replaced by Neoclassical Economics, which emphasized microfoundations, empiricism, and a hybrid form of Post-Keynesian Analysis that borrowed heavily from Monetarism. This is exemplified with the Chicago School in general and Milton Friedman in particular. His magnum opus, A Monetary History of the United States (1867-1960) with Anna J. Schwartz, earned him the 1976 Nobel Prize in Economics, as he conclusively proved that the Great Depression was a result of a massive contraction in the Money Supply (M2) caused by the Federal Reserve. This has effectively become the standard accepted interpretation of the Great Depression and the New Deal.
Friedman's ascendance drove new life into Classical Liberalism, and it swept across the United States with Reagan, the United Kingdom with Margaret Thatcher, in Australia with "economic rationalism", Chinese Style Market Reforms under Deng Xiaoping, and, quite controversially, in Chile under Augusto Pinochet and the "Chicago Boys." The wild success of these programs cemented Reagan's extreme popularity (he won the largest electoral landslide in United States history in 1984, and his successor, George H.W. Bush was elected in another landslide in 1988), and signaled the spread of Neoliberalism throughout the Developed and Developing World. Since this is a particularly U.S. Focused analysis, I will take time to define what I mean by "Reaganomics":
- Tight Money Supply to Reduce Inflation
- Reducing the Tax Code to cut Marginal Tax Rates and raise Effective Tax Rates
- Reduce Government Expenditure
- Reduce Government Regulation
- Increase Trade through Bi-lateral and Multi-lateral Trade Agreements
In the first aspect, Reaganomics was a resounding success in curbing inflation. Inflation fell from a peak of 13% in 1980 to about 4% in 1984. This lowered prices across the board for consumers, and led to a sharp increase in wealth of the middle class.
In the next aspect, Reagan cut tax rates across the board. This part requires some explanation, as there is a concrete difference in the statutory tax rate, which is the tax rate required by the authorities, and the effective tax rate, which is the actual tax rate paid. Since WWII, according to Hauser's Law, tax rates have averaged 19.5%, regardless of any major tax cut or tax increase. Taxation as a percentage of GDP was higher in 1981 following Reagan's tax cuts, when the top marginal tax rate was reduced from 70% to 50%, than it was in the 1950s when it was at 96%. In fact, only a handful of people (sometimes literally a handful, and as low as eight people) paid the top marginal tax rate in the 1950s. Regardless, despite the statutory rate of 96%, the effective tax rate hovered at around 42%. Today, the top marginal tax rate (which includes nearly 4% of the population), is at 36%, a mere 6 percentage point difference.
Similar gains were made in both trade relations and elimination of government regulations. Today, deregulation has lost its luster, and is often associated with a slashing of consumer and environmental protections. In the 1980s, this was not the case. Instead, there were various government entities that tightly controlled various industries. One example is the Interstate Commerce Commission (which has since been abolished), which auctioned licenses to truckers for carrying goods across state lines. Effectively, they would do this with contract rights, which could be bought and sold by third parties as a security. This was a ludicrous system that legally prohibited interstate commerce for quite literally no reason. It also set maximum prices on interstate travel by railroad, and (according to Friedman) is the main culprit behind the collapse of the U.S. rail industry in favor of the more carbon intensive automobile industry. Similar aspects of deregulation include the break-up of AT&T, which was a government sanctioned private monopoly that owned and operated at its peak over 85% of all telephone, wireless, and telecommunications stations. The break-up of the AT&T system led to the creation of virtually all modern Telecommunications companies from Comcast, to AT&T (formerly Southern Pacific Bell), Verizon, and others. Since then, the government has allowed these companies to form local monopolies and re-merge into massive conglomerates.
The rise of NAFTA, which was negotiated under George H.W. Bush and signed under Bill Clinton (after campaigning against it), represents the high point of Reaganomics. The erasure of transnational tariffs, import quotas, and trade frictions is largely seen (along with the rise of the internet) as the source of the 1990s economic boom which Bill Clinton took credit for. This resulted in massive economic development in Mexico and the United States, and has created trillions in new economic growth. The unfortunate consequence of this is that regions that formerly made up the industrial and manufacturing belt have been neglected and those industries have faced increasing global pressure. This is a complicated phenomenon and I will discuss this much later.
Finally, in terms of Government expenditure, the Reagan administration fell noticeably short, and represented one of the largest expansions in the Federal Deficit since World War 2. However, in both absolute terms and as a percentage of GDP, this is trivial compared to later presidents such as Bush, Obama, and, now, Trump (who is responsible for the largest of all time).
Ultimately, Reaganomics, and the ensuing Neoliberal economic movement was a resounding success, and has been credited with lifting literally billions out of poverty, and dramatically increasing the wealth and productivity of the entire planet. It was so thoroughly effective, that the various Leftist opposition movements were forced to incorporate Neoliberal policies into their platforms. This resulted in New Labour in the United Kingdom---exemplified by Tony Blair and Gordon Brown in the United Kingdom, and the New Democrats--exemplified by Bill Clinton and Barack Obama, int the United States.
Following the collapse of the Soviet Union and the cascade of revolutions against the various leftist nations of the Warsaw Pact, policy makers across the West became confident (perhaps overconfident) in the efficacy and superiority of Neoliberalism as practiced. This is exemplified by the Washington Consensus, a ten-point program that was designed by policy-makers as a one-size fits all approach to modernizing developing economies. Within the international realm, international relations increasingly became monopolized by the United States under the guise of Neoconservativism and Internationalism. This is exemplified by Francis Fukuyama's triumphalist work The End of History and The Last Man, which argued that humanity had reached the final point of its socio-cultural and economic evolution by developing into relatively free democracies, loosely bound by international organizations that regulated trade relations and policy decisions, with economies based around international capitalism as currently practiced. This led directly to vast continental trade agreements and frameworks, such as the Eurozone, the proposed Trans-Pacific Partnership, and the other proposed Transatlantic Trade and Investment Partnership.
However, ultimately, all good things must come to an end. In 2008, there was a massive financial crisis in the United States, which was mirrored by a similar financial crisis in Europe. Both of these involved complex crises that arose from market failures and government failures in regulating various financial innovations that arose in the late 1990s and early 2000s in what has come to be termed the Shadow Banking Sector. What this basically is are industries that have sidestepped the tightly regulated Financial Services Sector in several countries (but particularly the United States and United Kingdom, as the two largest centers of international finance). Money Creation, the process by which Central Banks and Private Depository institutions create credit for the entire economy, is considered to be an essential part (in fact, perhaps the most important part) of any modern economy according to virtually all modern economic theories. Recall that Milton Friedman definitively proved that the contraction in the Money Supply was responsible for the Great Depression--as well as partly responsible for the Stagflation of the 1970s. In short, banks need credit. Since credit creation in the normal banking sector is tightly regulated in the United States, this requires the financial services sector to lean on largely unregulated sectors for money creation.
These sectors typically create complex financial instruments by securitizing traditional and non-traditional assets.
Example: A major company (let's say General Electric) needs to take out a loan to pay its hundreds of thousands of employees. Traditional bank loans are not enough to finance this, so it turns to a financial market to sell short-term corporate bonds that will mature in 270 days. Since this is a well known company, with a well known credit score, this will be considered a safe investment. However, to hedge against the risk of default, its bonds are cut up and mixed in amongst various different short-term corporate bonds into what are known as tranches. One tranche may be made up of, say, 10% General Electric bonds, and maybe 9 other 10% fractions of other company bonds. This forms a Asset-backed commercial paper (ABCP). ABCP are insured against default against other types of hard assets, typically Real Estate, but more specifically Mortgage Backed Securities. How this insurance works, is that if the value of one asset type decreases, you can "swap" it for another using a derivative contract. Additionally, you can purchase Option contracts to purchase or sell others at a later date as a hedge against depreciation.
Where this becomes relevant is that the 2008 Financial Crisis started with the Subprime Mortgage industry. There were various factors that went into play in this event. At various points, mortgage lenders were encouraged to lend risky mortgages to individuals with little means of being able to repay them. Additionally, all of these mortgages were required to be securitized by two Federal Government Sponsored Enterprises (GSEs), Fannie Mae and Freddie Mac. These are oddities in U.S. History, in that you have quasi-government agencies having effective monopolies over key areas of the financial services sector. They are structured like Corporations, but all of their stock is held by the United States Congress, and their corporate leadership is selected by hand by the U.S. Congress. Both of these Federal Agencies were complicit, along with several investment banks, in the vast expansion of MBS that were improperly valued. Many of these mortgages were pegged to the Federal Funds Rate (which increased rapidly between 2004 and 2007), and this caused a systemic collapse within the financial services sector. Fannie Mae and Freddie Mac, as privileged GSEs, were able to invest massively in MBS well beyond what private institutions would be allowed to do. Both GSEs were responsible for investing in approximately $4.5 trillion of MBS, which later proved to be toxic. This required both of these agencies to be nationalized and bailed out by the Federal Government in 2008.
At the height of the Financial Crisis in 2008, several major investment and commercial banks were forced into bankruptcy. Because traditional channels of credit creation remained highly regulated, many of these banks relied on unregulated or quasi-regulated financial instruments in the Shadow Banking industry. While not all of these were bad (ABCPs being a prime example of a stable asset class), the interlocking Credit Default Swaps and other insurance instruments created an interdependence among sound financial instruments (such as ABCPs) and toxic financial instruments (such as Subprime MBSs). Additionally, the Financial Crisis induced a market panic, which depressed the prices of safe assets more than necessary. This helped cause a chain reaction that led to a market collapse. Now, as a Libertarian and Neoliberal, I would like to point out that at multiple key points the 1) Federal Reserve's interest rate policy, 2) the actions of Government Sanctioned Monopolies (GSEs like Fannie Mae and Freddie Mac), 3) explicit government initiatives, such as subsidies for Low Income Families, and 4) over regulation of traditional credit channels, were all major government actions that significantly contributed to the 2008 Financial Crisis.
In addition to this, the solutions to the 2008 Financial Crisis also involved explicit government actions which exacerbated many key problems within the system. Firstly, the U.S. Treasury under Hank Paulson pursued a policy of Capital Injections into the major financial institutions to prevent their failure. This involved the Troubled Asset Relief Program, or TARP. This involved buying up the toxic assets at market rate to subsidize the banks, which then owed money (with interest) to the U.S. Treasury. This raises interesting questions as to whether or not this was really a Neoliberal solution to the Crisis. Definitively, several colleagues of Milton Friedman (who died in 2006), criticized the act as Price Maintainance rather than Liquidity Injections. In other words, rather than help the market as a whole, they just helped the largest banks, who participated in the crisis in the first place. Secondly, Federal Reserve Chairman Ben Bernanke, who was well aware of Milton Friedman's thesis, sought to explicitly to avoid another Great Depression, and had the Federal Reserve engage in Open Market operations to increase liquidity in the financial system.
Ultimately, both of these policies stopped a Second Great Depression, and could be described as successes. However, both of these policies had the effect of the government effectively taking vast sums of moneys (billions in the form of TARP, and trillions in the form of QE) and redistributing it to largely wealthy institutions. So, in one sense, Neoliberalism has succeeded. But in another sense, government intervention still places a very significant role, and is exacerbating existing crises. Do note, however, at no point would an alternative system make sense. Given that we already have government monopolies in the form of GSEs like Fannie Mae and Freddie Mac, they made literally no difference in outcome (in fact, one could argue that they disproportionately made things worse). Additionally, at no point would anyone seriously consider taxation policies as being the culprit. It is neither here nor there. Likewise, trade policies are equally not to blame. And yet, these are the culprits that both the Left and Right fictitiously create, and then, in turn, create nonsensical policies to "solve."
At first glance, wealth inequality appears to be rising. Since the 2008 Financial Crisis, popular sentiment towards Neoliberalism has shifted significantly. On the Left, Capitalism is viewed as a destructive force. Writers like Naomi Klein argued that the Iraq War and the ensuing War on Terror exists solely as a Neoliberal/Neocolonial War to steal the oil wealth of other nations. On the Right, the existing system is viewed to value Jupiterian elites, such as Bankers, International Financiers (muh George Soros), and institutions (such as the IMF, UN, or World Bank), as either out of touch at best, or conspiratorially aligned at worst for financial exploitation at the expense of culture and patriotism.
While wealth inequality has risen slightly, it's size is essentially overblown. Various members of the Anti-Capitalist left tend to cite increasing levels of the Gini Coefficient as examples of why American Capitalism (which they term just capitalism in general) is morally wrong, and then project this backwards to blame Reagan (something, something, Iran-Contra). From the Congressional Budget Office, raw Gini numbers suggest at first glance that inequality has risen significantly. Unfortunately for Leftists, once you control for Taxation and After Tax Transfers, the Gini Coefficient drops precipitously to 0.43, up slightly from 0.38 in the late 1970s. The OECD averages around 0.35, however, many of these countries are small (like Denmark, or Sweden), and are not major centers of global financial activity, so this can skew the numbers significantly. Likewise, in the case of countries like Sweden, many of their main industries (like IKEA) may be headquartered for tax purposes in other European Countries, which skews their wealth statistics.
Additionally, gains to the highest quintile (the top 20% of Americans, or roughly those that own $500,000 or more in wealth) appear to be significantly higher than the rest of America, except when you control for taxation and wealth transfers (source: CBO).
On top of this, many leftists tend to conflate U.S. Wealth inquality, with Global Wealth inequality. U.S. Wealth inequality suggests that top 0.1%, who own about $1.9 Trillion of U.S. National Wealth, own more than the lower 49%. However, in 2015, total U.S. Wealth was estimated to be about $90 trillion, indicating that the top 0.1% only owned approximately 2.1% of all wealth in the United States. What actually is this wealth? Well, about 70% of it is single family homes, valued on average at $500,000. The remaining 30% of it are stocks and bonds, the majority of which are owned by mutual funds and pension funds. About 90% of the wealth in the United States is owned by people making between $50,000 to $400,000 each year. Effectively, this is the Middle Class.
In terms of Global Statistics, they argue that the top 1% own as much as the bottom 50%. However, this is a bit of sleight of hand. Over 50% of the global wealth is owned by the Developed World (North America and Europe). To be in the Global top 1%, you basically need to own anywhere from $500,000 to $1,000,000. In the United States, this can be fulfilled by earning $50,000 per year, and owning a single family home valued at $500,000, along with a comparable 401(k) or savings account. Once this reality is exposed, the argument for wealth redistribution, and the crisis of capitalism, laughably implodes.
http://money.visualcapitalist.com/wo...lization-2017/
Like many myths, wealth inequality has a kernel of truth to it. During the Financial Crisis, a significant amount of middle class wealth was destroyed in the form of housing valuation, mortgages, and financial wealth. In response, the Federal Reserve acted by injecting trillions of dollars of liquidity into the Bond Market through the Federal Open Market Committee (FOMC). Since the average American (neither you, nor I) has direct access to the bond market, this had the effect of replacing the destruction of trillions of dollars of wealth within the middle class, with trillions of dollars of wealth to the extreme upper echelons of the financial sector. Because FOMC actions to inject money in the system rely on buying up bonds, this has the effect of lowering interest rates on Treasury Notes. This in turn forces investors out of the Bond Market (where it is unprofitable), towards alternative markets, such as the stock market and the real estate market. Both of these have witnessed historic increases in valuation, far surpassing what normal markets would permit.
For real estate, it has already exceeded peak pricing by 20% in nearly every market. For the stock market, according to the Buffet Indicator (Total Stock Market Cap divided by Gross National Product), the stock market is overvalued by 36%. Since nearly 60% of the wealth of the top 0.1% is composed of stocks and bonds, this overvaluation has effectively led to a 36% increase in value (far outstripping any wage gains over the same time). However, since this is an artificial inflation due to a highly unique Monetary Policy, it fails many of the Leftist critiques of this phenomenon as being unique, or necessary to either Capitalism in general, or Neoliberalism in particular.
Most importantly, as the Federal Reserve works to tighten interest rates, stock prices are expected to continue to fall and contract.
To Be Continued
|