The Legacy of the Neoliberal Order

In the previous post I referred to the neoliberal order from the perspective of finance.  Here I will offer a wider review of this era because it helps explain where we are and it also raises inevitable questions about our future direction.  The source of my thoughts is again Gary Gerstle’s The Rise and Fall of the Neoliberal Order.

The first point of interest is that a political and economic movement becomes a prevailing order when it gathers strong enough force and persuasive power that it is adopted across the political spectrum.  Thus, the New Deal was conceived and put into action by Franklin Roosevelt and the Democrats but it found support and further enhancement in the policies of the Republican presidents, Ike Eisenhower and Richard Nixon.  Similarly, the neoliberal order was ushered in by Ronald Reagan but then it was further facilitated by Bill Clinton and remained effectively unchallenged by Barak Obama.

The reason the neoliberal order survived under both parties was because it appealed to both conservatives and liberals.  Conservatives had always harbored a deep apprehension against the New Deal with its heavy reliance on the state to repair market failures, the worst of all, of course, being the Great Depression.  The fiscal strains caused by the simultaneous pursuit of guns (Vietnam war) and butter (the Great Society and War on Poverty) by the Johnson administration and the ensuing loss of economic momentum were the forces that offered conservatives the opening they needed.  Their remedy was a return to free markets and as little government interference as possible.  Neoliberalism was then the restoration of economic liberalism free of the statist approach of the New Deal.

For their part, liberals had started to lose confidence in the managerialism model that favored corporate stability through entrenched corporate leadership and stable labor relations.  The potential and promise of computers and later of the internet appealed to liberals as the means to foster innovation and individual freedom.  By embracing the Silicon Valley and Wall Street, liberals believed a new age of tech-based creativity and prosperity was possible on a global scale. Both conservatives and liberals came to believe that restoring shareholders at the center of corporate power and relying on the market would open up new vistas of economic and individual growth.

But unleashing market forces has its dark side.  Creative destruction means displacement and uprooting as jobs move that test the stability of cultural traditions which is central to conservative ideology.  To justify these costs conservative neoliberals, Gerstle argues, had to invent a Neo-Victorian ethic that called for self-restraint, self-responsibility and self-reliance to overcome the excesses of the market and its materialistic temptations.  On the other side, the New Left liberals would continue to emphasize the need for a safety net to catch the human and social fall out from disruptive new technologies and globalization.

The neoliberal economy produced economic agility and innovations but failed to sustain the well-paying jobs of the disappearing manufacturing sector.  Factory automation reduced demand for labor and offshoring expanded labor supply, both putting downward pressure on wages.  At the same time labor unions came under a withering attack by politicians and corporations that weakened their bargaining power.  Absent any countervailing force, cutting labor costs became a business orthodoxy, and wages inevitably stagnated.  Without a coordinated policy to upgrade workers’ skills the rate of deindustrialization was too fast for a smooth transition to the new economy.  Workers without college education were those hit the hardest by the new direction of the economy.

Against the background of industry deregulation and financial liberalization, the conservative expectation that self-restraint and responsibility would be effective antidotes to market excesses proved to be another idealized construct of economic behavior just like that of the rational individual.  The 2007-08 housing crisis proved that the lure of easy credit and material gratification were too powerful for individuals to resist.  Liberals also failed to put in place an effective safety net.  Without control of the Congress, Bill Clinton, was forced to adopt welfare policies that worsened the terms of assistance to the poor.  Open border and trade policies exemplified in the North American Free Trade Agreement, the World Trade Organization, and the economic opening to China, without the simultaneous adoption of pro-labor policies, proved to be detrimental to working class Americans.  

By the turn of the century the unravelling of the pre-1980 social contract had started to erode important dimensions of human development in the U.S.  Marriage and birth rates declined, out of wedlock births rose, and deaths from drug and alcohol abuse along with suicides reached unprecedented levels.  The views on important policy-related issues also underwent a shift to more self-centered choices under the ideological weight of neoliberalism.  Tax cuts acquired legitimacy at the expense of welfare programs which became synonymous to individual failure.  Inordinate income and wealth inequality were accepted as signs of meritocracy.  Nonetheless, fiscal probity and the “less government is good” doctrine did not stop Republicans and Democrats from saving financial behemoths and the auto industry from the self-inflicted ruins of the Great Recession.  At the same time millions of households were left unprotected from home foreclosures and financial ruin.

Forty years of neoliberalism left us with some useful lessons.  A series of market and corporate crises and especially the Great Recession proved once more that markets cannot self-correct without state intervention and regulation.  Self-restraint and self-reliance are not resilient enough in the presence of tectonic shifts in the economic order.  Unstable and unrewarding jobs undermine social cohesion and cultural traditions.  A sharp rise of inequalities and loss of faith in the prospect of upward class mobility erode the commitment to democratic principles of governance.  At its end the neoliberal order finally met its nemesis, populism.

The signs that the neoliberal order is in retreat are around us.  Globalization is under attack.  International trade treaties are no longer popular.  Industrial policies, anathema to liberal economics, are adopted by Republicans and Democrats.  Cosmopolitanism and elitism are vilified by working class Americans.  Recent surveys show that majorities of Americans across parties are dissatisfied and anxious about the country’s direction.

 So, what is next?  The transition is complicated by two new factors.  One is the concentration of enormous economic (and political) power in the hands of a few mega-firms, some of which answer to a single person.  The other is the rapid advances in Artificial Intelligence.  Neither of these developments has given us signs that they believe in open governance and shared prosperity.  The challenge for democratic states, as I see it, is the democratization of the process by which societies choose the direction of technology and the allocation of power and responsibility in ways that look after the interests of all citizens, not just of those privileged by class, wealth, or corporate power.