4.1 Ronald Reagan, Margaret Thatcher, and their antecedents
Jimmy Carter, Ronald Reagan’s predecessor in the Oval Office, was saddled with the ripple effect of the Iranian Revolution on both America’s society, and its economy. Not only was the country in recession; consumer prices were skyrocketing due to a sudden constriction in the oil supply, and government spending did not seem to be helping to alleviate the problems Americans faced, as the rapid pace of inflation continued. Carter was also forced to deal with a hostage crisis, as Iranian revolutionaries stormed the U.S. embassy in Tehran and captured 52 American consular officials, who would be held in captivity for nearly 15 months. In 1980, the beleaguered incumbent squared off in an election campaign against a charismatic Republican challenger and former Hollywood film actor, Ronald Reagan, who won over the bulk of the American electorate by posing a simple question: “Are you better off than you were four years ago?”
Across the Atlantic, meanwhile, similar forces were combining to shape the future of British political economy. To that point in history, successive Labour governments had fashioned an economic system that incorporated aspects of capitalism and state socialism, including government control of a national steel company, British Petroleum, the National Health Service, education, much of the banking sector, and even automaker and airplane manufacturer Rolls Royce. Conservatives, meanwhile, had been loath to privatize these core institutions when elected to power in the postwar period, as Keynesian, interventionist principles continued to dominate mainstream economic thought. Britain was struck by a balance of payments deficit in the 1960s, as politicians in the Labour Party repeatedly capitulated to the demands of their constituency, the trade unions, even as the rise in Britain’s prosperity slowed relative to its major competitors, Germany, Japan, France, and the Soviet Union. In 1967, the administration of Harold Wilson devalued sterling in an effort to restore export competitiveness and imposed austerity measures—which briefly helped to erase the country’s trade deficit, but weren’t sufficient to sustain a revival of British industry—and the latter decision understandably vexed trade union leaders.
When stagflation struck in the 1970s, the subsequent Labour government of James Callaghan (who held a minority mandate from 1976 to 1980) imposed wage ceilings on Britain’s militant public-sector unions and slashed government spending, moves which many workers and their representatives perceived as a betrayal of the party’s foundational values. Riots and general strikes broke out, as the savings and purchasing power of wage-confined union workers rapidly eroded, and they took to the streets to vociferate their dismay. Their actions incited a backlash, however, as unions and their allies quickly drew disdain from much of a British electorate weary of service interruptions, high personal income taxes, and economic mediocrity. In 1980, Conservative leader Margaret Thatcher became Britain’s first female prime minister, and soon proceeded to pummel the unions into submission.
Neoliberalism—so-called because it purports to revive the laissez-faire notion of classical liberalism espoused by 19th-century economists Adam Smith and David Ricardo—is an ideology that embraces privatization or marketization of public assets and services, reductions of the tax burden for the wealthy and corporations whenever feasible (or in some cases, not so feasible), and (at least ostensibly) minimal government intervention in the workings of the economy. Although Thatcher and Reagan were not the first national leaders to undertake a neoliberal economic program, they were the first elected heads of government to do so. Previously, neoliberalism had characterized the military dictatorships of Augusto Pinochet in Chile and General Suharto in Indonesia, both of whom subscribed wholeheartedly to the tenets of the belief system, developed at the University of Chicago in the 1960s, and bolstered by Milton Friedman, Friedrich Hayek and their associates, who would become affectionately (and later, scornfully) known as “The Chicago Boys.”
In both Chile and Indonesia, implementation of the new system was achieved by brute force; from the 1973, CIA-supported coup d’état that overthrew the government of Salvador Allende in the South American country, Pinochet’s forces undertook an aggressive campaign of union-busting, outlawing collective bargaining, and violent repression of “leftist” dissidents. Pinochet privatized the vast majority of Chile’s government services. Public schools became chartered schools, taxes on the wealthy and on corporate profits were eradicated, labour and finance regulations were abandoned, and tens of thousands of workers were laid off as public institutions were sold to the highest bidder. Social security was privatized—leaving millions of Chileans’ life savings subject to the whims of the stock market. The minimum wage was eliminated, and the currency was artificially devalued. Friedman and Hayek theorized that this approach would lead to unrivaled prosperity for the majority of Chileans, and that the wealth generated by unfettered capitalism would lift millions out of poverty as it “trickled down” from the moneyed oligarchs. Needless to say, the outcome did not accord with their predictions.
Both Reagan and Thatcher lauded Chile as an example for their own countries, and frequently alluded to the economic growth delivered by the “Chilean miracle” from the late 1970s to 1981 as an a priori vindication of the wisdom of neoliberalism. And while it’s true that Chile experienced extraordinary economic growth during this period, Thatcher and Reagan omitted a rather crucial element from their analysis: that Chile’s rapid growth stages were interspersed with equally spectacular troughs of economic recession (Klein, 2007). Between 1973 to 1986—when riots on the streets forced an exasperated Pinochet to expel the Chicago Boys from his country, re-nationalize many of the institutions he had privatized, and abandon nearly all of their recommendations—Chile’s real GDP did not budge. Neoliberalism had not made Chile wealthier on the whole; rather, it had merely left the nation’s economy jarringly volatile. Nor had wealth cascaded down from the commanding heights as the Chicago Boys had asserted. If anything, the privatization of social security and the banking sector and the deregulation of finance had merely attracted a class of foreign speculators, who squandered the savings of millions of Chileans—but not before lining their own pockets and fleeing the country. Thus, rather than trickling down as promised, wealth was actually hoovered up from the middle class and the poor, broadening wealth inequality to levels beyond reason and leaving more than twice as many Chileans in poverty in 1989 as in 1970. The real value of wages fell by more than one third between 1973 and 1976, and then experienced a long period of stagnation that continued well into the 1990s. Meanwhile, corporate profits erupted like a geyser.
As Chilean economist Orlando Caputo observed at the time, “The Chilean system is easy to understand. Over the past twenty years, $60 billion has been transferred from salaries to profits.”
4.2 The roots of neoliberal propaganda
Of course, strongmen like Suharto and Pinochet held a distinct advantage over their British and American allies, Thatcher and Reagan: being despots, they had no need to win elections. Clearly, for the Iron Lady and her Hollywood Republican counterpart, imposing neoliberal ideals on an unwilling electorate was not an option. In order to effect revolutionary changes, they would need to persuade their compatriots to buy in. And that’s exactly what they set out to do.
The discord of the period in which they pursued power, rife with rampant inflation, oil shocks, a belligerent Soviet Union, economic stagnation and a hostage crisis in Iran, all were events upon which the candidates—and later heads of government—seized in order to convey their message to a public that was, fortunately for Reagan and Thatcher, receptive to the notion of a change in course.
In the context of the Cold War, both leaders played upon the image of strength and defiance, contrasted against the perceived wishy-washy nature of their political adversaries. Both emphasized the need for self-actualization and individual achievement—defined in strictly pecuniary terms—and the suppression of any consideration toward the community, the collective, or society around them. (Thatcher infamously asserted in a BBC interview that there was no “society,” only individuals and families.) Both promised—as the Chicago Boys had—that the accrual of wealth by those at the apex of the income pyramid would trickle down to the masses below, raising everyone’s standard of living while the wealthiest in society gradually progressed from very rich, to outrageously rich, to ineffably rich. Furthermore, cuts in taxes and a severe reduction in government “size” and “interference” (that is, role in the redistribution of wealth) would unleash “free-market” capitalism to its fullest potential. Both also maintained that social spending—particularly President Roosevelt’s New Deal programs, President Johnson’s Great Society, and Britain’s post-war welfare state—would need to be curtailed in order to provide those living in poverty an “incentive” to climb out of it on their own. As Reagan would commonly quip, he was determined to “starve the beast”—the beast, in this case, being “big government.”
However, as University of British Columbia law professor and director of the film The Corporation, Joel Bakan, points out, the reality of what took place was actually quite different from what Reagan and Thatcher described.
“[Thatcher, Reagan and other neoliberal leaders] didn’t really want to get the state out of the economy,” Bakan noted. “They wanted to get the state out of the business of redistributing wealth, and of regulating companies, and of delivering social services, and of creating a kind of robust public sector. But they still wanted the state to do things like create corporations, protect property rights…in fact, they wanted the state [involved in those areas] even more.”
Rather than serving the public good, as was its ostensible purpose, according to Bakan, the state began to assume a new role, and the public’s perception of the state’s role soon followed.
“What happened in the 1980s is that the state sided with capital, rather than trying to promote egalitarianism in society.”
Indeed, despite the affectations of Thatcher and Reagan, neither leader actually managed to reduce government spending. Reagan, after hiking taxes in 1982, initiated an ambitious reform of the tax code that saw dramatic reductions in income tax (the top personal income tax rate plummeted from 70 per cent to 28 per cent, while the nominal corporate tax rate dropped from 48 to 34 per cent). However, government outlays actually increased every year under his presidency, as his severe reductions in social spending were more than offset by a hefty increase in the military budget and expanded Medicare coverage. Thus, much of the prosperity of the “Reagan boom” was financed through deficits and stimulus in the form of tax cuts. It was, in point of fact, a Keynesian economic boom.
Thatcher, meanwhile, also presided over government spending that increased each year, although, similar to Reagan, her moves to privatize an array of Crown corporations—some of which were profitable, others less so—enabled her to drop the top personal income tax rate from 83 per cent to 60 per cent. In part, this was done in order to curtail brain drain, as large numbers of Britons were moving away hoping to avoid high taxes at home.
While both Reagan and Thatcher cut government services, they increased expenditures on the military and the police. As Bakan explained, investment in security and the curtailment of civil liberties are developments that frequently accompany neoliberalism.
“That’s really what neoliberalism is: putting all of the coercive power of the state on the side of corporations, on the side of property interests, rolling back taxes on the wealthy, and corporate interests, and rolling back regulation of corporations.”
Over the decades that followed, this is precisely what happened—not only in the U.S. and Great Britain, but also on an increasingly multinational scale. And the consequences have been profound.
4.3 The consequences of neoliberalism
The goals and passions of protesters who have joined the Occupy movement are diverse, from preserving biodiversity, to ending corporate personhood (or the recognition of the corporation as a legal person), to denouncing the proliferation of nuclear energy, to acknowledging the impact of the colonial legacy on Aboriginal people. But inchoate as these objectives appear to be, there is a common thread that intertwines nearly all of them: a denunciation of the ideology of neoliberalism that emerged from the University of Chicago in the 1970s, the distinctive form of political economy it has produced, and its awkward, rankling rescue from the jaws of death, beginning in 2008, through an historic bequest of corporate welfare.
In The Strange Non-Death of Neoliberalism, Prof. Colin Crouch of Warwick University describes the ideology and the economic model it has produced, and investigates why it failed to perish—or at least to suffer a rightful loss of credibility among the political elite of the developed world—in the wake of the worst financial crisis since the Great Depression. The primary consequence of neoliberalism, as Crouch illustrates, has been a growth and consolidation of corporate power. By extension, other societal consequences, like the criminalization of dissent and the despoilment of natural resources, have followed.
Beginning under President Carter, and accelerating under President Reagan, sectors of the American welfare state first constructed under Franklin Roosevelt, and expanded under Dwight Eisenhower, Lyndon Johnson, Richard Nixon and Gerald Ford, began to be dismantled. This dismantlement has continued in the years hence, while similar neoliberal conceptions have come to dominate the political economy of Canada, Europe, Russia, India, Brazil, China, and most of the world’s developing countries (thanks, in part, to restructuring programs advocated by the World Bank and International Monetary Fund).
Under Reagan, another of neoliberalism’s inevitable consequences arose, as wealth disparities between the poorest and richest Americans began to rapidly broaden. Crucially, Reagan further broke from the tradition of the Republican old guard (most notably Theodore Roosevelt) by trampling America’s long-standing antitrust regulation, designed to prevent large firms from gaining too much market share (Crouch, 54-55, also noted in Klein No Logo, 163). Reagan’s decision laid the groundwork for global “competition,” which forms the intellectual basis of capitalism, to achieve its logical end—corporations began to expand, merge, and dominate ever-increasing market shares, enhancing their own scope, reach, and earning potential, while effectively reducing consumer choice. Neoliberalism’s stock continued to rise throughout the 1980s (it had been credited, however dubiously, with bringing an end to the 1970s stagflation through deep cutbacks to public services), into the 1990s and eventually the 2000s, with stark results for both public policy and society as a whole. Free trade agreements like NAFTA led to the reduction or elimination of many protective tariffs, allowing a freer flow of consumer goods across borders and oceans. But those pacts also created further means and incentives for multinational corporations to cut costs and maximize revenues by shipping manufacturing jobs overseas and sub-contracting to foreign factories (see literature on the “global assembly line”, incl. Knox et al.).
Then as now, the mission of large profit-seeking enterprises involves maximizing productivity and profitability while minimizing costs. And particularly since the 1980s, free trade deals have helped remove many impediments to the free movement of capital. Big businesses have tended to shift production toward locations where industrial development is relatively advanced, spare parts available and economies of scale manageable. But they have also frequently sought out low-wage nations with few environmental protections and severe restrictions on the ability of employees to bargain collectively (Wolff, 2013).
It’s no coincidence that so many of the manufactured goods we use or consume on a daily basis are “Made in China.” And as author and journalist Naomi Klein observes in No Logo, corporations have invested much of the enhanced profits derived from the offshoring of production into unprecedented product marketing campaigns in the U.S., Asia, and throughout the Western industrialized world.
A further result of this process has been the increasing influence of multinational corporations and their owners and executives over the political landscape of the nations and jurisdictions in which they do business. Political leaders, anxious to attract investment, “capital” and private-sector jobs, have played along with the profit- and rent-seeking mission, slashing taxes and dismantling public programs to reduce corporate expenses—an approach Western political euphemists, who lack the authority to impose forced labour and outlaw collective bargaining as totalitarian states like China freely do, describe as “enhancing competitiveness,” “controlling spending,” “fiscal discipline,” and “creating a ripe environment for job creation.”
The race-to-the-bottom mentality of globalization and so-called free trade, political corruption, the “Citizens United” ruling by the U.S. Supreme Court that permitted unlimited corporate donations to American political organizations, corporate personhood, a burgeoning (and increasingly villainous) financial sector in Western countries whose constituents subsume ever larger capital flows while imposing ever more burdensome debt loads (Hudson, 1998) and occasionally even bet against their debtors’ ability to repay, a sharp decline in manufacturing, union membership and middle-class jobs in the West, and the persistence of a neoliberal orthodoxy on the policy agenda despite its failings, have combined to inflict numerous socially and ecologically undesirable outcomes. For instance, the climate change denial movement largely consists of propaganda and pseudo-science from a fossil fuel industry anxious to maintain and expand its profits. All the while, climate change, biodiversity loss and ocean acidification continue their steady march toward the point of no return.
Deregulation, often spun as “cutting red tape,” leaves an increasing expanse of the natural environment and Indigenous territory unprotected, resulting in unprecedented loss of biodiversity and destruction of both natural and human assets. “Free” trade, idolized by such leaders as Reagan, Thatcher, Brian Mulroney, and Bill Clinton, has facilitated a reduction in consumer prices for many imports, offset by a migration of middle-class jobs from the wealthy countries to overseas destinations like China, Malaysia, Indonesia, the Philippines, and Bangladesh (Fletcher, 2010). New trade and investor protection pacts in Canada and elsewhere promise to undermine meaningful Indigenous sovereignty, compromising the right of First Peoples to impose laws and regulations of their own on industrial activities within their jurisdictions. And cuts to both statutory and effective tax rates on corporate profits, in the name of “competitiveness,” have squeezed government treasuries.
In Canada, corporate tax receipts fell as a percentage of the federal tax base from 25 per cent in 1955, to 12.2 per cent in 1998, before rising modestly to 13.2 per cent in 2011 (however, with new corporate tax cuts announced under the purview of the federal Conservatives, this proportion will shrink again). In the U.S., corporations contributed nearly one third of federal tax revenue in 1952. By 1998, this had fallen to 11.5%. And in 2011, a mere 8.7% of the total tax base was corporate in origin—in spite of the U.S. having the highest statutory corporate tax rate in the industrialized world. This puny supplement has led some neoliberal commentators in the media—like Fareed Zakaria—to call for the abolition of corporate tax altogether in order to “stimulate the economy.” Meanwhile, not only has a greater proportion of the tax burden shifted to the citizenry, and the middle class in particular, but cutbacks in government services have left some Americans paying more for less. Despite enjoying extraordinary profit margins and rewarding their executives with unprecedented salary figures, corporations are paying less tax on their profits than at any other point in the past century.
Further results of the stagnation of wages, which has coincided with skyrocketing home prices, university tuition, and in the U.S., medical costs over the past 40 years, has been the expansion of both the financial sector (far more capital became available as corporate profits zoomed), and a commensurate explosion of both public and household debt (Hudson, 2010; Wolff and Barsamian, 2012). The latter owes largely to speculation and the titillation of real estate investors who saw an opportunity to enrich themselves with minimal effort, but has produced an unprecedented level of mortgage indebtedness for those who do not own their homes outright. Meanwhile, non-mortgage indebtedness nearly always accompanies mortgage borrowing because of the opportunity cost associated with high monthly housing payments. But ballooning student loans to cover unaffordable university tuition, the difficulty of saving money in a low-interest rate environment, and widespread credit-card usage to compensate for the failure of wages to keep up with the costs of housing and higher education, have also contributed to this self-reinforcing debt expansion.
Economist Richard Wolff, professor emeritus at the University of Massachusetts Amherst, explains this phenomenon here:
4.4 Reagan and Thatcher’s big lie, and the emergence of “the 1%”
As Wolff illustrates, beginning in the mid-1970s, real wages in the U.S. stopped rising for the first time in a century. And beginning in the 1950s, economic growth—rather than simply a result of happenstance and the westward expansion of the American colonial project—became a foothold of election campaigns. When the 1980s arrived, newly elected leaders Ronald Reagan and Margaret Thatcher knew they would need to persuade citizens of their respective countries that everyone’s prosperity would grow under a neoliberal program, if the mythical “free market” were permitted to allocate resources and labour according to its whims. Further, wealth accumulated at the top of the income distribution, they averred, would eventually “trickle down” to the middle and lower classes, enriching the wealthiest and poorest members of society all at once. Neoliberalism was marketed, in other words, as the best of all possible worlds—prosperity attained with minimal effort, the capitalism envisaged by Smith and Ricardo at its finest (despite significant differences between extant neoliberalism and the form of capitalism that Smith and Ricardo exalted).
However, this “trickle down” effect had been the opposite of the experience of countries where neoliberalism had already been implemented by brute force, like Pinochet’s Chile, Leopoldo Galtieri’s Argentina, and Suharto’s Indonesia. Indeed, rather than making its way down from top to bottom, neoliberal economic programs have instead consistently vacuumed wealth up, from the working class and the poor to the wealthiest members of society, through a collapse in the real buying power of middle-class wages, the exorbitant cost of privatized public programs and services that had formerly been free, the privatization of social security, which leaves millions vulnerable to the wild vicissitudes of a deregulated market, and dramatic increases in the cost of things like housing and post-secondary tuition.
What truly occurs then, in effect, is a transfer of the cost of keeping society running from high-income earners to low-income earners, and from asset owners to non-owners of assets.
Everywhere it has been applied, neoliberalism has tended to involve a series of distinctive components. Working-class citizens encounter union-busting and a stagnation or decline in real median wages, while an untenable spike in both public and private debt maintains economic growth and fuels the development of asset bubbles—until they burst. Powerful lobbying interests promote, and achieve, deregulation of industry and high finance, contributing to further instability in asset prices, commodities, and the financial sector. Propaganda, repression, or a combination of the foregoing, drives the rise to power of political leaders who favour corporate interests over the public interest, in spite of their affectations to the contrary. The foundations of meaningful democracy and national sovereignty erode, owing to secretive free trade and foreign investor protection pacts. Spending on security and the military increases in periods of economic expansion, while austerity predominates in hard times, both of which exacerbate the deleterious impacts of the business cycle for working people. GDP growth typically hits a wall when the debt bubbles that had fueled economic growth burst, at which point neoliberal governments generally favour austerity policies and deregulation in a quest to unshackle the forces of private-sector “job creation”.
The deterioration of public infrastructure tends to embolden calls for further privatization of the commons, which may deliver substantial improvements to a privileged few, but further raises costs for those least able to pay. All the while, sublime, unprecedented profits accrue to the corporate elite—“the 1%”—while the fortunes of the everyman gradually deteriorate. It’s an ideology rife with contradictions: homelessness, joblessness and perpetual want are juxtaposed with ludicrous fortunes and excess; the employer class exalts in its unparalleled “freedom” while thousands of peaceful protesters are beaten, tear-gassed and arrested; politicians promise long-term prosperity while extricating and liquidating non-renewable natural resources as rapidly as the present state of technology will permit; spectacle, trivia and pithy truisms become prized forms of knowledge, while investigative journalism departments are understaffed, public journalism is dismembered, and state funding for post-secondary education is inadequate to keep pace with growth in the number of students attending advanced institutions.
Neoliberal politicians demand never-ending GDP growth and preside over a perpetual rush to sell off natural resources, desecrating the environment and Indigenous territory in the process, all in a futile effort to cancel generationally compounded debts. Neoliberals obsess over “balancing the budget” and “eliminating the deficit,” goals they typically pursue through some combination of shifting liabilities from the public sector onto the private sector, reducing government services, or by transferring wealth from future generations and the ecosphere to present-day corporate coffers through resource extraction. While neoliberal booms are typically rapid and conducive to dazzling gains on the stock market, downturns tend to be vertiginous and crippling for the poor and working classes. Wealth inequality remains stable or increases modestly during good times, which are driven in large part by unsustainable debts and credit bubbles. In times of collapse, on the other hand, the gulf between rich and poor broadens, unemployment rates soar into the double digits, corporations hoard cash while awaiting the return of credit-driven aggregate demand, and well-paid jobs with benefits tend to become scarcer.
When faced with economic contraction and stagnation, neoliberal enthusiasts consistently advocate further dismantlement of regulations and the welfare state, on top of the cutbacks that have already occurred, using reductions in interest rates as a tool to expand the money supply. (However, declines in interest rates also tend to coincide with diminishing savings, and increasing household debt.) “Streamlining” and “cutting of red tape” is combined with further austerity in pursuit of the elusive balanced budget, and yet more tax cuts for corporations that do virtually nothing to stimulate long-term job creation or enhance the prospects of the middle class, but prove consistently efficacious at bolstering the fortunes of a privileged few—along with public debts. Though neoliberal politicians may periodically and marginally raise taxes on individuals with above-average incomes, usually as part of a political campaign platform, tax hikes on capital tend to be negligible under such regimes, and outweighed by a long-term pitch toward a corporate tax rate of zero. Meanwhile, the share of taxation left to the majority of the population swells. Hence, working people become allies of the 1% in demanding more reductions in the tax burden, groused by nettlesome consumption taxes, pinched by a rising cost of living, and dismayed by the erosion of government services, as their tax dollars seem to pay for less and less every year.
In the U.S., Canada, the U.K. and other industrialized countries in particular, however, neoliberal ideology has not been solely responsible for the events that led to the 2007-’08 crisis, or the broadening gap between rich and poor that now exists. As Wolff argues, much of the stagnation of wages in the 1970s is attributable to structural changes in American capitalism.
“What changed in the 1970s, was basically the end of the labour shortage,” which had been a persistent challenge for American capitalists since the latter half of the 19th century, Wolff recounts. In addition, “American corporations began looking for cheaper places to produce, because they were now being confronted with competition from the Europeans and the Japanese, who had recovered from World War II. And by the 1970s, American corporations were moving production out of the United States, particularly in manufacturing. So that lessened the demand for labour inside the United States.”
But there were also important technological and demographic factors at play.
“A new wave of innovation, this time the computer, also lessened the demand for labour, and at the same time, the supply of labour went up,” Wolff explains. “The Women’s Liberation Movement brought millions of American women out of their [traditional] roles as mother and homemaker and into the job market. And a whole new immigration wave—not from Europe, but mostly from Latin America—added.”
While the supply of labour increased, demand for labour dropped. “And as every capitalist knows, if you don’t have to pay your workers more, as you used to, then you don’t do it,” Wolff notes.
Indeed, the capitalist class to which Wolff refers did not raise wages absent the necessity to do so, and saw spectacular profit margins in the years that followed. Sometime around the middle of the 1970s, the American dream of an ever-rising standard of living for all citizens perished. But it would take several decades and four consecutive neoliberal mandates before the country experienced the full impact of that historic shift. In the mean time, Wolff explains, players in one particular sector of the U.S. economy “made out like bandits” on the strength of scintillating gains at the top of the income distribution.