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The Rise and Fall of Neoliberal Capitalism, by David Kotz

The term “neoliberal” can be confusing. In the United States, “liberalism” has meant less harsh social and economic policies than either “conservative” or “moderate” ones. FDR was a liberal while his successor Truman was more conservative. JFK was more liberal than moderate conservative Eisenhower. Barack Obama was more liberal than arch-conservative Bush. And so on.

Neoliberalism differs from these political labels. It’s an economic policy dating back to the 18th and 19th centuries, the period of classical economic liberalism. Think Adam Smith and laissez faire, letting the “invisible hand” of the market prevail: “the government that governs least governs best.” Ronald Reagan said things like that. He launched the Reagan Revolution – slashing taxes for the rich, deregulating basic industry and the banks, gutting environmental, consumer and workplace safety rules, cutting back social welfare programs, privatizing or contracting out public functions, and emphasizing globalization. Free trade agreements led to factory jobs disappearing overseas.

David M. Kotz

David M. Kotz

Reagan said this would benefit everyone, that is, everyone who was already rich. Neoliberalism felt like a return to the Roaring Twenties for the investor class. The top tax rate in 1950 was 91 percent for the top income bracket. The Economic Recovery Tax Act of 1981 slashed the highest rate to 50 percent. The Tax Reform Act of 1986 dropped it to 28 percent. Under Obama it rose to 43.4 percent. Trump pushed it down to 40.8 percent. Meanwhile wages and profits grew at about the same rate from the end of WW2 to the mid-1960s. From 2000-2007 profits were growing more than 13 times faster than wages.

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But the Vietnam war’s end, and a global oil crunch hit profits hard in the 1970s. The overall rate of corporate profit plunged from nearly 18 percent in 1965 to a dismal eight percent in 1982. Both inflation and unemployment skyrocketed in the seventies, causing a big business panic.

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“The smoothly functioning ‘mixed economy’ promised by regulated capitalism had stopped functioning smoothly,” Kotz observed. And its remedy for fixing economic problems – Keynesian demand management – was not able to solve the problems. The Keynesian system had prevailed since the time of FDR, but it was insufficient for the “stagflation” of the 1970s.

When Ronald Reagan took office in 1981, the Business Roundtable rallied around his economic program. “The business community feels strongly that all four parts of the economic recovery plan [decreases in social spending, tax cuts, regulatory reduction, and tight monetary policy] are essential, interrelated, and must be acted upon.”

To punctuate the change, Reagan crushed the Air Traffic Controllers union, PATCO, firing more than 11,000 of its 13,000 members when they struck for better work conditions and pay. The move sent shock waves through the labor movement, and stimulated business to crack down on unions across industry nationwide.

Born in Chile

Neoliberalism was introduced in Chile, after General Augusto Pinochet’s 1973 coup, orchestrated by Nixon and Kissinger, which overthrew the socialist government of President Salvador Allende. As Vijay Prashad wrote, “Pinochet brought in a group of free-market economists called the Chicago Boys to hastily give US-based multinational companies the best deal possible (particularly for Chilean copper).” The deal slashed taxes and privatized most public services, including pensions, all backed by brute force. The leading economic theorist of this deal was University of Chicago economist Milton Friedman. For the U.S., Friedman believedmonetary policy was so incredibly crucial to a healthy economy that he publicly blamed the Federal Reserve for causing the Great Depression.”

The Third World debt crisis in the 1980s and the demise of the USSR in 1991 fostered neoliberalism everywhere. The International Monetary Fund (IMF) had a field day, “pushing austerity regimes upon societies that had no capacity to tolerate public sector cuts as a condition to access financing,” as Prashad wrote. Strapped with unpayable debt, leaders in so-called “Third World” countries surrendered to IMF policies virtually en masse.

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In 1989, when Venezuelan President Carlos Andrés Pérez adopted an IMF package with deep cuts in fuel subsidies and other austerity measures, the result was a mass uprising, the Caracazo. That inspired a young military officer, Hugo Chávez, to enter political life. Revolted by the violence Pérez used to impose the austerity program, Chávez fought against it, winning the presidency in 1999.

Chávez condemned neoliberalism as a policy of mass starvation. He sparked a continent-wide “pink tide” of countries in the region winning anti-neoliberalism leaders in the years that followed: Haiti (2000), Brazil (2002), Argentina (2003), Uruguay (2004), Bolivia (2005), Honduras (2005), Ecuador (2006), Nicaragua (2006), Guatemala (2007), Paraguay (2008), and El Salvador (2009).

The U.S., especially the CIA, teamed up with local oligarchies in nearly all these countries to turn back the pink tide: an attempted coup against Chávez in 2002, and against his successor Maduro in 2020; successful coups in Haiti in 2004 and Honduras in 2009; “lawfare” (using the legal establishment as a weapon) leading to impeachments in Paraguay in 2012 and Brazil in 2016; a “self-coup” in Ecuador by President Lenin Moreno in 2017; and a temporarily successful coup against Bolivia’s President Evo Morales in 2019.

Prashad says “the combination of the U.S. illegal war on Iraq (2003), the global financial crisis (2007–08), and the general fragility of U.S. global power provided the international context” for the rise of the Pink Tide.

Unsustainability builds to a crisis

David Kotz provides a more technical analysis. He identifies three trends that built to a crescendo and a crash in 2008: rising levels of household and financial sector debt; toxic financial assets spread throughout the banking system; and growing excess productive capacity as consumer spending power ebbed.

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Household debt – mainly mortgages and credit cards – had grown slowly since the end of WW2. In the 1980s, the price of housing shot up, while wages plummeted. Families began using home equity like credit cards. And banks “leveraged” equity to invest on credit. A huge “credit bubble” formed, which “popped” in 2008.

The top five investment banks had asked the Securities Exchange Commission (SEC) for an exemption to a rule that limited investment banks’ borrowing. They got the exemption. But as one commissioner remarked, “If anything goes wrong it’s going to be an awfully big mess.”

The ensuing “mess” was the collapse of the global capitalist financial system – the most severe of any recession since the Great Depression of the 1930s (apart from the postwar readjustment in 1945-46). “During the first twelve months of the recession,” Kotz writes, “both global output and global trade contracted more rapidly than they had during the first twelve months of the Great Depression of the 1930s.”

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Kotz adds that “the astonishing near-collapse of the major financial institutions and one of the most famous industrial giants (GM), followed by an unprecedented government bailout, had a profound effect on society…” In September and October 2008, more than 450,000 jobs disappeared each month; then 700,000 per month in November and December.

“The economy seemed to be falling off a cliff,” Kotz wrote. “For decades the public had been told that free-market capitalism was a self-regulating system that delivered the goods. The old days of government intervention in the economy were over… Now the economy seemed to be collapsing, and the government was rescuing the largest banks and other financial institutions.” But not the people.

“Suggestions even appeared in the mainstream media,” Kotz notes, “that the economic crisis showed Karl Marx had been right after all about capitalism’s self-destructive tendencies, although…of course Marx had long ago been proven wrong about socialism.”

The sole exception globally to generalized crisis with inadequate government response was China, which launched a massive infrastructure investment program in November 2008, amounting to about 7% of China’s GDP each year for two years. The U.S. government response was less than a third of China’s program relative to U.S. GDP. As a result, “China’s economy quickly resumed growth at 9 to 10% per year,” Kotz observed.

Sluggish Recovery – End of an Era?

“Normally,” Kotz writes, “a particularly deep recession is followed by a vigorous rebound… This recovery has been far from normal.” The details are grim and fairly well-known: nagging unemployment and underemployment lasting for years, along with drastically lower median family income. But not for everyone: “from 2009 to 2012, 95% of the real family income gains in the U.S. economy went to the richest 1%, leaving only 5% of income gains for the other 99% of families.” No wonder Occupy Wall Street happened in 2011!

None of this resulted in re-thinking neoliberalism among the political class. In fact, the reverse happened, as Republicans took over Congress in 2010, “with the new ‘Tea Party’ movement pushing… to renounce ‘big government’.” Austerity became de facto economic policy at home and abroad. In Europe, Greece, Ireland and Spain descended into stagnation. Kotz writes that “as the crisis – and the bank bailout – unfolded, millions of people became outraged at the banks… The bankers and been saved from the consequences of their folly by the taxpayers.”

Ironically, there’s a silver lining: “austerity may be nearing the end of its period of dominance,” Kotz writes. “It appears the neoliberal form of capitalism has exhausted its ability to function… It is justified to regard the crisis that began in 2008 as the structural crisis of neoliberal capitalism.” And so “there is reason to expect that some kind of major economic change lies ahead.”

Possible Future Paths

Kotz identifies “four possible future directions of change (or absence of change)”:

  • continuation of neoliberalism, perhaps with some adjustments;
  • a new regulated form of capitalism, with business still in charge;
  • a form of regulated capitalism based on capital-labor compromise;
  • replacement of capitalism by an alternative socialist system.

Just one of these alternatives really interests us. Kotz says “the possibility that socialism will again come to represent a viable alternative future, even in the United States, should not be discounted – for several reasons. 

  • First, “since the crisis began in 2008, the worst sides of capitalism have been on vivid display, as millions lost their jobs and millions faced the loss of their homes… while corporate profits and the income of the richest 1% have soared.
  • Second, “in some Latin American countries…, new attempts to build a “Twenty-First Century Socialism” have emerged, in Venezuela and Bolivia… The idea has lived on as the egalitarian alternative when capitalism inflicts unbearable hardships on people.”
  • Third, “even in the United States a larger-than-expected percentage of the population has a favorable view of socialism… Among respondents under age thirty, the results [of a survey] were 37% for capitalism, 33% for socialism, and 30% undecided.” (Recent polls have been even more favorable to socialism.)
  • Fourth, “the sudden outbreak of the Occupy Wall Street movement… was the first significant avowedly anti-capitalist protest movement in the United States within memory. Its demonstrations took place in at least 150 U.S. cities and towns (as well as abroad)… showing the existence of a potential mass base for a radical movement against capitalism in the United States.”

The Kotz book went to press in 2015, so it did not bear witness to the rise of Bernie Sanders, AOC, or the new version of DSA. Nor did it see the return of Bolivia’s Movement Towards Socialism (MAS) in 2020, the reelection of Nicaragua’s Sandinista Daniel Ortega last July, or the victories of Xiomara Castro in Honduras and Pedro Castillo in Peru a month later, and of Chilean socialist Gabriel Boric in November.

As Vijay Prashad says, “there is now a changed context across the region, namely a more engaged China. China’s interest in expanding the Belt and Road Initiative (BRI) across Latin America has provided new sources of investment and financing for development in the region. It is widely accepted in Latin America that the BRI project is an antidote to Washington’s largely discredited IMF project and agenda of neoliberal austerity.

“With little original capital to invest in Latin America, the United States has mainly its military and diplomatic power to use against the arrival of Chinese investment.” This will make it much harder for the U.S. and the IMF to force austerity on the people of Latin America.

Next up is a struggle for 21st Century Socialism here at home. Some people are reading Martha Harnecker’s A World To Build: New Paths Towards 21st Century Socialism. That book focuses mainly on Venezuela. Harnecker says: “for Chavez, the art of politics was to make the impossible possible, not by sheer will power, but by taking the existing reality as one’s starting point and working to build favorable conditions and a correlation of social forces capable of changing that reality.” So can it happen here? Time will tell.

Accompanying graphics from: Neoliberalism, the second of four Anti-Imperialist Poster Exhibitions, gathers work from 59 artists from 27 countries and 20 organizations. Though it has become the hegemonic ideology of our time, neoliberalism is a term that remains hard to define, no less to visually represent.