The Withdrawn Hand of the Neoliberalist Government

At the end of the 1970s, the idea of making the federal government “smaller” increasingly received kudos among political circles. The strong unionized labor, high wages and low unemployment of the 1960s and 70s evolved into an era of deregulated labor markets, falling wages and tight federal spending after Reagan was sworn into office. As Robert Pollin discusses in Contours of Descent, this transition reflects a shift towards a free-market movement known as neoliberalism. Neoliberal policies account for three types of problems that we are faced with today. The Marx problem outlines the diminishing bargaining power of workers in relation to their bosses that comes as a result of the government failing to regulate the labor market. The Keynes problem stresses the instability of private investments and the need for the government to regulate the financial market. Finally, the Polanyi problem highlights the dangers of “starving the beast,” a phrase Paul Krugman uses to discuss the deliberate reduction of government expenditures. This starvation, whether through tax cuts geared towards the rich or spending cuts on important social programs, indicates that the government is sacrificing resources and allowing the free market to decide how the economy will function fairly. This is unjust, as David Gordon points out in his 1996 book Fat and Mean, especially for the millions of workers earning low wages whose underrepresentation and insecurity is a clarion call for government action. Together, Pollin and Gordon make a case for government intervention in order to prevent these three problems caused when we follow the neoliberalist path of deregulating and starving the beast.

Deregulation of financial markets is one flaw of the neoliberal system that creates both unstable investment in business and artificial growth in the economy. Deregulation was a serious problem during Clinton’s two terms even though the stock market bubble that resulted from it fueled the economic prosperity (Pollin, 86). Yet, from a long-term perspective, this brand of prosperity is not worth repeating due to its unsustainable roots. The stock market is supposed to be a medium in which companies can sell their ownership of investments in the form of a long-term asset. However, when the Federal Reserve allows an unregulated flow of funds pour into the stock market, this leads to rampant short-term speculation. In the equity markets under Clinton, to a dangerous degree, buying stocks became a game in predicting the day-to-day opinions of other investors rather than a company’s long-term prospects for profit. Without regulation, the prices of stocks were driven up disproportionately higher than the value of the investment that the stocks represented. Standard and Poor’s composite stock price index revealed this, exhibiting its highest ever price to earnings ratio in history, 44.2, by the end of 1998 (Pollin, 57). This constituted a failure on the part of Bill Clinton and Alan Greenspan, who failed to restrict how much of the loans that were taken by exuberant, speculative investors could be spent on stocks directly. This could have been done through instating margin requirements on borrowers, but instead the Clinton administration chose to deregulate and let private investment run its course. Moreover, as everyone’s stock fortune grew, confident households and firms engaged in debt-financed spending because their assets were so valuable. Little did they know that their assets were overpriced by the unsustainable bubble, and this hit them hard during the recession of 2001 in the form unpayable debt. It also left businesses with productive capacity that they invested in but could not use because of the limits that the financial crisis imposed on their expandability. Bush, as if carrying the neoliberalist torch, has done little to tame the deregulated financial market that led to the collapse of 2001. Deregulation of financial markets is the Keynes problem at work. It is an example of free market forces and private investment failing, and the Clinton era represents a time when the idle hand of the neoliberalist government was to blame.

Pollin and Krugman both argue that deliberately shrinking the fiscal scope of the government has obvious downsides and tenuous merits. Clinton starved the beast deliberately via sweeping cuts in government expenditures. Turning the government deficit into a surplus, while impressive at face value, did not come from growth-related tax revenues but mostly by reducing government spending from 21.9% to an emaciated 18.1% of GDP (Pollin, 28). This was a 17.1% bite out of the government expenditure purse that meant for dramatic cuts in funds for education, welfare, social security, and environmental regulation. Bush, on the other hand, starved the beast directly from its source of food; federal taxes reached their lowest rate in forty years (Krugman, p. II). His agenda targeted cuts in the estate tax, dividend income taxes, high-income bracket taxes, and taxes for big corporations. But unfortunately for Bush, he did not have the fiscal surplus or consumption boom of the Clinton era to fall back on. His tax cuts came at a time when government revenues were hit hard by a recession and at a time when military expenditures were on the rise due to the war on terrorism. So Bush, with deficits mounting, has been steering the government in a direction that will eventually force it to succumb to even more across-the-board expenditure cuts. Already, states are being forced to cut education funding, income-support, health care and job training programs by an estimated total of 100 billion dollars in 2003 (Pollin, 108). To prevent this, as Krugman states, the irrational crusade against taxes will have to give. The tax cuts and the large government expenditure cuts within the neoliberal framework is evidence of the government abdicating its responsibility to fund programs that assist less well-off people in society and often making blatant concessions to the rich. Forfeiting the moral sentiments that ought to accompany market forces is a manifestation of the Polanyi problem.

Lack of regulation in the labor market has caused job insecurity and a downward pressure on wages, which are two key characteristics of neoliberalism. During the Clinton and Bush administrations, mere gestures have been the extent of friendly policies towards unions and the regulation of labor conditions (Pollin, 121). Despite attempts to guarantee paid leaves, prevent the replacement of workers on strike and to cooperate with labor representatives, the last 10 years has seen a weak emphasis on improving the bargaining power of workers. Lack of sympathy towards organized labor has been the underlying factor of the heightened sense of job insecurity and the wage squeeze. This is strange when considering the two conditions present in the Clinton economy that typically treat those two maladies: low unemployment and high productivity. Looking closely at the problem with real wages and job insecurity reveals that the fundamental downsides of neoliberalist reliance on the free market are to blame, despite the apparent prosperity of the 1990s.

The root cause of the wage squeeze leads us to organized labor conditions. In order to prevent the formation of unions, anti-labor policies materialized in conjunction with corporate threats to shut down and relocate. According to a survey of three of Clinton’s first four years as president, 50% of US all firms exhibited such threatening behavior (Pollin, 55). As David Gordon states in Fat and Mean, the intimidating environment accounted for the fact that only 14% of nonagricultural workers were part of unions by 1999, compared to 35% in 1954 (Gordon, 220). But besides the fear of being fired for participation in a union, there has been a lack of union feasibility due to a refusal on behalf of the government and corporations to cooperate with them. Since the 1980s the government has made it difficult for unions to be elected for official representation, and even after passing that hurdle, companies have been obstinate in their refusal to grant unions a bargaining contract (Gordon, 243). In certain cases under Bush, union activity within the government sector has been directly banned by executive orders. The difficulty in organizing into unions has indirectly taken a bite out of the paycheck of non-supervisory workers. Handicapped with an ever-diminishing bargaining power, their real hourly wages fell by 7.8% from 1979 to 1994 (Gordon, 31). By historical and international standards, our economic policy towards workers has gone awry: “the United States appears to be the only advanced country in which lower paid workers have actually suffered absolute declines in real earnings over the last couple of decades” (Gordon, 28). The fact that workers have been pressured to discontinue union activity and then left at the mercy of uncompromising corporate bargaining power indicates the social irresponsibility of the neoliberal agenda.

The other malady, job insecurity, has been the result of the corporate bureaucracy that has grown disproportionately fast in relation to rises in total employment. Gordon attributes this sense of insecurity to the bloated level of 17.3 million supervisors and managers (in 1994) that have made firms inefficient and conflictual within their own ranks. The redundancy of these supervisors and managers has lowered worker security and morale (Gordon, 35). Gordon explains that the prevalence of bosses has worked in tandem with the wage squeeze in order to support a system in which workers can be underrepresented, exploited and disposed. To maintain order in an environment of such transience, supervision has become more abundant and more prone to using the “stick” of a threatening and monitoring presence rather than using the “carrot” of wage benefits to motivate workers to work. In other words, in order to stay mean to the undercompensated bottom, corporations have had to stay fat at the top. Evidence of the fatness is found in the fact that nearly one quarter of all incomes in the US, some 1.31 trillion dollars, was paid to bosses as income in 1994, a proportion unparalleled internationally (Gordon, 36). This trend in top-heaviness has, in effect, been another weight on the bargaining power of lower level workers. Throughout the 1980s and 90s, the government sat and watched as foreign competition and the big supervisory presence weighed down on the shoulders of workers not only in the form of shrinking wages but decreased job benefits. The duration of paid time off, for example, that has been granted to workers has declined by 19% from 1977 to 1989 (Gordon, 104). Considering the high productivity and tight labor market of the Clinton era, the extensiveness of workers who did not enjoy wage increases and job security created a boom that Pollin refers to as “hollow” (Pollin, 21). It seems clear by the unchecked corporate stick wielding and the ensuing insecurity of workers that the free-market neglect of neoliberalism needs to be replaced by a higher standard of social protection to workers and their wages. It the absence of government life vests to keep bargaining power and security of labor afloat, the Marx problem looms over the head of the American workforce.

It is no surprise that the alternative path of economic policy that Pollin and Gordon advise taking involves undoing the neoliberalist inertia when it comes to market regulation and government spending. Undoing this inertia would require intervening in financial and labor markets and reversing the tax cuts and fiscal stringency that characterize the most recent generation of politics. We can start by employing what Pollin calls an employment-targeted spending program. Government spending with the goal of controlled job expansion is beneficial on two fronts. First of all, it will create commitment to socially desirable programs such as public infrastructure, health, education and worker retraining initiatives which enhance the long-run productivity of our economy. Second of all, it increases the overall demand for labor, which in turn increases the bargaining power of workers and their ability to attain higher wages. Then, as a platform on which to battle the wage squeeze, both authors stress the need for a higher minimum wage. Gordon proposes setting minimum wage to half of the average manufacturing worker’s earnings and then tying that amount to an inflation index (Gordon, 241). This would ensure a fair real wage base for less-skilled workers and would have negligible negative impact on the employment rate (Gordon 242).

Once the issue of wages is raised, the next logical step in treating the neoliberal ailments is to support the right of workers to unionize without threats and risks presented by corporations. The government and corporations should pass legislation that officially recognizes a union’s representation when a democratic procedure among workers affirms that they want membership to an autonomous union. Gordon asserts that the disposable nature of the worker needs to be treated via employee participation councils that can foster cooperation in decision-making between lower-level employees and managerial ranks. Serving the same purpose is labor reform legislation that extends a benefits package of health coverage, guaranteed 3-week vacations, and paid overtimes to full time and part-time workers. Gordon even ventures to recommend establishing a government bank that subsidizes companies that bear cooperative work relations and union activity (Gordon, 248). Such labor market regulations are intended support the job security and wages of lower level workers through union activity and basic guarantees on behalf of employers. They achieve this in ways that empower and motivate workers, and would keep the bureaucratic burden in check or at least render its monitoring purposes obsolete.

Obviously, these ambitious programs that are rooted in higher government spending, higher wages and subsidies to cooperative workplaces require funding. A reversal of the kinds of progressive tax cuts that Reagan and Bush have used would be a start in funding such programs. Tax cuts on stock market earnings and tax cuts in which 45% of the relief goes to the top 1% of income earners is an example of the beast being wastefully and unnecessarily starved (Pollin, 95). Another means of procuring funds for a bigger and more responsible government program would be through a sales tax on all financial transactions, called the “Tobin Tax” (Pollin, 182). This would have generated significant government revenues during the stock market bubble of the late 1990s, and just as important, would encourage productive investment in stocks as long-term assets and not in the speculative nature of the day-trader. Finally, to assist in financing programs that galvanize the withdrawn neoliberal hand into action, legislation could mandate that commercial and investment banks allocate a certain proportion of their funds to social programs. This would serve the secondary purpose of limiting the amount of money that goes into the stock market and can swell up stock prices irrationally high. Although they entail fewer kickbacks for high-income earners and big businesses, these policies would give the government more revenues to spend, a solid foothold in actively ensuring high employment, financial stability, a set of social protections for workers and their wages, and more cooperative relationship between workers and firms. The free market economy by itself, as we have seen in the most recent administrations, cannot achieve these high-minded goals.

Neoliberalism is a living lesson in which free markets fail when left to their own devices. Rather than revel in the shrinking size of the government, the political arena needs to learn to recognize the red flags of market failure that beckon intervention from above. The symptoms exhibited when the Marx, Keynes and Polanyi problems run loose include unemployment, stock market crashes, diminishing real wages, skewed bargaining power of undervalued workers, managerial bloat, and a lack of funding for vital federal, state, and local programs. In the face of these three problems, the government needs to admit to itself that certain kinds of interventions are necessary in a capitalist economy. If the government is truly interested in the common good, it will take a more active role and relinquish its commitment to a minimalist and austere budget. Implementing the necessary interventionist policies will be difficult, as will all policies that run against special interests, business interests and politicians who are not progressive minded. But with time, and a shift in priorities, perhaps we will see crystallize the signs of a more active and benevolent government hand in the US economy.

Works Cited

• Pollin, Robert. Contours of Descent. New York: Verso, 2003. • Gordon, David. Fat and Mean. New York: The Free Press, 1996. • Krugman, Paul. "The Tax-Cut Con" The New York Times Magazine 14 September 2003: 54+.