Recipe for Crisis

In the day and age where it seemed to some people that neoliberalism, having led to a widespread financial and...

...economic crisis, followed by the social and political one, had been consigned to where it belongs, that is to the trash bin of history, the same is rearing its ugly head again. It’s no cause for celebration that in many places of the destabilised world, where neoliberalism used to be settled in nicely, it was supplanted these days by new nationalism and populism, more often right-wing than the left-wing one, oddly enough. You don’t fight evil with evil, nonsense cannot be addressed with another nonsense. So it’s hardly a cause for jubilation when neoliberalism gives way to new nationalism and one has to make even greater effort to offer something new, something progressive and socially attractive to replace those two harmful economic and political systems and the defective economic policy followed by their proponents. Undoubtedly, the new pragmatism is such a proposal, but there’s a long way before it prevails.

By Grzegorz. W Kolodko

At the cost of many for the benefit of few

Currently, a decade after the outbreak of the devastating crisis in 2008-09 – first in the USA, then in the United Kingdom, which had financial ties with the latter, then a nearly global one – the professional community has no doubts that neoliberalism was its main underlying cause. It is an ideology, school of economics and, last but not least, an economic policy which cynically feed on such magnificent liberal ideas as freedom, free choice and democracy as well as private property, entrepreneurship and competition, favouring enrichment of few at the expense of the majority. This goal is furthered by the kind of deregulation of the economy which puts the world of labour at a disadvantage to the world of capital, by the financialization of the economy, pushed ad absurdum at the turn of the 20th and 21st century, and by manipulating the fiscal redistribution in a manner that favours the wealthier social strata. It was also furthered by the notorious tax reform in the USA under the presidency of Ronald Reagan, in 1986.

Suffice to point out that while in 1979, when he was running for the office (he was president in the years 1981-89), the average hourly rate in the USA was $18.78 (at 2008 dollars), in 2008, at the time the crisis broke out, it amounted to… less, $18.52! What happened to the fruits of the major increase in labour efficiency, what happened to the national income growth? Well, as aresult of neoliberal practices, they went to few at the expense of the majority. This is vividly demonstrated by other facts, for instance that between 1970 and 2010 the share of profits in GDP increased by nearly 10 percentage points, because the share of wages fell from over 53% to below 44%.

While over three decades, from 1979 to the pre-crisis 2007, net income (after taxes and budget transfers) of 1% of the richest Americans increased by ca. 280%, that of the poorest 20% of the society rose only by ca. 20%, that is it didn’t grow enough each year to be felt by the society. No wonder then that income inequalities kept increasing and now they are at the highest level among all rich capitalist states. The most commonly used measure in this respect is the Gini index, which theoretically ranges from zero (when everybody receives the same part of income) to 1 (when somebody takes over the entire income). Currently, in the USA, it stands at ca. 0.4. By comparison, in Poland it is 0.3 and in the more egalitarian Denmark, it fluctuates around 0.25.

People first lose temper, then take to the streets

It is precisely the growing income inequalities and the widening areas of social exclusion that caused people to first lose temper and then take to the streets, also to the famous Wall Street, the occupied one. Things were aggravated by the irritating nonchalance of a section of political elites as well as of the media and “famous economists” furthering the agenda of those elites, who tried to put the blame for the glaring income and wealth inequalities, growing due to neoliberal practices, hence an intentional policy, on objective processes: on the current phase of technological revolution and globalization. This way a part of the anger was skilfully focused on aliens – on other countries and immigrants, on the Chinese and Mexicans, and elsewhere on Muslim or Central Eastern Europeans – and, as a result, on the irreversible globalization, and another part on one’s own establishment, which was by no means entirely blameless. And it turned out it was grist to the mill that brings waves of new nationalism, xenophobia, protectionism and anti-globalization resentments. It would be worthwhile to draw the right conclusions from therebut, sadly, it’s not happening. At least not in (still) the strongest economy of the world, the originator of the last global crisis, USA.

As a matter of fact, in the year Donald Trump took power, a yet greater error was committed than the one “achieved” by Reagan. A yet greater one because this time a moth’s flight toward a flame starts already after the great lesson of recent years’ crisis and everybody should be wiser in the hindsight. So should neoliberals. Unfortunately, neoliberalism’s signature greed coupled with populism’s naivety – both characteristics uniquely combined by the current resident of the White House – create a mix that is so toxic for logical thinking that, while you can never step in the same river twice, it turns out that stepping into the same swamp is by all means doable. And that is exactly the path Americans are taking by pushing the tax law through their Congress. I call it pushing because by voting at night they defeat the democratic opposition by one vote; because they succeed in doing so by buying off their own senators, in return for evidently particularistic concessions; because at the House of Representatives it’s necessary to redo the vote as racing against the pre-Christmas time produced faulty bills.

While Republicans are pushing the propaganda of success, and president Trump is shouting “Jobs, Jobs, Jobs!” from his Twitter account, writing that “This is truly a case where the results will speak for themselves, starting very soon”, democrats unanimously protest against the tax changes passed, resorting to such drastic terms as “heist” or “cheat”. Well, maybe not a robbery as everything was done within the law and without breaking the Constitution, but it does seem like a scam…

What’s the point of all this? ​

People can sense what’s cooking because only 27% of Americans support the new law and as many as 52% are against the solutions being implemented. They can count themselves and they put more trust in pragmatic arguments of non-partisan pundits than in biased pro-governmental experts and economists corrupted by the neoliberal lobby. While the latter are announcing a major economic growth acceleration due to decreased taxes for companies, CIT, independent centres – including the governmental ones, some of them being really outstanding – calculate that the additional GDP growth by 2027 will be the negligible 0.4-0.9%, or next to nothing. According to the Congressional Research Service analysis, a CIT reduction by 10 percentage points (the law cuts it by 14 points, from 35 to 21%) can increase the long-term growth rate by mere 0.15%. So what was the point of this battle? ​

What do you mean what the point was? To ensure that other changes jointly implemented under the trendy banner of tax cuts for companies, help enrich few at the expense of many. As a deputy prime minister and minister of finance of Poland (in 1994-97 and again in 200203), I myself used to cut taxes, including CIT, radically but sensibly: first down to 32% from 40% (bearing in mind that when I took office, the economy was after the infamous shock without therapy), and then from 28% down to the present 19%, but this was accompanied by other fiscal changes that promoted not only capital formation and investments but also concern for desirable income relations and human capital development. Growth picked up pace, income inequalities dropped, long-term public debt did not increase. This will not be the case of the United States, though the reduction of the very high CIT rate with the simultaneous elimination of the many tax reliefs that impair the system has its advantages. Growth will not significantly accelerate, unemployment rate will not fall, inequalities will grow and the debt will increase.

It is quite baffling how light-heartedly the authors and supporters of the tax reform are treating the unavoidable budget deficit growth and the consequently increasing public debt, which is already immense. With the exceptions of the apologists of the package, there is basically a general consensus that in the coming ten years the public debt will increase by as much as one and a half trillion US dollars. And this debt already exceeds 20 trillion US dollars, ca. 7% over the US GDP. It is clear that in such a situation the Fed will increase interest rates more aggressively, which will naturally weaken the propensity to invest, and slow down the growth.

Neoliberalism 2.0

Democrats hope that the taxpayers (seen as electorate by the political class) who have been misled by the government propaganda will sniff out those neoliberal manipulations and already in the fall of 2018 their vote will strip the Republicans of the majority in the American Congress, both in the Senate and in the House of Representatives. Maybe so, though not necessarily, as the way the tax package is structured, lower taxes and reliefs will benefit, in the coming years, a great majority of taxpayers, including those from less wealthy and more populous strata. However, their reductions disappear in 2025 and then their moment will come to pay for the cuts for the rich, which are not time-limited. Let’s add that this will happen already after next elections, presidential, parliamentary and local alike. In total, throughout the entire decade of 2018-27, the subsequent higher taxes, those regulated in the years 2026-27, will neutralise the benefits of the earlier period, from 2018-25. After 2025, as many as 53% of taxpayers will pay more to the IRS, and these will be households from lower tax brackets.

Impartial analysts have calculated that the greatest beneficiaries of the reform will be the wealthiest, rich multinationals and property owners. Indeed, one must have quite a nerve and display a reprehensible short-term bias in their economic and political thinking to push, in the context of what happened over the last four decades, for tax solutions which will by no means cut taxes for the poorest 20% of the population, as it is estimated that by 2027 tax cuts will total $10, while for one per mille of the wealthiest, this benefit will amount to $278,000.

Hence it turns out neoliberalism, apparently still undefeated despite the recent crisis, is condemning the American economy to another, yet greater crisis. This is not only a private business of the USA as, though the country’s relative role in the world economy will be gradually decreasing, it will still play, in several decades to come, a key part in world finance, and the US dollar will remain, in the foreseeable future, the main reserve currency. And that’s why also others will pay for this new episode of neoliberal excesses. It is worth remembering who we will have to thank for that…

Professor of Economics at Kozminski University, Warsaw

Former Deputy Prime Minister and Minister of Finance of Poland Author of bestselling books “Truth, Errors and Lies: Politics and Economics in a Volatile World” and “Whither the World: The Political Economy of the Future” (http://www.tiger.edu.pl/english/kolodko/ksiazki.htm)

Photo Courtesy of Stephen Melkisethian