Neoliberal economics – otherwise known as ‘free market economics’ or ‘The Washington Consensus’, appears to have doubled down recently, despite clear empirical failings. Mainstream debate has no shortage of economists preaching the virtues of deregulation, austerity and trickle down, and governments across the world seem to be listening. How did this happen? Probably somewhere between people’s refusal to abandon an entrenched ideology, the influence of the rich and powerful, and the lack of a sufficient alternative. In any case, here’s a series of facts that demonstrate quite how immune to evidence mainstream debate has become. I won’t offer much analysis here, just the neoliberal narrative of the crisis, contrasted with the facts, which I feel speak for themselves. This post is with a focus on the UK, but to some degree it applies to the US and Eurozone, too.
Firstly – the narrative goes – forget the ‘banking crisis’ – that’s over, now the real problem is the fiscal crisis:
Nevermind that debt is historically low, and that the market – which we praise for it’s ability to collect dispersed knowledge elsewhere – is saying that there isn’t a fiscal crisis:
In the UK, this invisible fiscal crisis is often pinned on the previous Labour government for spending too much in the boom years, long before the 2008 crash:
Note the fairly minimal deviations between taxes and spending prior to the crisis, during which, predictably, tax revenues fell and welfare spending shot up. Also note the refusal in the states to pin the deficit on Bush, whose pre-crisis policies actually did create a large chunk of the deficit. Anyway, I digress
Many on the right also claim that reported ‘debt’ is a red herring, and ‘off balance sheet’ obligations are far larger, for example future pensions:
I should note that this is with the Coalition’s pension reforms, but those reforms weren’t exactly revolutionary – just a bit of inflation reindexing and a few years of pay freezes. It’s pretty clear: at no point were pensions costs in any way a time bomb.
…despite the fact that the countries where it is often claimed we need deregulation, are lowest on the regulation index above. And no, there is no (inverse) correlation between regulation and growth.
They also claim we need to cut taxes, particularly on the rich or ‘job creators':
The above is a graph from a study by Thomas Piketty, Emmanuel Saez & Stefanie Stantcheva, showing the lack of correlation between cuts in marginal tax rates and growth.
Finally, there’s the policy the right always have time for – austerity! Magically, they claim, it achieves all of our goals at once. Firstly, it helps us balance the budget:
The bottom line, fleshed out with a lot of evidence, is one that others — including me and Christy Romer — have been arguing for a while: expansionary fiscal policy under these conditions doesn’t just aid the economy in the short run, it may well even improve the long-run fiscal prospect. And austerity may be self-defeating even in fiscal terms.
and secondly, it boosts growth by allowing the private sector to fill the gap:
This paper investigates the short-term effects of fiscal consolidation on economic activity in OECD economies. We examine the historical record, including Budget Speeches and IMF documents, to identify changes in fiscal policy motivated by a desire to reduce the budget deficit and not by responding to prospective economic conditions. Using this new dataset, our estimates suggest fiscal consolidation has contractionary effects on private domestic demand and GDP.
Austerity for everyone!
This is part of the reason my blog is so abstract – the policy prescriptions of neoliberalism have survived despite being obviously wrong, so all that’s left is to attack the intellectual underpinnings. Whilst I’m aware that neoclassicism =/= neoliberalism, the latter relies on the former for a large part of its assertions about the effects of taxes, regulation and the labour market. If this intellectual justification disappears, neoliberalism will have little left to stand on.