Neoliberalism Kills: Part Two

During Part One of this series, [1] I approached the end of my post with this paragraph.

Apart from the political opposition from the insurance companies that Medicare for All would have engendered, I think the main justification for abandoning Medicare for All and switching to the PO and eventually the PO-less ACA, was actually neoliberalism. The President, his main advisers, the Democratic leaders in Congress, and most progressives working for Washington progressive organizations were steeped in neoliberal doctrine. They viewed the Bush tax cuts and the two Wars as unpaid for. The ARRA stimulus Act was similarly unpaid for and added to deficit spending and to the debt-subject-to-the-limit. They believed and most believe today that the Federal Government can have solvency problems if the debt-to-GDP ratio increases too much, and interest rates on the national debt are driven up by the bond vigilantes.

A Medicare for All Act would have required Federal spending on health care to rise by $800 - $900 Billion per year over present levels. They were not ready to cover that with higher tax revenues, and they were not ready to deficit spend it because they viewed that as fiscally irresponsible, and believed then and still believe now that it's necessary to decrease the debt-to-GDP ratio over time.

So, they wouldn't consider spending for Medicare for All. They wouldn't look seriously at the hundreds of thousands of lives they were consigning to oblivion, at the bankruptcies and divorces they could prevent, or at the obvious fact that while HR 676 would have cost the Government $900 Billion more in money annually that the Government can create at will and at zero real cost; it would have saved the people who have to pay for health insurance, and health care out of pocket and in the form of “co-pays” $1.8 Trillion annually, thus providing a marvelous boost to the economy. Instead, they just said to everybody, that it was impractical and that the United States couldn't afford it; but that it would be able to to afford a self-supporting PO bill, and later when that was taken off the table, a deficit neutral insurance bailout like the ACA.

My friend Lambert Strether liked Part One and cross-posted it [2] at Yves Smith's Naked Capitalism site. But the above statement bothers him because he thinks that using the label neoliberalism alone without explaining what aspects of that paradigm provided the justification for taking Medicare for All off the Table, and who the political actors are who adhere to this, makes my treatment incomplete. Even though I agree with the view that it's easy enough to google “neoliberalism” if someone doubts what I mean by the “term,” I also agree with Lambert that it would add something to Part One for me to be more specific about my thinking and show the connections between neoliberalism and the decision to take Medicare for All off the Table. Hence, this Part Two.

What is Neoliberalism?

Neoliberalism is an evolving ideological paradigm which can be traced back to the work of Hayek and von Mises in the 1920s and even earlier than that. I won't however, do a historical survey here of the various developments and nuances. Instead, I'll just rely on the definitions and specifications of this body of thought that seem to me to be the clearest statements of the current state of the paradigm. Let's begin with this contemporary definition and characterization of neoliberalism by Thorsen and Lie (2007): [3]

Neoliberalism is, as we see it, a loosely demarcated set of political beliefs which most prominently and prototypically include the conviction that the only legitimate purpose of the state is to safeguard individual, especially commercial, liberty, as well as strong private property rights (cf. especially Mises 1962; Nozick 1974; Hayek 1979). This conviction usually issues, in turn, in a belief that the state ought to be minimal or at least drastically reduced in strength and size, and that any transgression by the state beyond its sole legitimate purpose is unacceptable (ibid.). These beliefs could apply to the international level as well, where a system of free markets and free trade ought to be implemented as well; the only acceptable reason for regulating international trade is to safeguard the same kind of commercial liberty and the same kinds of strong property rights which ought to be realised on a national level (Norberg 2001; Friedman 2006).

Neoliberalism generally also includes the belief that freely adopted market mechanisms is the optimal way of organising all exchanges of goods and services (Friedman 1962; 1980; Norberg 2001). Free markets and free trade will, it is believed, set free the creative potential and the entrepreneurial spirit which is built into the spontaneous order of any human society, and thereby lead to more individual liberty and well-being, and a more efficient allocation of resources (Hayek 1973; Rothbard [1962/1970] 2004). Neoliberalism could also include a perspective on moral virtue: the good and virtuous person is one who is able to access the relevant markets and function as a competent actor in these markets. He or she is willing to accept the risks associated with participating in free markets, and to adapt to rapid changes arising from such participation (Friedman 1980). Individuals are also seen as being solely responsible for the consequences of the choices and decisions they freely make: instances of inequality and glaring social injustice are morally acceptable, at least to the degree in which they could be seen as the result of freely made decisions (Nozick 1974; Hayek 1976). If a person demands that the state should regulate the market or make reparations to the unfortunate who has been caught at the losing end of a freely initiated market transaction, this is viewed as an indication that the person in question is morally depraved and underdeveloped, and scarcely different from a proponent of a totalitarian state (Mises 1962).

Thus understood and defined, neoliberalism becomes a loose set of ideas of how the relationship between the state and its external environment ought to be organised, and not a complete political philosophy or ideology (Blomgren 1997; Malnes 1998). In fact, it is not understood as a theory about how political processes ought to be organised at all. Neoliberalism is for instance silent on the issue of whether or not there ought to be democracy and free exchanges of political ideas. This means, as Harvey (2005) indicates, that policies inspired by neoliberalism could be implemented under the auspices of autocrats as well as within liberal democracies. In fact, neoliberals merely claim, in effect, that as much as possible ought to be left to the market or other processes which individuals freely choose to take part in, and consequently that as little as possible ought to be subjected to genuinely political processes. Proponents of neoliberalism are therefore often in the “critical literature? portrayed as sceptics of democracy: if the democratic process slows down neoliberal reforms, or threatens individual and commercial liberty, which it sometimes does, then democracy ought to be sidestepped and replaced by the rule of experts or legal instruments designed for that purpose. The practical implementation of neoliberal policies will, therefore, lead to a relocation of power from political to economic processes, from the state to markets and individuals, and finally from the legislature and executives authorities to the judiciary (cf. Østerud et al. 2003; Trollstøl and Stensrud 2005; Tranøy 2006).

Thorsen and Lie's view of neoliberalism as an encompassing system of thought with the above characteristics is the best account of it I've seen. This view is a general statement about neoliberalism. And it lets us see how dangerous and anti-humanistic neoliberalism is in its broad implications for many spheres of life. But, of necessity, it can't cover the finer points, and isn't specified to economic neoliberalism's take on the role of, and constraints on, Government policy in its relations with the economy. So, we need to go more deeply into the economic side of this. That further specification of one aspect, the economic side of neoliberalism, is called the Washington Consensus.

The Washington Consensus

Wikipedia offers a good statement [4] of the 10 points in the Washington consensus specified by John Williamson, of the Peter G. Peterson funded Institute for International Economics. [5] The points were used by the World Bank, the IMF, and other financial institutions to guide their relations with developing nations, and also as a set of principles or guidelines to inform the policies of Eurozone central authorities.

-- Fiscal policy discipline, with avoidance of large fiscal deficits relative to GDP;

-- Redirection of public spending from subsidies ("especially indiscriminate subsidies") toward broad-based provision of key pro-growth, pro-poor services like primary education, primary health care and infrastructure investment;

-- Tax reform, broadening the tax base and adopting moderate marginal tax rates;

-- Interest rates that are market determined and positive (but moderate) in real terms;

-- Competitive exchange rates;

-- Trade liberalization: liberalization of imports, with particular emphasis on elimination of quantitative restrictions (licensing, etc.); any trade protection to be provided by low and relatively uniform tariffs;

-- Liberalization of inward foreign direct investment;

-- Privatization of state enterprises;

-- Deregulation: abolition of regulations that impede market entry or restrict competition, except for those justified on safety, environmental and consumer protection grounds, and prudential oversight of financial institutions;

-- Legal security for property rights.

It's said by many that the Washington Consensus is dead now because of the Crash of 2008 and events since then. But I think it's plain that its influence lives on in the thinking of people like Erskine Bowles, Peter G. Peterson, David Walker, President Obama, media organizations such as CBS, NBC, ABC, CNN, and The Washington Post, many media commentators and reporters, think tanks around Washington such as the Committee for a Responsible Federal Budget, The New America Foundation, AmericaSpeaks, The Brookings Institution, so-called non-partisan organizations formed to influence the two major parties and even spawn a third party, such as Americans Elect, and No Labels, and many in Congress including the “Gang of Eight,” which Virginia Democratic Senate candidate and former Governor Tim Kaine says he will immediately join, if elected.

I think it's influence is felt even in liberal or progressive organizations, and among progressive commentators and writers, who all share, or at least constantly give lip service to, ideas like fiscal policy discipline, and tax reform, as well as more specific ideas derived from these principles which we will turn to now.

The Washington Consensus and the drive for Fiscal Sustainabiity/Responsibility Interpreted as Austerity and Long-term Deficit Reduction

The influence of the Washington Consensus is reflected in the myths and fairy tales being told by the continuing Fiscal Sustainability/Responsibility/Austerity political movement being driven by the above groups and people and many others. This movement has developed a more specific “Washington Consensus” in the form of myths and fairy tales derived from further specifying Williamson's Washington Consensus. In another place [6] I've listed and debunked them. Here, I'll simply list them, so that their relationship to more general neoliberal principles and the original Washington Consensus can be seen:

-- The Government is running out of money [7]

-- The Government can only raise money by taxing or borrowing [8]

-- We can't keep adding debt to the national credit card [9]

-- We need to cut Federal Government spending and make do with no more money [10]

-- If the Government borrows more money, the bond markets will raise our interest rates [11]

-- If we continue to issue more debt, then our main creditors may refuse to buy it, an event that would lead us to insolvency and severe austerity [12]

-- Our grandchildren must have the heavy burden of repaying our national debt [13]

-- There is a deficit/debt reduction problem for the Federal Government that is not self-imposed. [14]

-- The Federal Government is like a household and that since households sacrifice to live within their means, Government ought to do that too. [15]

-- The only way to tackle our deficit is to cut excessive spending wherever we find it. [16]

-- We should also find a bipartisan solution to strengthen Social Security for future generations [16]

-- We face a crushing burden of Federal debt. The debt will soon eclipse our entire economy, and grow to catastrophic levels in the years ahead [17]

-- The next generation will inherit a stagnant economy and a diminished country [17]

-- The United States is in danger of becoming the next Greece or Ireland [18]

-- Fiscal Responsibility means stabilizing and then reducing the debt-to-GDP ratio and achieving a Federal Government surplus. [19]

-- Federal Government austerity will create jobs. [20]

Each of the links provided refutes a claim offered by the more specific fiscal sustainability/responsibility/austerity version of the Washington Consensus. That version began to gather urgency in Washington soon after President Obama assumed office, and became a major force early 2010 with the President's appointment of the President's National Commission on Fiscal Responsibility and Reform. After nearly four years of the Obama Administration, these myths and fairy tales dominate the Washington conversation about fiscal responsibility, fiscal sustainability, and deficit reduction, and still push these issues to the center of our concerns, even after years of high unemployment, and the destruction of 40% of the accumulated wealth of middle class Americans, the continuing decline in the quality of our schools, our collapsing infrastructure, the continuing decline in social and economic mobility in the United States, the continuing subversion of the political system by monied elites, both personal and corporate, the continued failure of our health care system to deliver health care that works to all Americans, and doesn't economically devastate those who enter the health care system, and the continued exacerbation of many of our other problems. Why do the neoliberal partisans of austerity and long-term deficit reduction say that the fiscal responsibility problem is a more important problem than all of the others, or even a problem at all? Why do they prioritize fiscal discipline over everything else?

It's because they say that the US Government is constrained in its spending by its need to raise revenue from taxing and borrowing, and its dependence on the bond markets for reasonable interest rates when it borrows. This is the Government Budget Constraint (GBC) which is at the very center of their story, and which drives their reasoning to the conclusion that unless we get the national debt under control, so that the debt-to-GDP ratio stops growing and stabilizes at some reasonable level, our financing from the bond markets will carry prohibitive interest rates. And that if we continue borrowing beyond that our credit will finally collapse preventing us from funding many of of our essential programs and even our common defense.

All the claims, I've reviewed here, except perhaps for the last, are based on the idea that this GBC exists. There's plenty of evidence that it exists, they say. Look at households, look at private businesses, look at non-profit organizations, look at state Governments, look at Greece, Ireland, Spain, etc. They all have GBCs don't they, and since the Government is just like an enormous household, it has a GBC too, right? Wrong!

Modern Money Theory (MMT) says that for a Government with a non-convertible fiat currency, a floating exchange rate, and no debts in a currency not its own, there is no GBC. That claim is at the heart of the counter-narrative asserting that the US has no budget constraint except for self-imposed ones.

Some rightly point out that even though the Constitution allows creation of financial wealth without limit, a GBC does exist in the US because Congress has imposed it, by locating the power to create money “out of thin air” in the Fed, and by requiring that the Fed not extend credit to the Treasury, by either allowing it run a negative balance in its accounts, or by monetizing Treasury debt by buying it directly. However, these claims don't hold up because 1) Congress can always remove these constraints since they are political rather than economic, and 2) they ignore the 1996 legislation allowing the Secretary of the Treasury to mint proof platinum coins of arbitrarily high face value, [21] e.g. $60 Trillion.

Treasury can use that law to fill the public purse, pay off all debt subject to the limit, and cease to issue any new debt. Since this capability exists, even without Congress removing its constraints on Treasury money creation, Treasury can still create whatever it needs to close any gap that might appear between tax revenues and Federal spending of Congressional Appropriations.

Conclusion

So, here we are, a Government without a GBC that can never run out of money involuntarily, and we're facing a persistent, well-funded and powerful neolliberal consensus in Washington that wants to impose austerity on all of us in the name of a non-existent GBC that it passionately asserts will cause the nation to “go broke,” if we give priority to all of our major problems, while forgetting about their fantasy that we are doomed if we don't reach some entirely arbitrary level of debt-to-GDP ratio, that they have no way of even deriving in any rigorous way from their neoliberal theory of government fiscal responsibility.

With increasingly grave warnings of doom they try to make us believe that we are facing a national crisis that must be met with a bipartisan solution that will be impervious to the inevitable protests that will arise from most people when their solution causes suffering -- as it inevitably will, since as MMT shows, deficit reduction and government surpluses, in the presence of trade deficits, and desires to save in the private sector will inevitably cause destruction of private sector financial assets. Since the elites are in a better position to protect their financial assets than other Americans, the burden of austerity and the resulting hardships and fatalities will inevitably fall on most of us.

We will be sharing the sacrifices. They will be getting richer from their efforts in the international gambling casino, and from seizing everyone else's property when austerity renders debtors unable to repay their debts.

Negotiation of that “grand bargain” they are seeking will probably use Bowles-Simpson as a framework, even though that framework was never adopted by the “Catfood Commission,” and even though it has received great resistance in Congress since it was published by the two Chairs in the absence of agreement needed to make it a commission product. In any event, the main thrust of the austerians/deficit hawks: that fiscal policy should focus on a long-term deficit reduction plan cutting back the social safety net, is still very much alive politically in Washington, DC and another attempt to implement it is likely either in the lame duck session, or early next year in the new Congress, barring an implosion in Europe before then that could derail the neoliberal deficit hawk drive for austerity.

(Cross-posted from New Economic Perspectives [22].)