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It’s Not Class Warfare. It’s About Economic Policy

It was the dominant economic policy caused this crisis.  Economic policy is at the root cause of the friction between socio-economic classes.  It is economic policy that created the increasing income inequality we are currently experiencing.  It is economic policy that redirected income from lower and middle income households upward to corporations and upper income households. What is this economic policy?

The economic policy is called “neoliberalism” or “neoliberal”.  Those who were proselytize neoliberalism do not want to destroy or intentionally harm lower and middle class families but that has been the result of this flawed ideology.  An ideology that believes that “markets” and private enterprise are perfect and should be free from government intervention.  Neoliberals have used euphemisms such as “Trickle Down Economics” and “Supply side Economics” to promote their policies. 

The major flaw of neoliberalism is the notion that markets are perfect and should be ‘free’.  We, meaning people, create markets.  We operate in markets and as we all know we are far far from perfect.  Markets and private enterprise reflect our imperfections and government does as well.  Human nature is very prone to destructive forces such greed.  This utopian belief may work well if we all started out as equal - that we all had an equal opportunities to succeed.  We don’t.

There are other terrible flaws to neoliberalism: Efficient Market Hypothesis, markets tend to equilibrium, Capital Asset Price Model, Monetarism - basically much of the economic philosophy and theories that have emerged from the University of Chicago.  Neoliberalism has been a destructive force in our economy.  It has resulted in economic policies that redirected income upward and reconsolidated wealth and power at the top. 

The consequences of Neoliberalism can be best described in terms of the Neoliberal Policy Box that Dr. Thomas Palley has described:

Globalization, as exercised by ‘free trade’ agreements and free movement of capital across the globe, has resulted in American workers competing with lower-paid foreign workers many with lower standards of living than Americans.  The emergence and growth of multinational corporations (MNCs) has resulted in the exploitation of natural resources and human resources without paying for the social costs they create.  Neoliberal policies, through globalization, created a means to put downward (deflationary) pressure on wage growth for American workers.

Small government “policies undermine the legitimacy of government and push privatization, deregulation, and light-touch regulation.”  Sound familiar and what has resulted - huge no-bid contracts to companies such as Halliburton and Blackwater just to name a few, the calls for privatization of Social Security and Medicare, and a mortgage/financial crisis.  How easily we forget?  Now, we are hearing more talk of ‘small government’ and “freedom”.  For what, so that people with money and power have the freedom to do what they wish including crashing the entire global financial system.  And who is left to pick up the pieces and suffer the consequences - lower and middle income tax payers. 

Let’s be clear what “small government” really means.  It means the decimation of what meager social safety net we have in this country.  It means the destruction of government programs that invest in people whether through health care or education. 

“Small government” doesn’t necessarily mean less taxes.  There is a “trickle down” effect to neoliberal policies but it was not as intended or was it?  Cuts in social programs and even law enforcement programs at the federal level has a trickle down effect that gets magnified in bad economic times.  Less money flowing from federal level to state and municipal level for needed education, law enforcement, training programs or even small business assistance means those burdens fall on state and municipalities.  The states and municipalities are faced with either cutting these programs or keeping them and raising local taxes.  In the end, lower and middle class families pay a price whether through higher local taxes or the loss of needed programs.

Labor market flexibility,

involves attacking unions, the minimum wage, unemployment benefits, employment protections, and employee rights. This is justified in the name of creating labor market flexibility, including downward wage flexibility, which according to neoliberal economic theory is supposed to generate full employment. Instead, it has led to wage stagnation and widening income inequality.

And how has this labor market flexibility fared in our current economic crisis:  U6 unemployment at 16.5% with duration of unemployment increasing - not too good, actually that’s horrible.

Less than FULL EMPLOYMENT.  According to the Federal Reserve Act:

The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.

It’s possible to achieve FULL EMPLOYMENT and stable prices but the Federal Reserve abandoned the goal of FULL EMPLOYMENT and instead emphasized keeping inflation low:

This switch was promoted by the economics profession’s adoption of Milton Friedman’s notion of a natural rate of unemployment.  The theoretical claim is that monetary policy cannot affect long-run equilibrium employment and unemployment, so it should instead aim for a low and stable inflation rate. In recent years, that argument has been used to push the adoption of formal inflation targets. However, the key real-world effect of natural rate theory has been to provide the Federal Reserve and policymakers with political cover for higher actual unemployment, which has undermined workers’ bargaining power regarding wages.

What is needed?

The best economic policies provide a good balance between government participation in economy whether in the form of regulation, fiscal policy or monetary policy and private sector participation in the economy.  Too much or too little participation of government or private sectors is not good.  Right now, we have a private sector that is not producing jobs and we know through fiscal policy that the government can help (contrary to neoliberal theories). 

Our current economic crisis is the result of neoliberal economic policies that pushed deregulation, wage deflation and unfettered globalization.  This led to powerful and influential MNCs and huge financial conglomerates.  It resulted in huge bailouts for financial conglomerate and very little help to low and middle class families.  How easily we forget?