It was revealed today that the UK economy contracted by 0.3% in the final quarter of 2012. While the government scramble to blame weather, global conditions, a bloated public sector, immigrants and a sea of shirkers – today’s piece pins the failure of the UK economy where it belongs: on Osbornomics and the ultimate victory of the Neoliberal project.
What is Neoliberalism?
Neoliberalism is a political and economic theory which rests on the basic premise that free market capitalism is inherently good. Its economic underpinnings are based on the views of the likes of Milton Friedman, Alan Greenspan and others in the latter half of the 20th century. It beat out competing economic and political theories such as Fascism, Socialism and Marxism to become the dominant voice in politics and economic theory in the21st century.
It believes that the deregulation of finance and industry results in economic growth and prosperity. It believes that free market capitalism and democracy are inextricably linked. It believes that there is nothing the public sector delivers which a competitive private sector cannot deliver more efficiently. It believes that GDP growth is an appropriate measure of national prosperity. It believes that introducing private sector behaviours, management and principles into the public sector makes things better. It believes that what is good for business is good for the economy, is good for the people.
It relies on institutions like central banks, the IMF, the World Trade Organisation and the World Economic Forum to maintain political as well as economic control and dominance.
The Rise of Neoliberalism
The project began in the Chicago School of Milton Friedman. Whilst post war Britain was busy building a welfare state to protect each citizen from the whims of capitalism, Milton Friedman and this renegade rag bag of neoliberals were seeking to promote the competing idea of free market capitalism and neoliberalism.
In these early years, it was a hard sell for democracies because of the outcomes of high unemployment, great and growing disparity of wealth, social instability and so on. So Friedman and gang went to the governments which didn’t have to worry about pleasing their electorate – the dictatorships.
In 1973, Marxist Salvador Allende was ousted in a military coup by General Augusto Pinochet. Pinochet immediately established a totalitarian regime and the neoliberal policies of the Friedmanites – he oversaw the wholesale privatisation of the Chilean state. The initial results were an employment rate of 20%. After 1976, the Chilean economy began to grow and a new Chilean middle class was created. It was dubbed the Chilean miracle, as the number of cars tripled in 7 years and TVs, radios and other consumer items began to appear in abundance.
However, for the poorest 40 % in Chile, things went from bad to worse. In 1980, their calorie intake averaged 1,751 per person per day. In 1970 it had been at 2,019 per day. By 1983, as the 80’s recession took hold of the globalising economy, Chile (now entirely prone, its social security removed) felt the hit. Unemployment skyrocketed to 34.6%, manufacturing output dropped 28% and the deeply indebted privatised companies turned to the Chilean taxpayer for a bailout.
This story is the basic template for all stories where neoliberal policies have been introduced.
The same story is behind the eviscerated economies of the African continent. The western banking system offered massive loans to post colonial African states to ‘develop’ their economies. During the crashes of the 70’s the interest rates spiked and instead of relieving the debt, the IMF instead loaned great sums as part of Structural Adjustment Programmes. These contracts made loans contingent upon the countries adopting neoliberal policies of selling public services to private providers (mostly western), opening up the natural resources for ownership and profit by external corporations, and huge cuts in public spending. The continent has never recovered. And why would it? The process is an inexorable vicious circle with the debt growing, the ability to repay shrinking, and a largely impoverished, uneducated, hungry population disabled from turning things around.
The key incentive of neoliberalism is that it makes some people, really very rich indeed. It’s victims are spread across the globe and largely disenfranchised.
Thatcher and the Dismantling of Britain
Neoliberalism has remained in check in the West as democracy dictated that a full neoliberal project on the scale of Latin America and Africa wouldn’t wash with a voting public. Then came Thatcher.
The basic theories of Neoliberalism and Friedmanite ideology were captured in The Ridley Report, which proposed breaking up the public sector and it’s powerful unions. Margaret Thatcher proceeded to do just that, with gusto during her 11 year premiership of the UK from 1979-1990
Today, it is almost impossible to recognise the Britain that Thatcher inherited. To discuss a state model based on actual 70’s Britain in 2013 seems like some sort of socialist wet dream.
British Aerospace, Cable & Wireless, Jaguar, British Telecom, British Steel, British Petroleum, Rolls Royce, British Airways, Utilities such as water and electricity all put up for sale. The state-built, subsidised housing stock was put up for sale. Prior to Thatcher, all services and industry listed above were state owned, with wages and prices controlled by a democratically elected government.
The adverts at the time encouraged working class Britain to become members of the middle classes…own your homes, become a shareholder, live the dream.
In the late 1986, it was the turn of the banking sector to enjoy their liberation from state regulation with the so called Big Bang the City was unleashed. Massive boom, massive bust.
An End to Boom and Bust
Enter New Labour. With the political left cast into obscurity by the promise of and end to the class system and the opportunity for all to ‘make it’ – the Labour party went Neoliberal. They felt they could use the state to mop up the excesses of neoliberalism, to rescue those inevitable losers of a win-lose game.
In reality, whilst temporarily preventing immediate harms, this policy kept the true nature of Neoliberalism hidden from the population.
This period saw the rise in state benefits being applied to people in work. Whilst corporations kept wages flat, they also inflated the cost of living. Rents, energy, food, water, travel costs – all inflated. In response, access to credit (debt) and state benefits for workers increased to maintain the pretense of prosperity. In reality, the public were experiencing a living standards increase paid for by a boom in state and personal debt.
Whilst promising an end to boom and bust, New Labour not only failed to prevent the ultimate fulfilment of the Neoliberal project but perpetuated it. They delivered a wave of privatisations and outsourcing of public sector functions to the private sector.
It was new Labour which launched and aggressively promoted the Private Finance Initiative, an alleged means of capturing the best of the public and private sectors. In reality, it was a way of keeping debt of the UK balance sheet and privatising by stealth.
The government borrowed money at twice the price it would have cost to borrow in its usual fashion (gilts 4%, PFI 8%) and entered into costly 25-30 year mortgages with private corporations to build things like hospitals and schools. By 2012, the PFI bubble has burst and hospitals and schools are going broke.
The Time Bomb Explodes
The Financial Crisis of 2007/8 was a direct result of the neoliberal project as outlined above. It all began with the housing crisis in the US mortgage market. The unregulated Financial Services Industry had been making a vast profit from exploiting the rise in demand for credit. Mortgages were paid to anyone with a pulse, because banks no longer cared if the debt was repaid. They made their money from selling the debt on to derivatives traders who packaged these debts, turned them into an asset called a collateralised debt obligation and resold them on the investors. They also then put an insurance policy on the toxic ‘asset’ they had just sold, so that in the inescapable event that it tanked, they would get a hefty pay off. In this way, the traders made huge fees at each stage of the transaction and felt protected against future failure of the assets. In reality, the whole house of cards was inevitably going to collapse. The mortgage payers defaulted eventually, the mortgage providers started to fail, the traders saw losses and claimed their insurance, and finally the insurers collapsed and the whole system came screeching to a halt.
In banking failures past, there has generally been a revival of the principles of the left, one thinks of the building of the welfare state post World War II, or Roosevelt’s New Deal in the US which created the greatest period of growth the US had ever known. Bankers went bankrupt or to jail, and the tax payer won an increased level of social security.
However, in this modern day crisis the Neoliberals out did themselves. Instead of letting the banks fail, these former lovers of all things free market argued for state intervention. In the UK, £2 trillion of tax payer’s money was siphoned into the Bailout, or more than 3 times what the UK government spends in a year IN TOTAL. The taxpayer paid for the crisis. Neoliberalism had finally managed to insure itself against its self inflicted boom/bust cycle…with the taxpayer as guarantor.
One might expect after this debacle that the neoliberal project would have curled up on a corner and died of shame. One would be wrong. After a brief period of public apology, hand wringing a promises never to make the same mistakes and an increase in regulation – it was all quietly forgotten. In fact, not only was it forgotten, but the coalition government pinned the whole sorry mess on a failure to follow neoliberal principles. Rather than producing a plan for economic recovery caused by an unregulated runaway banking system, we're being sold a plan for recovering from a public spending spree.
Osbornomics says: The public sector is bloated, employee conditions are too extravagant, state benefits are too high, there isn’t enough access to credit (debt), and corporations needed to be freed up from all this red tape (regulation) to remain competitive.
Translation: sell more of the state, suppress wages, reduce job security, and reduce the living standards of the poorest people in the land and all will be well.
In the UK disability hate crimes have gone up by a quarter, unemployment has doubled, the number of food banks has increased six fold, the number of homelessness has risen 17%, 3 million people are unemployed, the rates of bankruptcy have increased in retail, financial services, mining and energy. In the last three years, the number of working people claiming housing benefit has increased by 86%.
What Osbornomics do to fix these problems? Cap housing benefit at £26k a year, but do nothing about controlling the exorbitant rents which result in the claims. For the first time, not increase social security payments in line with inflation. Make it easier to fire people and harder to appeal a dismissal. Give tax breaks to corporations and the most wealthy. Fail to add even one additional regulation to the Financial Services industry or put a single banker on trial for the crash.
Osbornomics is all about taking from those with the least, to expand the wealth of those with the most. And while the wealth is hoarded at the top, it cannot be generated at the bottom. It stagnates.
It is absolutely no surprise whatsoever that the economy is refusing to grow. Demand has been killed off by the dismembering of the consumer base. Osborne is propping a failed economy up with the constant pumping of new money into the system through quantitative easing. He is printing money and giving it directly to banks.
Osborne’s plan for recovery is like spotting that the fuel is empty in your car and pumping petrol into the glove box. The glove box overflows but the engine which moves the car still won’t start. He’ll be coming to you with the bill.
The Victory of the Neoliberal Project?
Until we find a new economic and political idea, or at least allow a space for new ideas to grow, the neoliberal project will continue. You need a history book rather than a magic ball to foresee what happens next. In the competition between civil society, democracy and human rights on the one hand, and the advancement of the neoliberal project on the other – the project always wins.
The winners, the 0.1% who own 81% of the wealth, will go for every last one of the 19% the rest of us have. When they own the water we drink, the food we eat, the heat in our homes, the schools we are taught in, the hospitals we are treated in – that kind of leverage leaves us powerless. So we really do need to stand together, realise our strength is in our numbers and in the provision of our labour, without which the game is over. The power is ours. If we would only realise it, and call time on this insidious project which makes the rich richer, the poor poorer and treats people and planet like units and commodities. It is time for a new idea.
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Excellent reading to get into the mindset of neoliberalism and the almost contagious enthusiasm and optimism it emits. It is a compelling ideology and did not dominate the globe for no reason.