Keep your seat belts on

Note, January 18, 2015: Since this post was first published, I have added additional references and a link to my research wiki entry to better support my claim that neoliberalism has been discredited.

Robert Reich is not my favorite economist. First, he’s entirely too beholden to the Democratic Party establishment—he was Democratic President Bill Clinton’s Labor Secretary—and second, possibly because of that, and because to acknowledge that neoliberalism is a thing would be to acknowledge that it was Democratic President Jimmy Carter who first embraced it, making it policy for the first time,[1] he denies the existence of neoliberalism. Reich’s argument relies on an assumption that neoliberalism’s embrace in the United States and United Kingdom fails to explain its apparent worldwide adoption,[2] because he fails to understand how the embrace of neoliberalism as the preeminent mainstream political ideology in those two countries[3] means that it is imposed on the entire world through institutions such as the World Bank and the International Monetary Fund.[4] That said, Reich might be right about at least some of this:

The Labor Department reported this morning [January 16, 2015] consumer prices recorded their largest drop in six years in December. Even excluding declining oil prices, inflation failed to rise – the weakest inflation reading in more than five years. What does this mean?

1. The economy isn’t nearly as strong as some had hoped. Blame near recession conditions in Europe and Japan, a huge slowdown in China, and continued wage stagnation in the U.S.

2. For this reason, the Fed may not raise interest rates in late spring or June, as had been expected.

3. Which means the stock market will continue to be propped up with savings that can’t earn much interest in the bond market, as well as by foreigners seeking a safe haven for their savings.

4. Deflation – falling prices across the board – remains a serious threat. Once it sets in, consumers hold back purchasing because they expect further price drops. This slows the economy even further. The Fed can’t do very much about this vicious cycle once it begins.

Keep your seatbelts on.[5]

A lot of this, it must be said, is due to a drop in gasoline prices, following a stupendous drop in the price of oil.[6] But there are other factors at work as well. The threat of deflation seems most serious in Europe, where Greece may shortly elect an anti-austerity government, possibly leading to its exit from the Eurozone.[7] A number of people seem concerned that the price of copper is dropping; a drop in demand here suggests that worldwide production is dropping on a much broader basis than the energy sector.[8]

I must hasten here to point out that I am not an economist. I would also point out that I still have not seen the sustained qualms that led me to warn my students that a recession was approaching prior to the 2007-2009 financial crisis (which turned out to be much worse than I expected). But there is a certain self-fulfilling prophesy aspect to the business cycle: Markets rise in part because investors think they will rise, and invest accordingly, and markets fall in part when investors turn pessimistic. This is not a rational process, but the imagination that markets are rational is one of the things economists got badly wrong in the run-up to the 2007-2009 crisis.[9] And while it seems clear from the so-called recovery since that Wall Street can do very well indeed while Main Street continues to suffer, a crash on Wall Street seems to have very deleterious effects for Main Street.

As Reich says, “Keep your seatbelts on.”[10] But what happens next should be more interesting. Neoliberalism is already discredited intellectually; as a response to the stagflation of the 1970s, nothing should be more clear at this point than that we have still failed to solve this problem. The idea that money supply can be micromanaged is subject to the same inadequacies of data of its Keynesian demand micromanagement predecessor.[11] It retains a significant hold because conservative politicians find in it a convenient rationalization for beating up on the poor.[12]

If we are indeed headed into yet another severe economic crisis, the third since and including the dot-com bust, and one which occurs long before anyone can sensibly claim we have recovered from the last one, then surely, neoliberalism’s day must be over. Unless, of course, the conservative predilection for favoring ideology over reality continues to hold.

  1. [1]Jacob S. Hacker and Paul Pierson, Winner-Take-All Politics: How Washington Made the Rich Richer—And Turned Its Back on the Middle Class (New York: Simon and Schuster, 2010).
  2. [2]Robert B. Reich, Supercapitalism: The Transformation of Business, Democracy, and Everyday Life (New York: Alfred A. Knopf, 2007).
  3. [3]Daniel Stedman Jones, Masters of the Universe: Hayek, Friedman, and the Birth of Neoliberal Politics (Princeton, NJ: Princeton University, 2012); Melvyn P. Leffler, “The Free Market Did Not Bring Down the Berlin Wall,” Foreign Policy, November 7, 2014, http://www.foreignpolicy.com/articles/2014/11/07/berlin_wall_fall_25_anniversary_reagan_bush_germany_merkel_cold_war_free_market_capitalism
  4. [4]Jeffrey D. Sachs, The End of Poverty (New York: Penguin, 2006); Joseph E. Stiglitz, Making Globalization Work (New York: W. W. Norton, 2007).
  5. [5]Robert Reich, [untitled Facebook posting], Facebook, January 16, 2015, https://www.facebook.com/RBReich/posts/933445033334760?fref=nf&pnref=story
  6. [6]Lynn Doan and Mario Parker, “Biggest Oil-Rig Drop Since 2009 Spells Tough Year Ahead,” Bloomberg, January 6, 2015, http://www.bloomberg.com/news/2015-01-06/biggest-oil-rig-drop-since-2009-spells-tough-year-ahead.html; Clifford Krauss, “Oil Prices Fall to Lowest Since 2009,” New York Times, January 12, 2015, http://www.nytimes.com/2015/01/13/business/energy-environment/oil-prices-fall-to-their-lowest-since-2009-recession.html; Clifford Krauss and Peter Eavis, “Oil’s Fall Continues Into 2015, and Stock Markets Shudder,” New York Times, January 5, 2015, http://www.nytimes.com/2015/01/06/business/oils-fall-continues-to-below-50-a-barrel.html; RTT News, “Crude Oil Plummets Below $49 On Euro Zone Worries, Supply Glut,” January 6, 2015, http://www.rttnews.com/story.aspx?Id=2437944;
  7. [7]Associated Press, “Market Continues Slide as Investors’ Unease Rises,” New York Times, January 6, 2015, http://www.nytimes.com/2015/01/07/business/daily-stock-market-activity.html
  8. [8]Economist, “Uneasy lies the red,” January 14, 2015, http://www.economist.com/blogs/graphicdetail/2015/01/global-economy
  9. [9]Paul Krugman, “How Did Economists Get It So Wrong?” New York Times, September 2, 2009, https://www.nytimes.com/2009/09/06/magazine/06Economic-t.html
  10. [10]Robert Reich, [untitled Facebook posting], Facebook, January 16, 2015, https://www.facebook.com/RBReich/posts/933445033334760?fref=nf&pnref=story
  11. [11]Silla Brush & Robert Schmidt, “How the Bank Lobby Loosened U.S. Reins on Derivatives,” Bloomberg, September 4, 2013, http://www.bloomberg.com/news/2013-09-04/how-the-bank-lobby-loosened-u-s-reins-on-derivatives.html; Joel Connelly, “Cantwell to Summers: ‘Do a mea culpa’ if you want to chair the Fed,” Seattle Post-Intelligencer, August 15, 2013, http://blog.seattlepi.com/seattlepolitics/2013/08/15/cantwell-to-summers-do-a-mea-culpa-if-you-want-to-chair-the-fed; Jacob S. Hacker and Paul Pierson, Winner-Take-All Politics: How Washington Made the Rich Richer—And Turned Its Back on the Middle Class (New York: Simon and Schuster, 2010); Simon Johnson, “The Quiet Coup,” Atlantic, May 1, 2009, http://www.theatlantic.com/magazine/archive/2009/05/the-quiet-coup/307364/; Simon Johnson, “The Rich Country Trap,” New York Times, January 2, 2014, http://economix.blogs.nytimes.com/2014/01/02/the-rich-country-trap/; Daniel Stedman Jones, Masters of the Universe: Hayek, Friedman, and the Birth of Neoliberal Politics (Princeton, NJ: Princeton University, 2012); Paul Krugman, “Economics in the Crisis,” New York Times, March 5, 2012, http://krugman.blogs.nytimes.com/2012/03/05/economics-in-the-crisis/; Paul Krugman, “The Austerity Agenda,” New York Times, May 31, 2012, https://www.nytimes.com/2012/06/01/opinion/krugman-the-austerity-agenda.html; Paul Krugman, “How the Case for Austerity Has Crumbled,” review of The Alchemists: Three Central Bankers and a World on Fire, by Neil Irwin, Austerity: The History of a Dangerous Idea, by Mark Blyth, and The Great Deformation: The Corruption of Capitalism in America, by David A. Stockman, New York Review of Books, June 6, 2013, http://www.nybooks.com/articles/archives/2013/jun/06/how-case-austerity-has-crumbled/; James Kwak, “5 Years Later, We’ve Learned Nothing From the Financial Crisis,” Atlantic, September 10, 2013, http://www.theatlantic.com/business/archive/2013/09/5-years-later-weve-learned-nothing-from-the-financial-crisis/279506/; Joseph E. Stiglitz, “Why Janet Yellen, Not Larry Summers, Should Lead the Fed,” New York Times, September 6, 2013, http://opinionator.blogs.nytimes.com/2013/09/06/why-janet-yellen-not-larry-summers-should-lead-the-fed/; Cass R. Sunstein, “Summers’s Critics Distort His Regulatory Views,” Bloomberg, August 6, 2013, http://www.bloomberg.com/news/2013-08-06/summers-s-critics-distort-his-regulatory-views.html
  12. [12]Paul Krugman, “Economics in the Crisis,” New York Times, March 5, 2012, http://krugman.blogs.nytimes.com/2012/03/05/economics-in-the-crisis/; Paul Krugman, “The Austerity Agenda,” New York Times, May 31, 2012, https://www.nytimes.com/2012/06/01/opinion/krugman-the-austerity-agenda.html

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