Economic Growth, American Politics and NeoLiberalism

Over the Holidays, I have found myself having several conversations regarding Microfinance: its benefits, its costs, the theory behind its popularity, the practical results on the ground, and why so many people – especially in the US – believe that helping the small entrepreneur will innately help the rest of the population.

The latter specifically became a rather heated discussion in my household as it feeds directly into the Republican vs. Democrat debate.

My mother, a devout Republican and small business owner in the US, is a firm believer that by hurting small business, you will inevitably hurt the working class. Businesses are what provide jobs and security to the working class. If businesses have to pay higher taxes or are unable to acquire capital, they will be unable to support their workforce. Therefore, if the government would be less restrictive on business, America could “get back to work” and pull itself out of the recession. This idea was concisely expressed by Terry Paulson, Republican political columnist, during the recent election:

Romney/Ryan will incentivize investors and entrepreneurs to get America working again… Instead of raising taxes, Romney/Ryan will cut taxes and spending while increasing federal revenue when more companies are making a profit, more people are working, and wages are growing. It’s time for free enterprise to do what Washington can never do–create jobs, jobs, jobs!

During our discussion, I could not stop thinking about how similar this “mantra” is to that of NeoLiberalists.

NeoLiberalism stems from “Classic Liberalism” which was founded by the “grandfather of Economics”, Adam Smith, in Wealth of Nations. Sound familiar? Remember the “Invisible Hand”?

The “Neo” in Neo-Liberalism comes from a rebirth and development of these classic ideas during the Cold War by several economists including, an notable economist named Milton Freidman.

Defined by its basic principles, NeoLiberalism theory states:

  • Sustained economic growth is the way to human progress
  • Free markets without government “interference” would be the most efficient and socially optimal allocation of resources
  • Economic globalization would be beneficial to everyone
  • Privatization removes inefficiencies of public sector
  • Governments should mainly function to provide the infrastructure to advance the rule of law with respect to property rights and contracts.

Following this logic, at the international level NeoLiberalism theory argues:

  • Freedom of trade in goods and services
  • Freer circulation of capital
  • Freer ability to invest

Sounds good, right?

For a lot of people, NeoLiberalism makes sense. It is what I learned during my studies at UCLA: economic models prove its “efficiency” and the global capitalism in which we live today was built from its ideas. Famous political leaders such as Ronald Reagan and Margaret Thatcher subscribed to it and organizations such as the WorldBank, World Trade Organization (WTO), and the International Monetary Fund (IMF) were built around the theory:

If we let the markets run freely, business will grow and economic benefit will “trickle down” to the bottom of society. Free market competition is the best way to promote growth and alleviate poverty:

But, has this really worked? Has NeoLiberal theory helped the poorest groups get “lifted out” of poverty?

If we look at global incomes published in 2008, we see that there is a dramatic problem is income inequality:

In a report done by the World Bank in 2008, almost half of the world, about 3 billion people, lived on less than $2.50 a day. 80% of the worlds population lived on less than $10 a day.

In the US, where trade liberalization and capitalism has, arguably, been the least regulated compared with other “industrialized” countries, the divide between the rich and poor is the highest :

 

However, interestingly Americans believe that the income distribution is much more equal than it really is:

The perception is that the bottom two-fifths of the population (the purple and light blue quadrants) are doing vastly better than they really are.

Here’s a graph showing the change in incomes for the top 1% and the bottom 99% of Americans since the 1970s.

The average income for the top 1% has increased nearly threefold, whereas the income of the remaining 99% has decreased slightly.

So, where is the “trickle down” effect we were promised by following the NeoLiberal Model?

We have grown the world economy as a whole, but what about the individual wealth of the average person? Why are we following a model that allows for such deep inequality? And what does our future look like if we continue to follow the same path?

Some food for thought….

For a more detailed explanation on these ideas, you can watch this lecture given by Joseph Stiglitz, a Nobel Prize recipient in Economics:

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