Greater inequality, greater instability

Robert Pollin, Contours of Descent: U.S. Economic Fractures and the Landscape of Global Austerity (London, New York: Verso, 2003), 229 pages, $21.00 cloth.

Robert Pollin's Contours of Descent deserves wide reading. This is a book sophisticated enough to be of interest to those with economics training, but written in a comprehensible and popular style, so that without sacrificing rigor it will be accessible to any interested citizen. It provides a broad review of the economic policies of Clinton and Bush and the IMF-World Bank regimen for third world countries, and it is packed with interesting details, citations to recent economic studies, and political as well as economic reflections on the passing scene.

Pollin frames the book around the triumph of neoliberalism in U.S. and global economic policy, its consequences, and the possibilities of escape from the neoliberal trap. The basic, and not unfamiliar, theme is that neoliberalism, and the closely related "Washington Consensus," have brought slower growth, greater inequality--and thus increasing poverty--greater instability, and a degraded environment to practically all countries, including the United States. It is an unsustainable system built on unequal power and its unjust use. It is a corruption of classical liberalism, as it imposes free market rules rigorously on weaker countries but makes regular exceptions for the controlling Western rulers.

Pollin argues that free markets have many merits and will surely be utilized in a well-managed economic order, but that the fallacy of neoliberalism is the failure to recognize that markets alone cannot solve three problems that Pollin identifies with Karl Marx, John Maynard Keynes, and Karl Polanyi. The "Marx problem" is the struggle of owners to keep wages under control by maintaining an adequate reserve army of unemployed. This problem has been exacerbated by globalization, the extension of the first world's reserve army to third world workers, and the use of this credible threat to keep wages down. Pollin acknowledges that this could benefit third world workers, but notes that this potential gain is limited by other effects of globalization, such as the influx of cheap agricultural imports, the shift to export-oriented agriculture, and the resultant massive flow of dispossessed peasants into urban labor markets.

The "Keynes problem" refers to the inherent instability of investment and the tendency of speculation to take over financial markets, the major theme of Keynes' classic General Theory of Employment, Interest and Money. The globalization of finance, the deregulation process of the past two decades, and the new faith in untrammeled markets, supported by the "efficient markets" and other free market rationales and ideologies of the Chicago School and much of the economics profession in general, have made the Keynes problem more acute. Pollin focuses heavily on the Clinton era stock market bubble as a classic illustration of the Keynes problem--its sources, costs, and once again the failure of much of the economics profession to see the bubble as a danger and manifestation of a badly working economy and derelict macro policy management.

The "Polanyi problem" harks back to another classic, Polanyi's Great Transformation, and its analysis of the terrible human costs of the failure to provide social protections for the victims of the agrarian and early industrial revolution in England. The lesson is that an untrammeled free market is socially intolerable and that decency and social stability require a protective framework that recognizes common humanity. Key elements in the protective framework are labor organizations and state institutions and policies that can meet the contingencies of unemployment, sickness, and old age. As Pollin stresses, neoliberalism has had the support of the powerful and the intellectual rationales to carry out a relentless attack on the protective frameworks built up by struggles over many decades. This attack has been carried out at home, with the support of Democrats as well as Republicans, and in the third world, with the help of civilian as well as military governments, pressed of course by the IMF, World Bank, WTO, and the governments and financial institutions of the great powers. The hypocrisy here is notable: Pollin points out that both the World Bank and IMF have recently acknowledged, while expressing surprise and disappointment, that global poverty has not declined with the growth and productivity advances of the 1990s. At the same time they continue to promote policies that push peasants off the land and cut government expenditures that alleviate the distress.

A salutary feature of Contours of Descent is the dismantling of the widely-held belief that the Clinton administration, following 12 years of right-wing government, worked to alleviate the Marx, Keynes, and Polanyi problems. On each, the Clinton performance was abysmal. Unlike Reagan and the younger Bush, the Clinton administration did not openly attack the labor movement, it raised the minimum hourly wage from $4.25 to $5.15, (35 percent below its 1968 real value, although productivity was up some 80 percent), and made some improvements in NLRB performance and vetoed cuts in NLRB and OSHA funding. But Clinton failed to fight for his Striker Replacement Act and in this and other cases engaged in what Pollin calls "gesture politics." This is in contrast with his huge effort on behalf of NAFTA, which was bitterly opposed by the Democrats' labor constituency (and a vast majority of Democratic voters and legislators) and damaging to labor. Labor union membership continued its long numerical decline under Clinton.

As regards the Keynes problem, Clinton era prosperity was built on the deregulation of financial markets, increasing corporate profitability rooted in weakened labor bargaining power, speculation, and the spectacular stock market bubble that led to sharply increased upper-class consumption and an investment boom. Pollin notes that in 1996, Federal Reserve chair Alan Greenspan refused to intervene with his available powers (margin requirements) to contain the bubble, despite his recognition that it was based on speculation and was unsustainable. The bubble and its collapse was a perfect illustration of the continued salience of the Keynes problem, and the Clinton era perpetuation of the Reagan-initiated deregulation process (notably, the termination of the Glass-Steagall separation of commercial and investment banking) will undoubtedly contribute to macro-instability in future years.

As to the Polanyi problem, the Clinton years were notable for the passage of the 1996 Personal Responsibility Act, a major blow to social solidarity, ending a core federal protection of the poor harking back to the New Deal, and driving large numbers into the low-wage labor market. Under Clinton, poverty rates failed to decline despite the prosperity, worker insecurity remained high, and income inequality reached new heights. The prison population soared, another manifestation of a crumbling social structure, with poor people treated ruthlessly (and with conspicuous racist bias). At the same time the Clinton team regularly bailed out investors, as in the Mexican and East Asian financial crises in 1994-1995 and 1997-1998, and the crash of the Long Term Capital Management hedge fund in 1998. With the small "peace dividend" and budget surplus that emerged in the late 1990s, Clinton used the money to reduce the national debt rather than spend it for pressing educational, infrastructure, welfare state, or other human needs--so much for the promise to "put people first."

Pollin calls attention to the sorry failure of mainstream economics to recognize and criticize the Clinton-Greenspan bubble and its inequitable and unsustainable underpinnings. He quotes the last Clinton Economic Report of the President in which the Clinton economists laud both financial deregulation and executive stock options as efficiency enhancing forces, completely ignoring their bubble enhancing effects. He also cites Greenspan's important congressional testimony of July 1997, in which Greenspan explained that inflation was not rising despite the lowering unemployment rate because of "a heightened sense of job insecurity," which he described elsewhere as the case of the "traumatized worker," helpful in keeping wages down. Pollin shows that the mainstream economists were very slow to recognize greater job insecurity as a key factor altering the unemployment/inflation relationship--and when they did, it did not trouble them. Liberal economist Jane Yellen, coauthor with Alan Blinder of a book on the 1990s entitled The Fabulous Decade, told the Federal Reserve Open Market Committee in 1996 that while the labor market is tight, "job insecurity is alive and well ... and the bargaining power of workers is surprisingly low." Pollin notes that Yellen and Blinder didn't let this interfere with their conclusion that the 1990s were fabulous. Apparently these economists, like Clinton, don't feel pain as long as only workers suffer. They have quietly internalized what amounts to a mercantilist perspective in which the welfare of the workers, who are still the majority of the population, are not the ends of the economy but rather the means by which larger ends--growth in gross domestic product and national power, and expansion of market values--are accomplished.* This perspective also calls to mind the 1971 statement of Brazilian head-of-state General Emilio Medici: "The economy is doing fine, but the people aren't." It is no coincidence that Medici led a dictatorial regime much prized by the U.S. political and economic leadership.

Pollin has an excellent analysis of the Bush economic program, featuring the first three big tax cuts, always offered as meeting some current problem like recession, but which "always had only one primary purpose, which was to deliver a sumptuous tax bonanza to the rich." Pollin shows in detail how the tax cuts were skewed, how their rationales never held water, and how they were ultimately at the expense of the middle class as well as the poorest citizens. They pushed burdens on to state and local governments that these could not fulfill, with increasingly harsh consequences for civil society. Pollin also stresses that there was a deliberate Bush design to use tax cuts to squeeze the civil functions of government by reducing government revenue and even producing deficits that "will generate new pressures for cuts in social spending, just as occurred during the Clinton years of eliminating 'big government.'"

Pollin discusses in detail the rise of deficits under Bush and the various arguments on the costs and benefits of deficit spending. He contends that deficits are good when incurred to combat recessionary conditions, although they must also be appraised in terms of what the deficit spending is used for. If used to fund wars of aggression and provide tax bonanzas for campaign donors and other top dogs, as Bush uses them, this is a gross misallocation of resources with ugly equity effects at home and abroad. Pollin raises the question of whether Bush can use the "war on terror" and the invasion and occupation of Iraq as a "'big government' engine to drive the U.S. economy forward?" He answers that this is a terrible kind of engine, that wastes resources on a huge scale; that creates a great deal of business uncertainty; and that only clearly serves the interests of war contractors and the oil company beneficiaries of conquest.

Bush of course has exacerbated all the "problems" defined by Pollin. He has more openly attacked labor and the labor movement as a genuine class-war protagonist of the corporate community. He came into office as the financial abuses of the Clinton-deregulation-bubble era had become inescapably public, but with Bush in office very little reform was enacted to deal with the problems that surfaced in the wake of the numerous scandals. As Pollin says, Bush "is committed to minimizing the impact of Sarbanes-Oxley [an accounting reform law], the one major federal regulatory initiative that did result from the scandals." As for the Polanyi problem, Bush has stepped up the attack on the welfare state and would obviously like to gut the Social Security system if he can find a way to do this, piecemeal if necessary. He is pushing for more "free trade" moves that will further damage labor, and like Clinton he offers no social protection for worker casualties that are likely to ensue. With Bush social solidarity is verbal only; class war is real.

Pollin's long chapter, "The Landscape of Global Austerity," describes the disastrous shift in the third world from the pre-1980s "development" era to the hegemony of neoliberalism. In the earlier years, third world countries tried to develop on the basis of a state socialist planning model, or "import-substituting industrialization" (protecting and aiding infant industries), or via other ad hoc interventionary practices such as those used by the "Asian tigers" earlier and into the neoliberal era. Pollin explodes the myth that these tigers, and earlier the great powers themselves, relied on free trade to attain sustainable growth. But due to the debt trap and interventionary efforts of the great powers, the poor countries have been forced into the neoliberal trap and kept there.

Pollin shows that the performance of the third world countries in the neoliberal era has been poor in comparison with the earlier era of greater independence, state intervention, and "protectionism." Growth rates are down and income distribution has worsened (and the gaps between third world and Western powers have increased). He provides three case studies that show: how the neoliberal order systematically damages third world agriculture, with dire consequences ("Peasant Suicides in India"); how following neoliberal rules enforced by the IMF can lead to national disaster ("The Argentinian Economic Collapse"); and the limits of sweatshops as a constructive route for third world development ("Sweatshops and Global Manufacturing Production"). These case studies are rich with details that are beyond summarization. Pollin also discusses foreign aid, and shows that a return to growth rates of the pre-neoliberal era would benefit third world countries far more than any aid levels realized or even proposed.

Pollin's policy conclusions are modest and sketchy. As regards the United States, he would reverse all the elements in the neoliberal ascendancy that have exacerbated the Marx, Keynes, and Polanyi problems. He would like to see a strengthened labor movement, a new policy stress on job creation and high employment and less concern over the inflation threat, and a refurbished safety net that protects workers and families made jobless. He supports the "living wage" movement and would like to see it extended more widely. He favors a rebuilding of a financial regulation system and the imposition of a stock market transaction tax (a Tobin tax) to contain speculation and bubbles. For the third world, he wants to see freedom from neoliberal controls, a new interventionism designed to stimulate growth and the building up of domestic markets, and greater access of third world countries to Western markets (made more palatable and consistent with worker welfare in the advanced countries by the installation there of a strong safety net).

These policy proposals are not radical--they address the exacerbation of the Marx, Keynes, and Polyani problems, without addressing these problems at their core, in capitalism--but at a time of savage political regression and the neoliberal paralysis of the "opposition" party, achieving these would be a spectacular reversal of neoliberalism. Whatever one's reaction to these policy recommendations, the merits of Contours of Descent are clear and will be enlightening to all readers open to some kind of progressive social agenda.

*In his classic study of labor as a cost of production and means to higher ends under mercantilism, Edgar S. Furniss wrote: "Mercantilism teaches us that in working out a system of public policy based upon nationalistic purposes the dominant class will attempt to bind the burdens upon the shoulders of those groups whose political power is too slight to defend them from exploitation and will find justification for its policies in the plea of national necessity." The Position of the Laborer in a System of Nationalism (Boston: Houghton Mifflin, 1920), p. 203.

Edward S. Herman is Professor Emeritus of Finance, the Wharton School, University of Pennsylvania.

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