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The Collapse of Neoliberalism

The long-dominant ideology brought us forever wars, the Great Recession, and extreme inequality. Good riddance.

Paul Volcker, chairman of the Economic Recovery Advisory Board, and President Obama during a meeting in 2009. (Saul Loeb/AFP/Getty Images)

Welcome to the Decade From Hell, our look back at an arbitrary 10-year period that began with a great outpouring of hope and ended in a cavalcade of despair.

With the 2008 financial crash and the Great Recession, the ideology of neoliberalism lost its force. The approach to politics, global trade, and social philosophy that defined an era led not to never-ending prosperity but utter disaster. “Laissez-faire is finished,” declared French President Nicolas Sarkozy. Federal Reserve Chairman Alan Greenspan admitted in testimony before Congress that his ideology was flawed. In an extraordinary statement, Australian Prime Minister Kevin Rudd declared that the crash “called into question the prevailing neoliberal economic orthodoxy of the past 30 years—the orthodoxy that has underpinned the national and global regulatory frameworks that have so spectacularly failed to prevent the economic mayhem which has been visited upon us.”

For some, and especially for those in the millennial generation, the Great Recession and the wars in Iraq and Afghanistan started a process of reflection on what the neoliberal era had delivered. Disappointment would be an understatement: the complete wreckage of economic, social, and political life would be more accurate. In each of these arenas, looking at the outcomes that neoliberalism delivered increasingly called into question the worldview itself.

Start with the economy. Over the course of the neoliberal era, economies around the world have become more and more unequal. In the United States, the wealthiest 1 percent took home about 8.5 percent of the national income in 1976. After a generation of neoliberal policies, in 2014 they captured more than 20 percent of national income. In Britain, the top 1 percent captured more than 14 percent of national income—more than double the amount they took home in the late 1970s. The story is the same in Australia: The top 1 percent took about 5 percent of national income in the 1970s and doubled that to 10 percent by the late 2000s. As the rich get richer, wages have been stagnant for workers since the late 1970s. Between 1979 and 2008, 100 percent of income growth in the U.S. went to the top 10 percent of Americans. The bottom 90 percent actually saw a decline in their income.

During the neoliberal era, the racial wealth gap did not fare much better. In 1979, the average hourly wage for a black man in the U.S. was 22 percent lower than for a white man. By 2015, the wage gap had grown to 31 percent. For black women, the wage gap in 1979 was only 6 percent; by 2015, it had jumped to 19 percent. Homeownership is one of the central ways that families build wealth over time, yet homeownership rates among African Americans in 2017 were as low as they were before the civil rights revolution, when racial discrimination was legal.

It is also worth putting the 2008 economic crash into perspective—both historical and global. Between 1943 and the middle of the 1970s, the number of bank failures in the country was minimal—never getting above single digits in any given year. Deregulation of the savings and loan associations brought widespread failures and bailouts in less than a decade. Deregulation of Wall Street brought the epic crash of 2008 in less than a decade.

This shouldn’t have been too much of a surprise, as neoliberal policies had already wreaked havoc around the world. Looking back at the 1997 Asian financial crisis, the economist Joseph Stiglitz comments that “excessively rapid financial and capital market liberalization was probably the single most important cause of the crisis”; he also notes that after the crisis, the International Monetary Fund’s policies “exacerbated the downturns.” Neoliberals pushed swift privatization in Russia after the Cold War, alongside a restrictive monetary policy. The result was a growing barter economy, low exports, and asset-stripping, as burgeoning oligarchs bought up state enterprises and then moved their money out of the country.

Despite its alleged commitment to market competition, the neoliberal economic agenda instead brought the decline of competition and the rise of close to monopoly power in vast swaths of the economy: pharmaceuticals, telecom, airlines, agriculture, banking, industrials, retail, utilities, and even beer. A study by The Economist found that between 1997 and 2012, two-thirds of industries became more concentrated. Even centrist think tanks like the Brookings Institution have recognized the dangerous rise of monopolies and argued that the concentration of economic power brings with it higher prices for consumers, increased economic inequality, and a less dynamic economy.

Rising economic inequality and the creation of monopolistic megacorporations also threaten democracy. In study after study, political scientists have shown that the U.S. government is highly responsive to the policy preferences of the wealthiest people, corporations, and trade associations—and that it is largely unresponsive to the views of ordinary people. The wealthiest people, corporations, and their interest groups participate more in politics, spend more on politics, and lobby governments more. Leading political scientists have declared that the U.S. is no longer best characterized as a democracy or a republic but as an oligarchy—a government of the rich, by the rich, and for the rich.

The neoliberal embrace of individualism and opposition to “the collective society,” as Margaret Thatcher put it, also had perverse consequences for social and political life. Humans are social animals. But neoliberalism rejects both the medieval approach of having fixed social classes based on wealth and power and the modern approach of having a single, shared civic identity based on participation in a democratic community. The problem is that amid neoliberalism’s individualistic rat race, people still need to find meaning somewhere in their lives. And so there has been a retreat to tribalism and identity groups, with civic associations replaced by religious, ethnic, or other cultural affiliations.

To be sure, race, gender, culture, and other aspects of social life have always been important to politics. But neoliberalism’s radical individualism has increasingly raised two interlocking problems. First, when taken to an extreme, social fracturing into identity groups can be used to divide people and prevent the creation of a shared civic identity. Self-government requires uniting through our commonalities and aspiring to achieve a shared future. When individuals fall back onto clans, tribes, and us-versus-them identities, the political community gets fragmented. It becomes harder for people to see each other as part of that same shared future. Demagogues rely on this fracturing to inflame racial, nationalist, and religious antagonism, which only further fuels the divisions within society. Neoliberalism’s war on “society,” by pushing toward the privatization and marketization of everything, thus indirectly facilitates a retreat into tribalism that further undermines the preconditions for a free and democratic society.

The second problem is that neoliberals on right and left sometimes use identity as a shield to protect neoliberal policies. As one commentator has argued, “Without the bedrock of class politics, identity politics has become an agenda of inclusionary neoliberalism in which individuals can be accommodated but addressing structural inequalities cannot.” What this means is that some neoliberals hold high the banner of inclusiveness on gender and race and thus claim to be progressive reformers, but they then turn a blind eye to systemic changes in politics and the economy. Critics argue that this is “neoliberal identity politics,” and it gives its proponents the space to perpetuate the policies of deregulation, privatization, liberalization, and austerity. Of course, the result is to leave in place political and economic structures that harm the very groups that inclusionary neoliberals claim to support.

The foreign policy adventures of the neoconservatives and liberal internationalists haven’t fared much better than economic policy or cultural politics. The U.S. and its coalition partners have been bogged down in the war in Afghanistan for 18 years and counting. Neither Afghanistan nor Iraq is a liberal democracy, nor did the attempt to establish democracy in Iraq lead to a domino effect that swept the Middle East and reformed its governments for the better. Instead, power in Iraq has shifted from American occupiers to sectarian militias, to the Iraqi government, to Islamic State terrorists, and back to the Iraqi government—and more than 100,000 Iraqis are dead. Or take the liberal internationalist 2011 intervention in Libya. The result was not a peaceful transition to stable democracy but instead civil war and instability, with thousands dead as the country splintered and portions were overrun by terrorist groups. On the grounds of democracy promotion, it is hard to say these interventions were a success. And for those motivated to expand human rights around the world, it is hard to justify these wars as humanitarian victories—on the civilian death count alone.

Indeed, the central anchoring assumptions of the American foreign policy establishment have been proven wrong. Foreign policymakers largely assumed that all good things would go together—democracy, markets, and human rights—and so they thought opening China to trade would inexorably lead to it becoming a liberal democracy. They were wrong. They thought Russia would become liberal through swift democratization and privatization. They were wrong. They thought globalization was inevitable and that ever-expanding trade liberalization was desirable even if the political system never corrected for trade’s winners and losers. They were wrong. These aren’t minor mistakes. And to be clear, Donald Trump had nothing to do with them. All of these failures were evident prior to the 2016 election.

In spite of these failures, most policymakers did not have a new ideology or different worldview through which to comprehend the problems of this time. So, by and large, the collective response was not to abandon neoliberalism. After the Great Crash of 2008, neoliberals chafed at attempts to push forward aggressive Keynesian spending programs to spark demand. President Barack Obama’s advisers shrank the size of the post-crash stimulus package for fear it would seem too large to the neoliberal consensus of the era—and on top of that, they compromised on its content. About one-third of the stimulus ended up being tax cuts, which have a less stimulative effect than direct spending. After Republicans took back the Congress in 2010, the U.S. was forced into sequestration, a multiyear austerity program that slashed budgets across government, even as the country was only beginning to emerge from the Great Recession. The British Labour Party’s chancellor of the Exchequer said, after the 2008 crash, that Labour’s planned cuts to public spending would be “deeper and tougher” than Margaret Thatcher’s.

When it came to affirmative, forward-looking policy, the neoliberal framework also remained dominant. Take the Obamacare health care legislation. Democrats had wanted to pass a national health care program since at least Harry Truman’s presidency. But with Clinton’s failed attempt in the early 1990s, when Democrats took charge of the House, Senate, and presidency in 2009, they took a different approach. Obamacare was built on a market-based model that the conservative Heritage Foundation helped develop and that Mitt Romney, the Republican governor of Massachusetts, had adopted. It is worth emphasizing that Obamacare’s central feature is a private marketplace in which people can buy their own health care, with subsidies for individuals who are near the poverty line. There was no single-payer system, and centrists like Senator Joe Lieberman blocked the creation of a public option that might coexist and compete with private options on the marketplaces. Fearful of losing their seats, centrists extracted these concessions from progressives. Little good it did them. The president’s party almost always loses seats in midterm elections, and this time was no different. For their caution, centrists both lost their seats and gave Americans fewer and worse health care choices. Perhaps the bigger shock was that courageous progressive politicians who also lost in their red-leaning districts, like Virginia’s Tom Perriello, actually did better than their cautious colleagues.

On the right, the response to the crash went beyond ostrichlike blindness in the face of the shattering of the assumptions undergirding their public policy views. Indeed, most conservatives seized the moment to double down on the failed approaches of the past. The Republican Party platform in 2012, for example, called for weaker Wall Street, environmental, and worker safety regulations; lower taxes for corporations and wealthy individuals; and further liberalization of trade. It called for abolishing federal student loans, in addition to privatizing rail, western lands, airport security, and the post office. Republicans also continued their support for cutting health care and retirement security. After 40 years moving in this direction—and with it failing at every turn—you might think they would change their views. But Republicans didn’t, and many still haven’t.

Although neoliberalism had little to offer, in the absence of a new ideological framework, it hung over the Obama presidency—but now in a new form. Many on the center-left adopted what we might call the “technocratic ideology,” a rebranded version of the policy minimalism of the 1990s that replaced minimalism’s tactical and pragmatic foundations with scientific ones. The term itself is somewhat oxymoronic, as technocrats seem like the opposite of ideologues. But an ideology is simply a system of ideas and beliefs, like liberalism, neoliberalism, or socialism, that shapes how people view their role in the world, society, and politics. As an ideology, technocracy holds that the problems in the world are technical problems that require technical solutions. It is worth pointing out what this implies: First, it means that the structure of the current system isn’t broken or flawed; it thus follows that most problems are relatively minor and can be fixed by making small tweaks in the system. Second, the problems are not a function of deep moral conflicts that require persuading people on a religious, emotional, or moral level. Instead, they are problems of science and fact, in which we can know “right” answers and figure out what works because there is consensus about what the end goals are. Together, the result is that the technocratic ideology largely accepts the status quo as acceptable.

The technocratic ideology preserves the status quo with a variety of tactics. We might call the first the “complexity canard.” Technocrats like to say that entire sectors of public policy are very complicated and therefore no one can propose reforms or even understand the sector without entry into the priesthood of the technocracy. The most frequent uses of this tactic are in sectors that economists have come to dominate—international trade, antitrust, and financial regulation, for example. The result of this mind-set is that bold, structural reforms are pushed aside and highly technical changes adopted instead. Financial regulation provides a particularly good case, given the 2008 crash and the Great Recession. When it came time to establish a new regulatory regime for the financial sector, there wasn’t a massive restructuring, despite the biggest crash in 70 years.

Instead, for the most part, the Dodd-Frank Act was classically technocratic. It kept the sector basically the same, with a few tweaks here and there. There was no attempt to restructure the financial sector completely. Efforts to break up the banks went nowhere. No senior executives went to jail. With the exception of creating the Consumer Financial Protection Bureau, most reforms were relatively minor: greater capital requirements for banks or increased reporting mandates. Where proponents claimed they were doing something bold, Dodd-Frank still fell prey to the technocratic ideology. The Volcker Rule, for example, sought to ban banks from proprietary trading. But instead of doing that through a simple, clean breakup rule (like the one enacted under the old Glass-Steagall regime), the Volcker Rule was subject to a multitude of exceptions and carve-outs—measures that federal regulators were then required to explain and implement with hundreds of pages of technical regulations.

Dodd-Frank also illustrates a second tenet of the technocratic ideology: The failures of technocracy can be solved by more technocracy. Whenever technocratic solutions fail, the answer is rarely to question the structure of the system as a whole. Instead, it is to demand more and better technocrats. Those who acknowledge that voting for the Iraq War was a mistake regretted not having better intelligence and postwar planning. Rare was the person who questioned the endeavor of policing vast regions of the world simultaneously with little knowledge of the local people, customs, or culture. All that was needed was better postwar planning, they said: It was a technical, bureaucratic problem.

Dodd-Frank created the Financial Stability Oversight Council, a government body tasked with what is called macroprudential regulation. What this means is that government regulators are supposed to monitor the entire economy and turn the dials of regulation up and down a little bit to keep the economy from another crash. But ask yourself this: Why would we ever believe they could do such a thing? We know those very same regulators failed to identify, warn about, or act on the 2008 crisis. We know markets are dynamic and diverse and that regulators can’t have full information about them. And we know regulators are just as likely as anyone else to be caught up in irrational exuberance or captured by industry. Instead of establishing structural rules for permissible financial activities, even if they are a little bit overbroad or underinclusive, Dodd-Frank, once again, put its faith and our fates in the hands of technocrats.

We should not be surprised by these dynamics. The arc of neoliberalism followed a pattern common in history. In the first stage, neoliberalism gained traction in response to the crises of the 1970s. It is easy to think of Thatcherism and Reaganism as emerging fully formed, springing from Zeus’s head like the goddess Athena. But it is worth remembering that Thatcher occasionally pulled her punches. Rhetorically, she would champion the causes of the right wing. But practically, her policies would often fall short of the grand vision. For example, she refused to allow any attempt to privatize the Royal Mail and the railways. She even preferred to use the word denationalization to privatization, thinking the latter unpatriotic and far too radical. The central problem, as she noted in her memoirs, was that “there was a revolution still to be made, but too few revolutionaries.”

A similar story can be told of Ronald Reagan. Partly because he faced a Democratic House of Representatives, conservative radicals were occasionally disappointed with the extent to which the Reagan administration pushed its goals. Under Ronald Reagan, William Niskanen writes, “no major federal programs … and no agencies were abolished.” The Intergovernmental Panel on Climate Change was created during the Reagan administration, and President Reagan signed a variety of environmental laws. Early leaders were not as ideologically bold as later mythmakers think.

In the second stage, neoliberalism became normalized. It persisted beyond the founding personalities—and, partly because of its longevity in power, grew so dominant that the other side adopted it. Thus, when the Tories ousted Thatcher and replaced her with John Major, they unwittingly made Thatcherism possible. Major wanted to offer Britain “Thatcherism with a human face,” and he set himself to smoothing out the rough edges. The result was to consolidate and advance the neoliberal project in Britain. When Major was elected in his own right, in 1992, he got more votes than Thatcher ever had—and more than Tony Blair received in 1997. As Major himself noted, “1992 killed socialism in Britain.… Our win meant that between 1992 and 1997 Labour had to change.”

The American story is similar. Reagan passed the torch to George H.W. Bush. Although Bush was not from Reagan’s political camp within the Republican Party (he had challenged Reagan for the presidency in 1980 and was viewed with skepticism by the true believers), Bush moved to embrace Reaganism in his campaign commitments. At the same time, with the losses of Carter in 1980, Walter Mondale in 1984, and Michael Dukakis in 1988, Democrats began to think they had to embrace neoliberalism as a path out of the political wilderness.

Eventually, however, the neoliberal ideology extended its tentacles into every area of policy and even social life, and in its third stage, overextended. The result in economic policy was the Great Crash of 2008, economic stagnation, and inequality at century-high levels. In foreign policy, it was the disastrous Iraq War and ongoing chaos and uncertainty in the Middle East.

The fourth and final stage is collapse, irrelevance, and a wandering search for the future. With the world in crisis, neoliberalism no longer has even plausible solutions to today’s problems. As an answer to the problems of deregulation, privatization, liberalization, and austerity, it offers more of the same or, at best, incremental and technocratic “nudges.” The solutions of the neoliberal era offer no serious ideas for how to confront the collapse of the middle class and the spread of widespread economic insecurity. The solutions of the neoliberal era offer no serious ideas for how to address the corruption of politics and the influence of moneyed interests in every aspect of civic life—from news media to education to politics and regulation. The solutions of the neoliberal era offer no serious ideas for how to restitch the fraying social fabric, in which people are increasingly tribal, divided, and disconnected from civic community. And the solutions of the neoliberal era offer no serious ideas for how to confront the fusion of oligarchic capitalism and nationalist authoritarianism that has now captured major governments around the world—and that seeks to invade and undermine democracy from within.

In 1982, as the neoliberal curtain was rising, Colorado Governor Richard Lamm remarked that “the cutting edge of the Democratic Party is to recognize that the world of the 1930s has changed and that a new set of public policy responses is appropriate.” Today, people around the world have recognized that the world of the 1980s has changed and that it is time for a new approach to politics. The central question of our time is what comes next.

From the book The Great Democracy by Ganesh Sitaraman. Copyright © 2019 by Ganesh Sitaraman. Reprinted by permission of Basic Books, New York, NY. All rights reserved.