How Neoliberals Fueled the Rise of Socialism

The rising popularity of politicians on the American left who either explicitly identify as socialists or at least don't shy away from or disavow the term appears to be causing genuine concern within the Washington establishment. That is, of course, entirely justified. Socialism is profoundly unjust and destructive. These days socialists like to present their entire ideology as nothing more than having a bit of empathy for those in need or an interest in seeing everyone have access to services like modern health care. Look any deeper though or ask some follow-up questions and the truth will eventually surface. What the socialists actually want is a massive increase in government interventionism that would see nearly every aspect of life politicized and the remaining productive components of the economy hollowed out into a zero-sum lobbying battle to claim some of the diminishing loot of a much larger, more powerful, and tax-happy federal government. Any step toward socialism needs to be energetically opposed by everyone who cares about the rights and material well-being of everyday Americans. However, the concern we're seeing from the neoliberal and neoconservative establishment is frustrating because the political order they have built and preserved over the last half century has made the growing popularity of this kind of democratic socialism all but inevitable. Scholars like Gabriel Kolko, Murray Rothbard, and Patrick Newman have written extensively about how the powerful, centralized federal government that we live under today originated in the so-called progressive era in the late 1800s and early 1900s. And importantly, it was not grassroots reformers who spurred the growth of the federal government at the time but well-connected business interests. The narrative many of us were taught in school of government officials reluctantly giving themselves more power over the economy at the turn of the century to placate a public demanding an end to laissez-faire capitalism is merely a convenient creation myth to justify what has always been a scheme to use state power to redistribute wealth from the broader public to a small cast of well-connected families and firms. As nearly all of human history makes clear, these sorts of crony state-empowered redistributive schemes tend to be rather unstable. That's in part because people typically aren't all that pleased when it starts to become clear that the government is transferring some of their wealth to people that are already far wealthier, requiring the opinion molders of the political class to frequently scramble to find some new ways to excuse the policies making up the racket. But also, the government doing things like warping credit markets to benefit certain industries or launching unnecessary wars to enrich weapons companies and empower foreign leaders who are good at lobbying has plunged the country into several economic and geopolitical crises. So far, the American political class has done a remarkable job using these crises to greatly expand and accelerate their self- enriching redistributive rackets. But every crisis is unique. Different situations have required different responses, which brings us to the rise of what's often called the neoliberal Washington Consensus. The political establishment's well-known embrace of neoliberalism in the 1980s was primarily a response to the events of the 1970s. For much of that decade, the country was forced to endure a prolonged period of high inflation that was caused by the Federal Reserve's extensive money printing in the '60s and early '70s to help finance the Vietnam War and Johnson's Great Society programs. That economic chaos was then intensified by the collapse of the Bretton Woods system, the OPEC oil shocks, and Nixon's wage and price controls. As we've seen in the past few years, inflation alone is more than enough to create strong public demand for political change. But in the '70s, previous credit expansion, combined with the government's persistent unwillingness to allow the economy to correct itself also resulted in a stagnant economy. And that combination of high inflation and stagnant economic growth or stagflation as it came to be known was considered economically impossible by Keynesian economists. So the high inflation, low economic growth, and real-time collapse of Keynesianism, the school of thought the political class had been using to justify its economic interventionism, meant change was coming. Also, by the mid to late 1970s, the so-called new left, which had started as student protests against the Vietnam War in the '60s, had descended into a highly disturbing mix of lethargic drug use and outright terrorism. Into that vacuum stepped Milton Friedman. The nerdy, quick-witted, suit-sporting economist was a perfect foil to the radical, convention-flouting far left much of the country was growing tired of. Friedman's ability to quickly, thoroughly, and politely eviscerate left-wing economic arguments in a highly entertaining fashion made him a star on the talk shows of the day. And unlike the Keynesians, Friedman's monetarism seemed vindicated by the stagflation. Thanks in large part to Friedman, the neoliberals took hold of the culture enough to prompt the left-leaning Carter administration to deregulate many parts of the economy including the railroad, airline, and trucking industries. And then of course came Ronald Reagan. Together with Friedman and his fellow Chicago school economists and foreign leaders like Margaret Thatcher, Ronald Reagan and his political successors supposedly rolled back all the reforms made since the progressive era ushering in an age of market fundamentalism or unfettered capitalism. They helped bring about the modern Washington consensus that the government ought not meddle in the economy at all, which we're told is only just now, four decades later, starting to face some pressure from figures like Bernie Sanders and Donald Trump. At least that is the narrative that both neoliberals and their opponents have settled on, but it's not true. The rise of neoliberalism in the '70s and '80s was, to be sure, a real ideological shift. The Friedmanites did come to dominate the economics discipline and political culture in very much the same way the Keynesians had decades before. However, the actual implementation of those free market ideas was nowhere even close to what the establishment narrative would have us believe. Virtually all the deregulation that occurred during the Reagan presidency had actually been passed during the Carter administration. It was only because the changes were phased in during the Reagan administration that made it seem like the new president was deregulating the economy. In fact, he was doing no such thing. The same goes for tax cuts. As Murray Rothbard explained, the much heralded Reagan tax cuts that were passed in 1981 were more than offset by tax increases that same year. The administration then spent years raising taxes even more in the name of closing loopholes. And all that was necessary to help fund the massive increase in government spending that took place throughout the Reagan years. The so-called Reagan revolution was truly, to paraphrase Rothbard, an acceleration of statist intervention rolled out under the cover of free market rhetoric. There was, however, one area where the Friedmanites did see their policy prescriptions implemented in a genuine and lasting way. Monetary policy. Unfortunately, when it comes to monetary policy, the Friedmanites entirely abandon their support for markets and instead advocate for government central planning. These new establishment-approved neoliberal economists believed not only in a fiat monetary system controlled entirely by a government central bank, but in a highly active inflationist central bank. Friedman himself wrote a famous book with Anna Schwartz that used questionable econometric methods to argue that the Great Depression happened because the Federal Reserve had not been printing enough money. Unsurprisingly, the political class was a lot more willing to implement a Friedmanite program that gave them more power over the economy rather than less. And so, it was in the realm of monetary policy that the largest expansions of both state power and the crony rackets it's utilized for took place under the new neoliberal paradigm. First, the Fed was leaned on to print money to help pay for the hawkish foreign policy of the post-1980 Republican Party. And then, especially under the chairmanship of the late Alan Greenspan, the Central Bank began to directly prop up the financial sector. The evolution of Wall Street from one of many options for investing one's savings to essentially been the nerve center of the entire economy was not the result of some natural change in saver preferences. It was the consequence of government policy. Specifically, Greenspan's Fed helped prop up Wall Street with a steady supply of easy money and cheap credit to artificially boost the sector, paired with extensive bailouts for these firms whenever the good times ran out. This was, in effect, a major escalation of the kinds of crony rackets the federal government has been carrying out since the Progressive Era. All justified by Friedman's monetarist apologia for government money printing. And that gets to the core of it. The Friedmanite, Reagan-led neoliberal revolution did not end economic interventionism. It rebranded it. And the financialized economy was that new brand. Getting rich on Wall Street became the epitome of capitalism. The rising stock market was the new metric for economic strength. And the Fed's money printing became the economy's lifeblood. In the decades since that Fed-enabled racket has expanded dramatically and has seeped far beyond the financial sector. It has allowed the political class to supercharge the rackets built up over the last century, which, remember, the neoliberals never did away with, transferring far more of our wealth to that small cast of well-connected cronies. And yet, thanks in large part to the neoliberals of the past and present, this highly interventionist system where the government is actively warping the market to benefit those already on top is called and truly considered by many to be genuine free market capitalism. That isn't true. It's a trick. A trick meant to mislead us so that whenever a new economic crisis strikes, we reflexively conclude the crisis happened only because the government isn't involved enough in the economy. And that is the mindset that has made so many normal, everyday, non-ideological people open to the arguments of these self-described democratic socialists. The neoliberal and neoconservative establishment has done much to carry out this trick. They shouldn't be surprised that it's working. >> [music]