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Neoliberalism 2.0 may lead to greater crises

By Grzegorz W. Kolodko | China Daily | Updated: 2018-02-12 10:16

In the day and age when it seemed to some people that neoliberalism-having led to a widespread financial and economic crisis, followed by the social and political turmoil-had been consigned to where it belongs, that is to the trash bin of history, the economic and political theory is rearing its ugly head again.

Undoubtedly, "new pragmatism"-a novel, unorthodox outline of economic theory and economic policy aiming for triple balance, economic, social and ecological-is an alternative proposal to failing neoliberalism, but there's a long way to go before it prevails. China can contribute a lot to the success of new pragmatism, if it continues its fruitful combination of the power of the invisible hand of the market with the visible hand of the government.

A decade after the outbreak of the devastating global financial crisis, the professional community has no doubts that neoliberalism was its main underlying cause. It is an ideology, school of economics and an economic policy that cynically feeds on such magnificent liberal ideas as freedom, free choice and democracy as well as private property, entrepreneurship and competition, favoring enrichment of a few at the expense of the majority.

This goal is furthered by the kind of deregulation of the economy which puts the world of labor at a disadvantage to the world of capital. The financialization of the economy was pushed ad absurdum at the turn of the 21st century, and the fruits went to few at the expense of the majority by manipulating the fiscal redistribution in a manner that favors the wealthier social strata.

It is precisely the growing income inequalities and the widening areas of social exclusion that caused people to first lose temper and then take to the streets, also to the famous Wall Street, the occupied one. Things were aggravated by the irritating nonchalance of a section of political elites, as well as of the media and "famous economists" furthering the agenda of those elites, who tried to put the blame for the glaring income and wealth inequalities, growing due to neoliberal practices, hence an intentional policy, on objective processes: on the current phase of technological revolution and globalization.

This way a part of the anger was skilfully focused on alienson other countries and immigrants, on the Chinese and Mexicans, and elsewhere on Muslims or Central Eastern Europeans-and, as a result, on the irreversible globalization, and another part on one's own establishment, which was by no means entirely blameless. It turned out it was grist to the mill that brings waves of new nationalism, xenophobia, protectionism and anti-globalization resentments.

Lesson of financial crisis being ignored

In the year Donald Trump assumed the office of the United States president, a yet greater error was committed, because this time a moth's flight toward a flame began after the great lesson of recent years' crisis, and everybody should be wiser in the hindsight. So should neoliberals.

Unfortunately, neoliberalism's signature greed coupled with populism's naivety created a toxic mix. And that is exactly the path Americans are taking by pushing the tax law through their Congress.

Only 27 percent of Americans support the new taxation law and as many as 52 percent are against the solutions being implemented.

Biased progovernmental experts and economists, corrupted by the neoliberal lobby, are announcing a major economic growth acceleration due to decreased taxes for companies, corporate income tax (CIT), independent centers calculate that the additional GDP growth by 2027 will be a negligible 0.40.9 percent, or next to nothing. According to the Congressional Research Service analysis, a CIT reduction by 10 percentage points (the law cuts it by 14 points, from 35 to 21 percent) can increase the longterm growth rate by a mere 0.15 percent. So what was the point of this battle?

Enriching a few at expense of many

To ensure that other changes jointly implemented under the trendy banner of tax cuts for companies, help enrich a few at the expense of many. As a deputy prime minister and minister of finance of Poland (from 1994 to 1997 and again in 200203), I myself used to cut taxes, including CIT, radically but sensibly: first down to 32 percent from 40 percent, and then from 28 percent down to the present 19 percent, but this was accompanied by other fiscal changes that promoted not only capital formation and investments but also concern for desirable income relations and human capital development. Growth picked up pace, income inequalities dropped, longterm public debt did not increase. This will not be the case with the US, as growth will not significantly accelerate, unemployment rate will not fall, inequalities will grow and the debt will increase.

The way the tax package is structured, lower taxes and reliefs will benefit, in the coming years, a great majority of taxpayers, including those from less wealthy and more populous strata. But their reductions will disappear in 2025, and then their moment will come to pay for the cuts for the rich, which are not time-limited. Impartial analysts have calculated that the greatest beneficiaries of the reform will be the wealthiest, rich multinationals and property owners.

It turns out that neoliberalism, apparently still undefeated despite the recent crisis, is condemning the US economy to another, and greater crises. This is not only a private business of the US as, even though the country's relative role in the world economy will be gradually decreasing, it will still play, in several decades to come, a key part in world finance, and the US dollar will remain, in the foreseeable future, the main reserve currency. And that's why others will also pay for this new episode of neoliberal excesses. It is worth remembering who we will have to thank for that.

The author is distinguished professor of Economics at Kozminski University, former vice-premier and minister of finance of Poland, international adviser with CCG, and the author of Truth, Errors and Lies: Politics and Economics in a Volatile World and Whither the World: The Political Economy of the Future.

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