Gaming the System

The Big Short and neoliberalism: The story behind the crash

If you haven't seen The Big Short, you should. The film portrays Wall Street, flying under the banner of neoliberalism, engaging in an amoral feeding frenzy the likes of which America hasn't seen since the Roaring Twenties. Subprime loans, collateral debt obligations, credit default swaps: Warren Buffett called it "playing with weapons of mass destruction." Paul Volker likened it to casino betting.

While we can trace neoliberalism's roots back to a reading, and a misreading, of Adam Smith, it is Milton Friedman who serves as neoliberalism's modern-day high priest. In Capitalism and Freedom, a polemic, more assertion than argument, Friedman launches into his thesis, which, boiled down, is that the state has an important but limited role to play.

In his book, A Brief History of Neoliberalism, David Harvey sums up the argument: strong private property rights, free markets and free trade. The role of the state is to secure private property rights and to guarantee the proper functioning of markets (by use of military force if necessary). Moreover, if markets don't exist, they must be created, which leads, of course, to the commoditization of almost everything.

Friedman opposed the creation even of national parks; he thought that all highways should be toll roads, that secondary education, health care, and Social Security all should be privatized. Much of the military as well. He opposed the 1964 public accommodation legislation — reasoning that since discrimination (so he thought) would cost businesses money, they would change their ways as the free market dictated.

Ronald Reagan came along in 1980 and gave neoliberalism a soft smile and a shoulder shrug. In 1987 he appointed Alan Greenspan to head up the Federal Reserve. Greenspan is a supporter of Friedman's neoliberalism and, what's more, a devotee of Ayn Rand.

Add a couple of carefully vetted Supreme Court nominations and neoliberal America was open for business. The financial collapses of the late '80s were assumed to be merely aberrant; neoliberals believed that with even more imaginative financing, the market boat could be righted. For them the Roaring '90s were just ahead.

Donald Rumsfeld, a disciple of Friedman, got his chance to experiment with neoliberalism when the U.S invaded and occupied Iraq. Paul Bremer, the U.S.-appointed czar, a Rumsfeld acolyte, imposed neoliberalism on Iraq. He issued orders that included the privatization of all public enterprises, including the army. Iraq was to be sold off, and the U.S. would see to it that the "democratic" process installed a government committed to the neoliberal agenda.

So, 30 some-odd years later, the question is this: Did neoliberalism work as promised? Did incomes rise? Did production increase? Did America see a return to '40s equality? Did those lower taxes produce the promised trickle-down effect?

And is the world a more stable place?

My longtime Eastern Washington University colleague Keith Quincy seeks to answer this question in his 2012 book Worse Than You Think. Supported by 45 pages of footnotes, he concludes with a resounding, "No, it isn't." He finds that since the early '70s, when Baby Boomers were first entering the job market, real income has fallen except for a few professions. For most part, given the loss of manufacturing in tandem with a war on unions, the rise in finance and rigged taxes, we don't see wages rising to match productivity and inflation. Instead we see unemployment, private debt, plutocracy and a shriveling middle class.

His data show that every president since Reagan has underestimated unemployment and overstated growth — that numbers being reported are not even close to reality. (You want to report lower unemployment? Just don't count those who are no longer looking for work. And who would know?)

Greek economist Yanis Varoufakis, in his book The Global Minotaur, agrees that the middle class, which had begun to decline in the early '70s, really took a dive with the coming of '80s neoliberalism. It was then that "trickle down" became "trickle up." Varoufakis, however, also associates neoliberalism with America's Cold War strategy (and more broadly, America's national security strategy).

It worked this way: America spent its postwar surpluses restoring the European and Japanese economies viewed as critical to Cold War strategy. We effectively justified national security ends through neoliberal means. By the 1970s, however, there were no more surpluses, so America simply reversed course and began to borrow to buy. America thus protected its world position by becoming the world's "surplus circulator," an essential but terminal strategy.

Writers who have examined this history argue that the unintended consequences have been dramatic or devastating, depending on your point of view: further breakdown of community, rising inequality, rising debt, diminishment of "national interest" aside from national security.

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About The Author

Robert Herold

Robert Herold is a retired professor of public administration and political science at both Eastern Washington University and Gonzaga University. Robert Herold's collection of Inlander columns dating back to 1995, Robert's Rules, is available at Auntie's.