Even for the casual reader, it is hard to miss the radical ideas behind US President Joe Biden’s economic programmes that were outlined in his speech to a joint session of Congress last week. It casts a wide net across all segments of society and the economy, which is to be expected of policies aimed at recovering from the deep end of the crisis.
But its real significance lies in the attempt to reset and introduce a new paradigm in how the US approaches its economic policy. What the paradigm is can be better understood from the perspective of what it is against, which in popular parlance is known as neoliberalism.
It is a loaded, hard-to-define term that traces its intellectual origin to prominent ideologues and self-proclaimed “neoliberals” Friedrich Hayek and Milton Friedman. But for at least the past five decades since the ideas received the political backing of former US president Ronald Reagan and UK prime minister Margaret Thatcher, it has been the dominant ideology that has shaped our economic system.
There are small variations depending on the national context, but it is essentially a system that puts its faith in the free market and the doctrine of small government. It promotes the idea that the solution to economic and social problems lies in the invisible hand of the economy. So, the less intervention from the government, the better.
Even in matters that may require government intervention such as unemployment and low wages, the neoliberal proponents would argue that the market should be left alone to find its own equilibrium to solve the problem. Hence, the privatisation of public services became the dominant feature of the economy; deregulation sits on top of government initiatives so that businesses can carry on unhindered and taxes are kept low on the understanding that this accelerates economic growth.
Under this framework, welfare and social security programmes were considered a burden to the state as they, in theory, discouraged people from working and created a culture of dependence.
Through international institutions such as the World Bank and International Monetary Fund, this economic paradigm was promoted with missionary zeal and implemented like a dogma throughout the developing world.
Because the alternative was socialism, the neoliberal ideas became ideological. So, any attempt to deviate from economic orthodoxy was deemed apostatic.
Following the implementation of neoliberal policies in the 1980s, the US appeared to have run a good decade. Both incomes and productivity grew exponentially through the 1990s. Whether it has anything to do with deregulation or a low tax regime and welfare spending cuts is a matter of considerable debate.
But the wall of neoliberalism began to crack at the dawn of the new millennium. Despite all the free market prescriptions, the economy failed to grow, private investment declined and working adults actually spent fewer hours working, defying the theory that income tax cuts would encourage people to work more.
In the meantime, inequality grew wider. According to the US Federal Reserve, the top 1% of Americans now control more than US$34 trillion or 30% of all household wealth, while the
bottom 50% holds only US$2.1 trillion (1.9%).
The flaw of neoliberalism was laid bare in 2008 when the entire financial system of the West collapsed, costing the economy more than US$15 trillion. Policymakers were unanimous in voicing that deregulation was to blame for the crisis.
Many thought that the global financial crisis would be the trigger point for the US to shift away from the spectre of the “free market”. However, it took more than a decade, the Covid-19 pandemic and a 78-year-old mild-mannered leader for the country to wake up to its senses and realise that there was something wrong with the way its economy works.
Biden strikes at the heart of neoliberalism. He proposes a slew of tax increases on capital and high income, with those at the top paying as high as 43% in taxes. It will effectively reverse the uneven tax structure that favours the wealthy instead of the middle class and usher in what he calls a fairer tax system that redistributes the disproportionate income at the top to a wider segment of society.
The revenue from these taxes will be channelled into the largest green infrastructure development programmes, the creation of a care economy to create hundreds of thousands of caregiving jobs for the disabled and the elderly, and a potentially permanent child allowance of up to US$3,600 per year. The former may be common to governments around the world, but the latter two — in-home care jobs and cash transfers to children — will technically turn the US government into a job guarantor and provider of universal basic income for families.
For the Scandinavians, this is probably nothing to shout about. But for the observers of American capitalism, Biden’s economic plan, in its current form, stands equal in its breadth and depth to Franklin Roosevelt’s New Deal and Reagan’s neoliberalism. Barring any ideological opposition, it will be the US’ third act after 1933 and 1981 to bring in a new economic paradigm that will radically change the economic and social trajectory for many decades to come.
Nazim Rahman works in private equity