Neoliberalism died a long time ago, but the COVID-19 crisis buried it altogether, as social democrats return to their first instincts.
The Return of the Welfare State …
When the Joe Biden administration and Congress passed a $1.9 trillion aid package, Paul Krugman quipped in The New York Times that this marked the “end of the ‘end of welfare as we know it,’” as former President Bill Clinton put it.
The COVID-19 crisis revealed the health care system’s shortcomings; i.e., involvement of the private sector and the free market model in the management of testing and vaccination processes, which came at the cost of more than 2.6 million lives.
The general population has already started to abandon neoliberal ideology and turn to a strong state able to solve its problems. Ronald Reagan’s quoted remark that “the nine most terrifying words in the English language are ‘I’m from the government, and I’m here to help’” from the 1980s has become irrelevant. During these difficult times, citizens are calling for government intervention.
The Biden administration is responding to those demands. The poorest families are seeing their income increase by 20%, with an extra $12,460 to households of four with one working parent and one unemployed parent. This policy alone is thought to reduce child poverty by 50%. The vast majority of low-income Americans will receive an additional $1,400. Health insurance premium subsidies and child benefits will provide additional support. Some $4 billion in debt relief for minority farmers is also thought to be a step toward healing the wounds of slavery.
According to a report by The Economist, the relief plans enacted since the beginning of the pandemic total $6 trillion. The Federal Reserve will inject $2.5 trillion into the banking system this year. Interest rates will continue to remain at or around zero. Fear of inflation seems to be a disease now only seen in neoliberal dinosaurs.
In the aftermath of the 2008 crisis, support was directed to rescue banks, but it failed to stimulate the economy. This time, aid is being extended to the poorest and therefore most disadvantaged segments of society. They are known to have the highest spending-consumption trend compared to their income. Thus, the aid is expected to strengthen aggregate demand, driving businesses to invest more in production and create more jobs. Contrary to neoliberalism, the importance of the Fed and monetary policy in economic management decreases as government and fiscal policies take the lead.
Surveys show that 75% of citizens and 60% of Republican voters approve the Biden administration’s aid package, which provides support to the lower and middle class. Republicans, who did not vote for the aid package in the Senate, are keeping a low profile. The GOP is apparently abandoning the economic debate and retreating into “culture wars” issues, focusing on children’s books and TV series.
At this point, we can make two observations. Voters can change their mind if they see a government that is able to implement crucial economic policies. Second, if the Biden administration can take advantage of the popularity triggered by this aid package and manage the “culture wars,” it may have the chance to deal a major blow to the “fascism on the rise.”
… And Its Global Effects
The editor of The Economist, a stronghold of neoliberalism, expects that social democratic policies aimed at employment in the U.S., stimulating demand and improving income distribution will make a positive contribution at the global level.
Depending on the strength of American economic growth, the increase in imports will provide significant support to economic growth at the global level. Moreover, this change in policy will probably be adopted by other developed economies seeking to manage crises. Thus, instead of a new way to accumulate capital, we have found a new crisis management model.
On the flip side, international capital, which will want to benefit from the economic recovery and possible interest rate increases, will tend to return to the center from peripheral countries. According to the Financial Times, the economies of poor countries with high dollar-denominated debt, poor budgetary balances and weak reserves will have a hard time. I don’t even want to think about the challenges facing a country with negative foreign currency reserves such as Turkey.