href="#ulink_cdcd407c-d6c8-5ad1-8127-7a2fd96311c6">Figure 2.4 Balance of payments: largest debtor and surplus economies, 1998–2019 ($m)
Source: data from Organisation for Economic Co-operation and Development (OECD)
This toxic combination of deindustrialization and free trade undermined the incentive to invest and reduced the rate of productivity and economic growth in the economies pursuing neo-liberal policy agendas. But, as we will see in the following chapter, it also contributed to growing inequality, the precarity of livelihoods and the rise of populist political leaders.
The crisis in macroeconomic policy – matching demand with supply
Building factories and infrastructure requires a variety of inputs, including labour, material supplies and services. The production of these inputs generates incomes. Workers earn wages and salaries, and this cascades along the supply chain as suppliers require their own suppliers. But does this economic activity add up to the balancing of supply and demand? Are the incomes generated in all of the supply chains sufficient to consume what is being produced in the economy?
‘Say’s Law’ in economic theory posits that supply (investment and production) creates an equivalent level of demand (incomes and consumption). In other words, the making of things produces the incomes required to consume what is made. Thus, it is believed, one problem which should not concern policy makers is the need to help consumers to mop up all the goods and services which the economy can produce. However, history shows that this key tenet in economic theory is fallacious. At its core, capitalism has consistently experienced periods in which demand is unable to keep up with productive capacity. This is not surprising. New technologies produce more products with less labour. Thus, unless wage growth or consumption by the owners of productive capital outstrip productivity growth, it stands to reason that the incomes generated in production will not be sufficient to consume the products churned out by new, more efficient production lines. Moreover, in periods when consumer confidence is low, consumers may prefer to hold back, to save their incomes for a rainy day.
Both of these factors were at play during the Great Depression in the 1930s. The Great Crash in the stock markets in 1929 plunged many consumers into debt. Unemployment grew rapidly, partly – as we will see in Chapter 5 – as a result of the introduction of labour-saving mass production technologies. And consumer confidence plummeted. Moreover, income inequality had grown rapidly during the 1920s and there were limits to how many luxury yachts, gold-plated watches and designer clothes an individual could consume. The combination of these developments resulted in a downward spiral in the major economies. As consumption fell, firms reduced their output or went out of business. This led to a reduction in the incomes required to consume what was being produced. Consumer confidence fell, further dampening the demand for the goods. And thus, the economy spiralled downwards.
These problems, and the resultant policy responses, were addressed by Keynes during the 1930s. He argued that, since there was a periodic tendency in capitalism towards under-consumption, public policy had to intervene to support demand. Tackling the crisis in confidence during his inauguration in 1932, President Roosevelt famously declared, ‘The only thing we have to fear is fear itself.’ He then rolled out his New Deal Program which increased government expenditure and helped to grow the US economy out of its deep depression. The New Deal provided relief to the unemployed. It created 250,000 jobs for young men to work in projects in rural areas, and promoted very large investments in infrastructure, skills development, schools and other public facilities. Although in itself the New Deal did not solve the problem of economic stagnation (it was the ‘boom’ created by the mass production of arms during World War 2 which proved to be the decisive stimulant to growth), these government-led investment programmes played an important role in economic revival.
The challenge of managing consumption to balance production remained a critically important component of public and economic policy throughout the twentieth century, and has endured during the first two decades of the twenty-first century. As we will see in subsequent chapters, after World War 2, government expenditure played an important role in sustaining consumer demand. In the US, and then in Europe, there were massive investments in housing and in the infrastructure required to promote the growth of automobilization and suburbanization. In Europe, welfare programmes played a complementary role in sustaining consumption. Although these post-war welfare programmes were not rationalized in terms of their contribution to economic stability and growth, both directly (though benefit payments) and indirectly (as jobs were created in the public sector delivering welfare benefits) they played a critical role in bolstering consumption.
But from the beginning of the 1980s, these well-tried structures for matching demand and supply in the economy were undermined by the introduction of neo-liberal economic policies. These were pioneered in the UK and the US – the Thatcher–Reagan revolution – and then replicated across the globe, sometimes as a result of national choice and, in other cases (notably in the developing world), as a result of pressure exerted by the US, the UK and the EU. Neo-liberalism sought to reduce the role of government and to reduce the ‘tax burden’. It promoted lower tax rates on higher incomes in order to ‘remove the disincentive to entrepreneurship and investment’. Simultaneously, the neo-liberal agenda attacked welfare payments on the basis that social security promoted the growth of a ‘work-shy’ labour force living off welfare. (The irony in this agenda was that, whilst it was argued that welfare support reduced the incentive of the poor to work, it was simultaneously argued that tax reduction would increase the incentive of the rich to work even harder!)
Corporate tax rates were progressively reduced in an attempt to encourage investment and to bid investments away from competitor countries through a ‘war of incentives’. Figure 2.5 shows the trajectory of corporate profit taxes in major high-income economies. In some cases – notably the UK and Sweden – these have fallen by two-thirds since the neo-liberal tax revolution in the early 1980s. The evidence to support the investment-promoting function of these tax-reducing reforms is weak. For example, in the UK corporate taxes were reduced from 27 per cent in 2010 to 19 per cent in 2017 (with a commitment to a further reduction to 17 per cent in 2020). This had no impact on the rate of corporate investment, which stagnated between 2010 and 2018. In the US, as we will see below, swingeing cuts to corporate tax rates were mostly used to reward shareholders. As I will show in the chapter which follows, this fall in corporate tax rates was matched by a large decline in personal tax rates.
Figure 2.5 Corporate tax rate: France, Germany, US, UK, Japan and Sweden, 1981–2019 (%)
Source: data from OECD
This neo-liberal agenda undermined the capacity of governments to fund investments in infrastructure. Consequently, over the subsequent decades the deficit in infrastructure spending mushroomed in the high-income economies, particularly in the US and the UK. In the US, between 2003 and 2017, public expenditure on roads, bridges, water systems and other infrastructure fell by 8 per cent. In 1930 (even before Roosevelt’s New Deal Program investments in roads and dams), infrastructure investments were 4.2 per cent of GDP. In 2016, this ratio had fallen to 2.5 per cent. The American Society of Civil Engineers estimated that underinvestment in infrastructure between 2016 and 2025 would exceed 2 trillion dollars.2 The UK is in an even more parlous state with the share of infrastructure spending in GDP being even lower than that in the US.3
The falling rate of investment in infrastructure had an adverse impact on economic productivity as it increased the logistical costs of moving goods, services and information around the economy. But it also had the effect of dampening the growth in aggregate
