tend to be labour intensive and have many linkages within the national economy. The greater the extent of infrastructural expansion, the greater the multiplier effect on local incomes, and hence on aggregate demand.
Additionally, at the same time as the rate of infrastructural investments was falling, the reduction in the growth (and in some cases the absolute levels) of expenditure on social welfare also held back what had been a major underwriter of consumption during the Great Depression and in the Golden Age after World War 2. In the face of these two dampeners to consumption, what measures did neo-liberal governments adopt to prop up aggregate demand?
Sustaining demand through Quantitative Easing
Faced with stagnant – and, in some cases, falling – demand, governments in the high-income economies sought to stimulate consumption through the introduction of Quantitative Easing programmes (QE). QE involves governments pumping money into the economy using a variety of instruments to buy securities, such as bonds, from the private sector. It had been pioneered during the Great Depression in the US, but in recent years it was the government of Japan which first resorted to QE. Following a decade of low growth, in 2001 the Japanese government began a programme which pumped liquidity into the economy. As the Global Financial Crisis unfolded after 2008, the Japanese initiative was copied by the US Federal Reserve Bank, the Bank of England and the European Central Bank. They each injected very large sums into their economies, designed to promote investment and thereby, indirectly, to promote demand. In the US, QE added more than $2 trillion to the money supply. The UK’s QE programme injected £79 billion of liquidity into the economy between 2009 and 2012. The European Central Bank provided €2.5 trillion to Eurozone economies between the beginning of the Financial Crisis and the end of 2018.
The critical feature of these QE monetary-stimulus programmes is that, although they were intended to promote investment in productive assets, in reality, outside of China (where money was directed to promote infrastructure), they were undirected. As a result, the money pumped into the economy was largely used to finance speculation. As we will see below, this speculative boom also led to an increase in consumer borrowings and spiralling debt. Speculation has taken a number of forms. At the relatively trivial end of the speculative spectrum, a Da Vinci painting was sold for $450m in 2017, a Cezanne for $272m in 2011 and a Gauguin for $217m in 2014. But the most significant arena for speculation has been in housing. In the US, house prices doubled between 2000 and 2007. They fell sharply during the 2008 Financial Crisis, but then resumed their upward trend. By 2018, they were 50 per cent greater than they were in 2012, and 70 per cent higher than in 2002. In the UK, residential house prices grew by more than 230 per cent between 2002 and 2018. In Germany, house prices grew by more than 40 per cent between 2011 and 2018. This speculation in property was not confined to the high-income economies. In India, property prices increased by more than 250 per cent between 2011 and 2018. In Shanghai, the price index for second-hand homes grew by 300 per cent between 2004 and 2017.4
Growing financialization fuelled short-termism and dulled innovation
The neo-liberal policies adopted after the early 1980s fostered the growth of what has come to be termed financialization, particularly in the US, the UK and other high-income countries. Financialization describes a structure in which the financial sector grows very much more rapidly than the productive sector producing goods and services for sale to consumers. And where there is a conflict of interests between the productive and financial sector, the interests of finance triumph. As we will see, financialization has had adverse consequences for economic growth, income distribution, innovation, investment and other drivers of economic and social wellbeing.
The roots to financialization can be traced back to the neo-liberal policy agenda and the changes in tax legislation in the US in the early 1980s. This provided companies with the facility to repurchase their shares and, in so doing, to distribute profits to shareholders. The mantra for these changes was that of ‘maximizing shareholder value’. The argument was that economic growth would be fostered if corporations were run in the interests of their shareholders rather than their workforces, society at large or a combination of these stakeholders.
These changes in the tax regime had a major impact on corporate governance. The new incentives for stock repurchases led to senior executives receiving their remuneration in the form of shares as well as salaries. This meant that, being both ‘owners’ and managers, corporate managers had a triple-dip into the cash generated by their enterprises – their salaries, the rewards they received through dividends on the shares they held, and cash repurchases of shares.
There were two major related consequences of this change in incentives to corporate managers. The first was their impact on innovation and investment. Providing management with the incentive to pay themselves with shares meant that they had an overwhelming interest in driving up the value of their company’s stocks. Share prices increasingly responded to short-term profit trends – usually reported at quarterly and half-yearly intervals. Investments in research and development, innovation and costly equipment required to deliver productivity change and growth in the medium and long term reduced profits in the short term and so were neglected. This led to a frenzied focus on the capacity of managers to deliver immediate profits at the cost of long-term growth and had perverse outcomes. New managers would sweep into a company, cut investments in innovation and costly equipment and produce sparkling profits. Share prices would consequently rise and management would cash in their shares. They would then move on as ‘heroes’ (because of their amazing impact on profitability) to the next company, which would be hollowed out in similar fashion. Ironically, their ‘hero status’ would be enhanced by the collapse of profitability in the firms which they had previously ‘rescued’ after they left, with scant recognition that this decline in profitability was a direct result of their ‘heroic’ management. As Bill Lazonick has shown, all of this led to a sharp decline in investment in innovation and other drivers of longer-term productivity growth.5
A second and related consequence of this change in tax incentives was a process of widespread and systematic ‘looting’ of company coffers by senior executives and shareholders. Not only did senior management gain from their appreciating share options but, instead of using profits to invest in the future, profits were distributed to shareholders, which of course included the very same executives who made the decisions on what to do with profits. Mariana Mazzucato refers to this as a transition from ‘value addition’ to ‘value extraction’.6
The outcome of these developments can be seen in the changing face of stock markets. Stock markets are in theory supposed to provide the finance for new productive investments. Companies which require funds to invest in expansion and product development can raise resources by issuing shares to investors. During the 1950s and 1960s, the stock markets in the US had served this function. They provided substantial investment finance for the non-financial corporate sector, averaging more than 0.5 per cent of GDP. But the changes in tax legislation introduced in the early 1980s by Ronald Reagan changed the direction of financial flows. The flow of funds shifted from investors providing funds to the corporate sector via the stock market, to the corporate sector shifting funds to shareholders, again via the stock market. In the decade before, during and after the 2008 Financial Crisis, the accumulated flow of funds from the corporate sector to the stock markets was an astonishing $4.46tn, equivalent to 2.7 per cent of total US GDP over the period.7
The neo-liberal tax reforms introduced by the Trump Administration in 2017 (the Tax Cuts and Jobs Act) provided a further bonanza to shareholders. Sixteen US corporations which had held financial assets of more than $1 trillion outside the US had been waiting for the day in which they could repatriate these funds to the US at reduced tax rates. They argued that punitively high corporate taxes of 35 per cent inhibited them from returning global profits to invest in the US. The value of these external assets for the five major companies was $269bn for Apple, $143bn for Microsoft, $107bn for Alphabet, $76bn for Cisco and $71bn for Oracle. Following intense
