Decline of Neoliberalism Behind Chaos in America

In his inaugural address, the new president of the United Stated swore “to restore the soul and secure the future of America”. However, the world has changed with time, and the fundamentals of American society and economy are no longer what they used to be. The foundation of the American spirit - liberal values - has been shaken. The United States’ road ahead is destined to be bumpy and full of impediments.

Neoliberalism reached dead-end

After the Cold War, the United States became the world’s sole superpower. Its neo-liberal development model of “American democracy + unlimited freedom market” became popular all over the world, and once became an ideal solution for many developing countries. However, no single development model can solve the problem of all countries. Those developing countries that embraced neoliberalism have encountered many problems afterward. Neoliberalism has also been questioned in America. Since the Asian financial crisis broke out in 1997, followed by the dot com bubble in 2001, the financial crisis in 2008, and the European debt crisis, neoliberalism fell off the alter, the miracle of the American model vanished, and people’s confidence wavered.

Since then, due to the decline of American values and neoliberalism, different ideologies, including populism, economic nationalism, racism, and anti-globalization, have begun to rise and spread to Europe and other places. Then, consecutive chaos occurred in the United States and the Western world. Especially after the COVID-19 outbreak, neoliberalism failed to secure American economic growth. In terms of public health, the United States has the world’s best medical personnel and medical resources, but it has turned out to be the most affected country. In terms of economy, the United States suffered its worst recession since the 1930s. Even under the special economic stimulus plan, the number of unemployed still reached dozens of millions, and the number of bankrupt companies is 10 times of that during the 2008 financial crisis. In this context, American racial contradictions and conflicts have also become intensified. The “Black Lives Matter” movement swept across the country, and White supremacy racist groups were rampant. Racial polarization and social divisions enlarged. In terms of politics, the Democratic and Republican parties kept confronting each other. Although Biden won 81 million votes, Trump’s votes were also record-breaking.

Although these crises appear differently, their root causes are all related to neoliberalism. In the United States, medical resources are too privatized and marketized, which has severely weakened the response to public health issues. Under the dominance of neoliberalism, labor, capital, technology and other production factors are more profits-oriented, which has directly or indirectly triggered immigration-related problems, hollowing out of the manufacturing sector and larger income gaps among residents, worsening economic, social, and political crises. In the face of the crises, neoliberalism is helpless. At present, the large-scale economic rescue and stimulus measures launched by the United States and the West, such as unlimited quantitative easing and other fiscal tools adopted by the Federal Reserve, are based on reckless borrowing that totally ignores bottom lines. The US Treasury Department’s economic aid policy has sent a large amount of money to enterprises and American people, which greatly deviates from the concept of neoliberalism.

Social and historical logic behind neoliberalism’s decline

As a form of liberalism, neoliberalism is a return to early classical liberalism, and a product of a specific historical phase. The emergence and development of neoliberalism is closely related to social evolution and the capitalist mode of production.

In the early stage of capitalism, the government reduced its intervention in the market, and opened wider to the outside world, which was conducive to promoting free competition and economic and social development. On this basis, the classical liberalism that flourished from the 17th to the early 20th century was born. David Hume and Adam Smith were two pioneers of this theory. As capitalism continued to develop, classical liberalism ended in the Great Depression in 1929, and Keynesianism, represented by the Roosevelt New Deal, began to prevail. From World War II to the 1970s, administrative intervention and the government’s role in safeguarding individual freedom and market economy were widely accepted.

Since the 1980s, Western economies have simultaneously experienced high inflation and economic stagnation. At the same time, due to the establishment of financial monopoly capitalism, the economy was highly financialized and securitized. All productive resources could be turned into financial assets tradable in the market. In pursuit of higher returns, neoliberalism came into being. Neoliberalism requires that all production factors should realize cross-industry, cross-border, and cross-time free flow, minimizing market barriers and government intervention, and reducing transaction cost. Similar to classical liberalism, the excessive development of neoliberalism has led to serious social divisions, hollowing-out, and political polarization. The development of financial monopoly capitalism is difficult to sustain and faces crises.

Printing money is not the way out for America

As a traditional establishment elite, Biden’s victory indicates that the Unites States will to some extent break from Trumpism and go back to its original path. The new US government has made clear through various channels that it will take all measures to unite the American people, rebuild the American economy, restore US international image, and regain the US global leadership. But in the face of multiple political and economic chaos, it may be difficult to fulfill these ambitious goals.

The first is financial constraints. The US government intends to introduce an economic reform plan with a total budget of more than $10 trillion. To this end, the government is going to launch the largest tax reform plan in history, which is to gradually increase taxation from large companies and wealthy people, and increase $4 trillion in tax revenues to support economic reforms in the next 10 years. However, according to the research by some American think tanks, the current US fiscal deficits and federal debts are already high, and the new plan may not be able to achieve the goals in a short time. With further expansion of expenditures, the US financial situation will only worsen.

The second is currency constraints. In just a few months, the Fed’s balance sheet has swelled to $7.4 trillion. Newly issued dollars have reached more than 20% of all the US currencies issued over the past hundred years. Interest rates have fallen to nearly zero, and there is only limited room for easing. In addition, a large amount of money is printed, inflation expectations are rising, and the financial bubble continues to bulge. These factors also limit the further expansion of monetary policy.

The third one is social and political constraints. In the elections, the two parties and the American people were extremely divided. According to a poll conducted by the Pew Research Center in the United States, most voters said that their differences with each other lies in “values” and “social development paths”. Although the Republican Party has lost control of both chambers of the Congress, it still has a lot of influence, which is enough to create chaos and contain the new government.

The last, and also the most important, one is the new government will find it difficult to overcome the shortcomings of neoliberalism, and even more difficult to reverse the decline of financial monopoly capitalism. The new government plans to strengthen its role in economic operations and invest in new infrastructure, energy, manufacturing, and scientific research to create new edges for the United States. Such reform, which completely deviates from American economic and political traditions, will surely go through severe trials and challenges.

Contributed by Xu Feibiao, Deputy Director, BRICS and G20 Research Center, China Institutes of Contemporary International Relations

Translated by Ren Meiqi