December 2012        

An economic analysis of neo-liberalism

Neo-liberals argue that the role of the state should be reduced and the role of the market should be increased.
      1. They argue that taxes should be cut. This reduces the role of the state and increases profits and the income of shareholders. Tax cuts reduce services to the rest of the population. Irish trade unions fell into the trap of forgoing services (taking tax cuts) for pay increases in the national wage agreements. In the United States the Republican Party argues that there should be tax cuts for the rich.
      2. Neo-liberals argue that government expenditure should be cut. This includes cuts in welfare so as to provide “incentives to work” when there are no jobs. In addition, they argue that the budget should be balanced if there is a deficit. To get to this requires cuts in expenditure and increases in taxation and “austerity,” as we know it in Ireland.
      3. They argue that businesses should be deregulated. The argument goes that government regulation increases costs and makes them less efficient. The banking debacle of 2007 shows how wrong this argument is. Deregulation increases profits for businesses in the short term.
      4. They argue that inflation should be kept low (2 per cent is the European Central Bank rate). Lenders tend to be rich, borrowers tend to be poor. If the interest charged to a borrower is 3 per cent and inflation is 2 per cent, the borrower is paying 1 per cent in real terms (1 per cent above inflation). This makes the rich richer and the poor poorer. This applies to creditor (rich) countries and debtor (poor) countries. So Germany is getting real interest transfers from Spain, Ireland, Portugal, and Greece. Neo-liberals argue that low inflation leads to high growth and low unemployment. There is no economic evidence for this assertion.
      5. They believe in low wages. Thus they advocate undermining the role of trade unions by changing the laws on picketing. They call for an end to the minimum wage, or a reduction in it. They want a high level of unemployment to keep downward pressure on wages.
      The IMF and the OECD called recently for the reduction of the Irish minimum wage, which stands at more than half the median wage, to between 30 and 40 per cent. They are in the forefront of the austerity measures that are damaging the peripheral countries of the euro area. Falling wages should cause profits to rise, but they have the opposite effect, cutting consumer spending and profits.
      6. They believe in privatisation. They argue that private firms are more efficient than state-sponsored companies, because they operate in competitive markets. But in reality they become monopolies when they are sold to private monopolies.

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