Reagan, Thatcher, and the dawn of neoliberalism
“Redistributive effects and increasing social inequality have in fact been such a persistent feature of neoliberalization as to be regarded as structural to the whole project.” – David Harvey, “Freedom’s Just Another Word”
The elections of Ronald Reagan and Margaret Thatcher in 1981 and 1979, respectively, ended the post-WWII era of regulated capitalism and ushered in the new age of neoliberal economic policy, enacting a slew of legislation that unfettered capital from the structures and systems that had been created to keep it in check.
Before the election of Reagan and Thatcher, the postwar period had seen meaningful social compromises made between capital and labor that allowed for the successful accumulation of capital, but also ensured that capital remained embedded in a web of social and political constraints that checked its inherently extractive nature. The economy was a mixed-market one in which business and industry were regulated by the state, and in which it was accepted and expected that the state would focus on full employment, economic growth, and the welfare of its citizens. In this era of embedded capitalism, state power would be freely deployed alongside – or even, if necessary, intervening with, by way of welfare structures like education and healthcare – market forces to achieve these ends.
But by the end of the 1960s the mixed-economy system of the early post-WW2 years was falling apart. “The embedded liberalism that had delivered high rates of growth to at least the advanced capitalist countries after 1945 was clearly exhausted and was no longer working,” David Harvey writes in Freedom’s Just Another Word.
The social and political constraints allowed under embedded capitalism had shown themselves to be at odds with capital accumulation. “The neoliberal project,” then, Harvey writes, was “to disembed capital from these constraints.”
"There's no such thing as society."
Thatcher was elected Britain's Prime Minister in 1979 and began pushing a suite of economic policies that advanced supply-side solutions to the stagflation that had grown rampant during the 70s. She also got to work dismantling the social democratic state that had emerged in Britain after 1945. Trade union power was severely limited, companies were privatized, and the commitments of the welfare state abandoned. Taxes reduced, which hindered municipal governance and encouraged large inflows of foreign investment.
But perhaps the largest shift induced by Thatcher’s administration was the abandonment of social solidarity and the rejection of the idea that the government’s role was to intervene on behalf of some societal monolith.
“There’s no such thing as society,” Thatcher once famously remarked. “There are individual men and women and there are families. And no government can do anything except through people, and people must look after themselves first. It is our duty to look after ourselves and then, also, to look after our neighbors."
"The most terrifying words in the English language are: I'm from the government and I'm here to help."
In the United States, the process of neo-liberalization began before Reagan came into power with his predecessor Jimmy Carter’s increase of the nominal interest rate to 20 percent under Chairman of the Federal Research Paul Volcker. This ‘Volcker shock’ was the U.S.’ answer to the paralyzing stagflation of the 1970s. Unlike with Thatcher, however, Carter’s monetarism was not accompanied by an abandonment of social welfare and government regulation. That came instead with Ronald Reagan, who beat Carter for the presidency in 1980 and almost immediately began cutting budgets and taxes and attacking trade unions. The most famous of these attacks was his 1981 stand-off with the striking members of PATCO, the air traffic controllers’ union.
“This signaled an all-out assault on the powers of organized labor at the very moment when the Volcker-inspired recession was generating high levels of unemployment,” writes Harvey. “But PATCO was more than an ordinary union: it was a white-collar union which had the character of a skilled professional association. It was, therefore, an icon of middle-class rather than working-class unionism.” In other words, the fact that Reagan would take on PATCO, a union of highly-educated workers who weren’t anti-Republican in the way most blue-collar union members are, meant he would take on anybody.
The effect of the PATCO strike’s failure on labor conditions was intense: the Federal minimum wage, which had been on a par with the poverty level in 1980, fell to 30 percent below that level by 1990.
Deregulation continued at a whip-fast rate. Capital moved away from the unionized north-east and midwest to the non-union and weakly regulated south and west (a move that was made largely possibly by tax breaks on investment). Perhaps most significantly for the immense social inequality, we see today, corporate taxes were reduced dramatically and the top income tax rate was reduced from 70 percent to just 28 percent – the largest tax cut in American history.
While both the US and the UK began cold campaigns of neoliberalism in the late 70s, it was the US that waged an imperialist war against oil-producing countries in much of the non-communist world (and also the US under Reagan that incurred the largest deficit in US postwar history. Britain maintained a balanced budget).
Saudi Arabia, presumably under direct military pressure from the United States, agreed in the mid-1970s to recycle all of their petrodollars through New York investment banks, leaving the latter with massive funds that they needed to do something with to turn a profit. Still, in its mid-1970s slump of depressed economic conditions and low-interest rates, the United States wasn’t an attractive hunting ground for the New York bankers – instead, they looked to foreign governments which, as head of Citibank Walter Wriston pointed out, “can’t move or disappear.”
The United States would intervene in a country battling a strongman, and, in return, Harvey writes, “they would always keep their country open to the operations of US capital and support, and if necessary promote US interests, both in the country and in the region...as a whole...For example, the CIA engineered the coup that overthrew the democratically elected Mosaddeq government in Iran in 1953 and installed the Shah of Iran, who gave the oil contracts to US companies (and did not return the assets to the British companies that Mossadeq had nationalized). The shah also became one of the key guardians of US interests in the Middle Eastern oil region.”
Post-1973 (the year that Saudi Arabia agreed to recycle petrodollars through New York banks), the big New York investment banks began focusing on lending capital to foreign governments, which required the liberalization of international credit and financial markets. Developing countries were eager for credit and borrowed heavily at rates that were advantageous to New York bankers. Despite rates skewed in their favor, the New York bankers faced a serious disadvantage: the loans they made were in US dollars, and so even a modest rise in US interest rates could cause vulnerable countries to default and expose the New York investment banks to serious losses.
Reagan came up with a solution that both lessened the loss-exposure of New York banks and ensured that borrowing countries would adopt a neoliberal doctrine that would benefit the US and other advanced capitalist nations. The IMF and World Bank would roll over debt in defaulted countries – in return for the implementation of neoliberal reforms, like welfare cuts, privatization, and more flexible labor market laws. “The restoration of power to an economic elite or upper class in the US and elsewhere in the advanced capitalist countries drew heavily on the surpluses extracted from the rest of the world through international flows and structural adjustment practices,” writes Harvey.