The Downfall of Neoliberalism: Side Effects

Modern Political Ideology Part 2

The Downfall of Neoliberalism: Side Effects

As discussed in Part 1, neoliberalism reshaped the global economy over the past five decades. It championed market liberalization, globalization, and deregulation, fostering unprecedented growth and technological innovation. However, this triumph came with significant costs. While neoliberalism succeeded in driving economic efficiency, it also unleashed profound side effects, including rising inequality, job displacement, social fragmentation, and environmental degradation. These unintended consequences have fueled political polarization, undermined trust in institutions, and challenged the sustainability of neoliberalism as a governing ideology.

The election of Donald J. Trump as the 47th President brought various news headlines and articles claiming the death of neoliberalism. (See Notes)

This essay examines the fallout of neoliberal policies, focusing on the systemic challenges that emerged as market efficiency often came at the expense of equality, community stability, and environmental stewardship.

I. Economic Inequality

Neoliberalism’s emphasis on free markets and deregulation disproportionately benefited corporations, high-income earners, and asset owners. While global GDP surged, wealth and income became increasingly concentrated in the hands of a few.

Concentration of Wealth:

From 1980 to 2020, the share of U.S. income held by the top 1% rose dramatically, rising from 10% to over 18%. In contrast, the bottom 50% saw their share decline from 20% to under 14%. (Source: World Inequality Database)

Wealth inequality mirrored income disparities, with the richest 1% controlling over 34% of total U.S. wealth by 2020, up from 23% in 1980.

Stagnation of Wage Growth:

While productivity soared by 80% between 1980 and 2020, private sector pay for production workers grew by just 30%. This disconnect left many workers struggling to maintain their standard of living. (Source: Economic Policy Institute) It’s not that material well-being didn’t rise, but the previous affordability of one income began to creep into the affordability provided by households with two incomes.

Deregulation and weakened labor protections eroded workers’ bargaining power, exacerbating income disparities.

Policy Drivers:

Tax reforms, such as the Reagan-era Tax Reform Act of 1986, significantly reduced top marginal tax rates while cutting corporate taxes. The Securities and Exchange Commission (SEC) legalized stock buybacks in 1982. These changes amplified wealth concentration among high-income earners and shareholders.

II. Job Losses and Economic Displacement

Globalization and market liberalization fundamentally transformed labor markets, often at the expense of traditional industries and local economies.

Deindustrialization:

The offshoring of manufacturing jobs to lower-cost countries like China and Mexico devastated industrial regions in the United States. Between 2000 and 2020, the U.S. lost approximately 5 million manufacturing jobs. (Source: Bureau of Labor Statistics)

Case Study: The "China Shock" following China’s entry into the WTO in 2001 led to significant job losses in industries like textiles, steel, and machinery.

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Case Study 1: China and the WTO

Background

China’s accession to the World Trade Organization (WTO) in December 2001 marked a seismic shift in global trade dynamics. This event was the culmination of decades of economic liberalization in China and years of negotiation with global trading partners. It symbolized the integration of the world’s most populous nation into the global market economy, aligning with neoliberal principles of free trade and open markets.

Impact on the United States

1. Trade Volume Surge:

   • In 2001, U.S.-China trade totaled $121 billion. By 2022, it had ballooned to $690 billion, making China the United States’ largest trading partner in goods for much of that period. (Source: U.S. Census Bureau)

   • Imports from China grew rapidly, particularly in consumer electronics, apparel, and machinery, while U.S. exports to China focused on aircraft, soybeans, and vehicles.

2. Price Deflation for U.S. Consumers:

   • The influx of inexpensive Chinese goods contributed to price deflation in consumer markets. For example, between 2000 and 2010, the average cost of electronics in the U.S. fell by 10%-15%. (Source: U.S. Bureau of Labor Statistics)

3. Job Losses in Manufacturing:

   • From 2001 to 2011, the U.S. lost approximately 2.4 million manufacturing jobs attributed to increased competition from Chinese imports, often referred to as the "China Shock." (Source: Economic Policy Institute)

   • States in the Rust Belt—Michigan, Ohio, and Pennsylvania—were particularly affected, as traditional industries like steel and textiles faced steep competition.

4. Investment and Growth in China:

   • U.S. businesses benefited from access to China’s vast labor pool and consumer market. For instance, companies like Apple and General Motors significantly expanded their operations in China, contributing to their global revenue growth.

   • By 2024, China had become the largest market for several U.S. multinationals, including Tesla, which reported over 36% of its global sales from China.

Case Study Conclusion

China’s integration into the WTO catalyzed significant economic growth for both nations but at a cost to U.S. manufacturing sectors. While U.S. consumers benefited from lower prices, workers in traditional industries faced dislocation. The “China Shock” remains a contentious topic in U.S. political discourse, shaping debates over trade policy and economic fairness.

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Impact on Rust Belt Communities:

Once-thriving manufacturing hubs in states like Michigan, Ohio, and Pennsylvania faced urban decay, rising unemployment, and declining social cohesion.

The opioid crisis, which disproportionately affected these areas, exacerbated the economic and social toll of deindustrialization.

Rise of the Gig Economy:

Neoliberal emphasis on labor market flexibility led to the rise of the gig economy, characterized by precarious employment and limited benefits.

While platforms like Uber and DoorDash created new opportunities, they often left workers without job security, healthcare, or retirement benefits.

While it succeeded in driving economic growth, neoliberalism’s side effects—rising inequality, job displacement, and social fragmentation—have fueled a backlash that challenges its viability as a governing ideology.

III. Social Fragmentation

Neoliberalism’s market-centric approach weakened community ties and deepened societal divisions.

Erosion of Community Institutions:

The decline of unions, churches, and local civic organizations, once pillars of American society, left many communities without a sense of solidarity and purpose. While factors beyond neoliberalism contributed to the changing feel of community cohesion, the corporate structure driving neoliberalism exported community wealth to foreign workers and U.S. shareholders.

Globalization often favored urban centers, leaving rural areas and small towns economically and socially marginalized.

Political Polarization:

The rise of platform technology companies with social media algorithms channeled news content to tribal audiences. Rising inequality and economic displacement fueled resentment, particularly among working-class voters who felt abandoned by political elites.

Populist movements on both the left (e.g., Bernie Sanders) and right (e.g., Donald Trump) capitalized on these frustrations, challenging the neoliberal status quo.

Cultural Consequences:

Urban-rural divides, generational tensions, and racial disparities intensified as neoliberal policies failed to address systemic inequities.

Trust in government and institutions plummeted, with only 20% of Americans expressing confidence in their government by 2020, down from 73% in 1958. (Source: Pew Research Center)

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Case Study 2: The North American Free Trade Agreement (NAFTA)

Background

Implemented on January 1, 1994, NAFTA created the largest free trade zone in the world, linking the economies of the United States, Canada, and Mexico. The agreement sought to eliminate tariffs, reduce trade barriers, and boost economic integration across North America.

Impact on the United States

1. Trade Growth:

   • Between 1993 and 2017, U.S. trade with Canada and Mexico more than tripled, rising from $290 billion to $1.3 trillion. (Source: Congressional Research Service)

   • Exports to Canada and Mexico accounted for nearly one-third of total U.S. exports by 2017. This included agricultural exports and services exports.

2. Job Creation and Loss:

   • Job Gains: Sectors like agriculture and services saw significant benefits. For example, U.S. agricultural exports to Mexico quadrupled, with corn and soybeans experiencing the largest growth. The agreement supported 14 million U.S. jobs tied to trade with Canada and Mexico, with nearly 5 million of these jobs supported by the increase in trade. (Source: U.S. Chamber of Commerce)

   • Job Losses: The Economic Policy Institute estimates that approximately 850,000 U.S. manufacturing jobs were lost due to NAFTA, primarily in industries like textiles and auto manufacturing.

3. Investment and Outsourcing:

   • U.S. companies increased foreign direct investment (FDI) in Mexico to take advantage of lower labor costs. For example, the auto industry saw significant offshoring of production to Mexico, leading to cheaper vehicles for U.S. consumers but contributing to job losses in the Midwest.

   • In contrast, Canadian and Mexican firms invested more heavily in the U.S., with manufacturing plants in sectors like steel and machinery supporting regional supply chains.

4. Economic Integration:

   • NAFTA created highly integrated supply chains across North America. For instance, the automotive industry routinely moves parts across borders multiple times before final assembly, enhancing efficiency but increasing dependency on cross-border trade.

Case Study Conclusion

NAFTA redefined economic relations in North America, boosting trade and fostering deeper integration. However, the agreement also fueled debates over the displacement of U.S. workers and the trade-offs between cheaper goods and local job preservation. The renegotiation of NAFTA into the United States-Mexico-Canada Agreement (USMCA) in 2020 reflected ongoing efforts to address these concerns.

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IV. Environmental Degradation

The pursuit of economic growth under neoliberalism often overlooked environmental consequences.

Unsustainable Growth:

Global CO₂ emissions increased by over 60% from 1980 to 2020, driven by industrial expansion and fossil fuel dependency. (Source: Global Carbon Project)

Deforestation, resource depletion, and biodiversity loss accelerated as market efficiency prioritized short-term profits over long-term sustainability.

While the U.S. has seen a net gain in forest area in recent years, deforestation remains a concern, particularly in regions like the Amazon, which is a critical component of global biodiversity and climate regulation. Between 2010 and 2020, the global net loss in forests was 4.7 million hectares per year, with the U.N. Food and Agriculture Organization (FAO) estimating that 10 million hectares of forest are cut down each year.

The U.S. has been a significant consumer of natural resources, leading to concerns about resource depletion. For instance, per capita seafood consumption grew 30 percent over the last three decades, led by fresh and frozen seafood. As part of a global trend, overfishing has been a critical threat to marine wildlife, with 38% of fish stocks overfished (compared with about 10% in the mid-1970s) and coral reefs undergoing their fourth mass bleaching event.

Globally, wildlife populations have declined by an average of 69% in the past 50 years. In the U.S., habitat degradation and loss, driven primarily by our food system, is the most reported threat, followed by overexploitation and invasive species.

These statistics underscore the environmental impacts associated with economic activities that emphasize immediate financial returns, often at the expense of ecological health and long-term sustainability.

Corporate Externalities:

Deregulation allowed industries to offload environmental costs onto society, contributing to pollution and climate change.

Free trade agreements often lacked robust environmental standards, exacerbating global challenges.

Difficulty With Global Governance:

International frameworks to address climate change, such as the Kyoto Protocol and Paris Agreement, struggled to reconcile national interests with global action.

V. Financial Vulnerabilities

The deregulation of financial markets under neoliberalism fostered innovation but also created systemic risks.

Financialization of the Economy:

The share of U.S. corporate profits derived from the financial sector nearly doubled between 1980 and 2008, reflecting the sector’s growing dominance.

The Garn-St. Germain Depository Institutions Act (1982) deregulated savings and loans, contributing to speculation. The Gramm-Leach-Bliley Act (1999) repealed Glass-Steagall, enabling commercial banks to expand into investment banking. Complex financial instruments, such as mortgage-backed securities (MBS), fueled speculative bubbles, culminating in the 2008 financial crisis. The market for MBS grew from $200 billion in 1980 to over $7 trillion by 2007, driven by securitization.

Corporate Short-Termism:

The neoliberal focus on shareholder value maximization incentivized cost-cutting, stock buybacks, and underinvestment in workers. Certains forms of corporate innovation were subsidized by government with benefits flowing to shareholders, more so than workers.

Debt Dependence:

Rising private and public debt sustained consumption and economic growth but left households and governments vulnerable to economic shocks. The large government deficits in the United States fed corporate welfare and left the country vulnerable to rising interest rates after the 2020 pandemic.

U.S. household debt grew from $4.6 trillion in 1999 to $16.9 trillion by 2022. (Source: Federal Reserve)

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Question to readers: which side effect of neoliberalism bothers you the most and why?

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VI. Backlash and Political Realignments

Neoliberalism’s side effects sparked widespread discontent, reshaping political landscapes.

Populist Movements:

Economic grievances and cultural anxieties fueled the rise of anti-establishment political forces across the globe.

Examples include Brexit, the election of Donald Trump on two separate occasions, and the surge of far-right parties in Europe.

Demand for Economic Justice:

Growing calls for wealth redistribution, universal basic income, and stronger labor protections reflect a rejection of neoliberal orthodoxy.

Shift in Political Ideology:

Policymakers increasingly advocate for state intervention to address inequality, climate change, and economic insecurity, signaling the decline of the neoliberal consensus. However, the promises to voters and the economic policies that serve large political donors are often at odds.

VII. Conclusion

Neoliberalism’s legacy is a paradox: its achievements in efficiency and global integration came at a significant social and environmental cost. While it succeeded in driving economic growth, its side effects—rising inequality, job displacement, and social fragmentation—have fueled a backlash that challenges its viability as a governing ideology. What if neoliberalism’s core accomplishment was corporate capture of democratic governance systems?

As the world grapples with the fallout of neoliberalism, the need for a new framework that balances growth with economic dignity, sustainability, and resilience becomes clear. The next essays in this series will explore emerging political ideas that appear to be replacing the neoliberal order. They don’t look promising. Eventually, we will look at a framework that might address current challenges and chart a better course for the future.

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Notes:

The Common Sense Papers are an offering by Common Sense 250, which proposes a method to realign the two-party system in the United States with the creation of a new political superstructure that circumvents the current dysfunctional duopoly. The goal is to heal political divisions and reboot the American political system for an effective federal government.

Notes on Neoliberalism:

1. The Downfall of Neoliberalism: It Worked (Part 1)

2. “The message to Democrats is clear: you must dump neoliberal economics” by a Nobel laureate in economics, Joseph Stiglitz, November 28, 2024, The Guardian.

3. “How Inflation Ended Neoliberalism—and Re-Elected Trump” by Jennifer Burns, November 15, 2024, The Wall Street Journal.

4. “What was neoliberalism?” by Matthew Yglesias, July 11, 2024, Slow Boring on Substack.

5. Podcast: “How Will Democrats and the Left Pick Up the Pieces in Trump's Second Term?” by Ana Kasparian, January 22, 2025, Unaligned on Substack.

6. “The Convergence of Capitalism and Authoritarianism and the Global Crisis of Democracy” by Scot Nakagawa, February 7, 2025, The Anti-Authoritarian Playbook on Substack.

7. “Libertarianism is corporate propaganda and neoliberalism is its sociopolitical agenda” by Ryan Ward, January 9, 2025, Free Market Moralism on Substack. Emphasis: “The reason that neoliberalism is so hard to pin down ideologically is because it is not a coherent ideology. It is a sociopolitical strategy that has the goal of increasing and entrenching corporate rights and power. The reason that it is so similar to libertarianism is because it uses libertarianism as a cover for its explicitly corporate agenda. In other words, libertarianism provides a pseudo-philosophical/moral/political foundation from which to argue that neoliberalism is more than a nakedly corporate sociopolitical agenda.”

8. “The Inflection Point: Jimmy Carter and the Birth of Neoliberalism” by Jared Yates Sexton, December 30, 2024, Dispatches From A Collapsing State on Substack.