Neo-Conservatives and neo-Liberals, are they finally on the run?

By William Keegan  /  THE OBSERVER , LONDON

Sat, Sep 24, 2005 - Page 9

The label neo-conservatives or neo-cons is generally applied to the US right-wing faction that has had such an overwhelming influence on US policy in the Bush administration.

The label "neo-liberals" has been freely applied on mainland Europe to the elements, particularly in Germany and France, that wish to respond to "globalization" by generally-moving economic policy to the right, in a more avowedly "free-market" direction than is traditional in either of those two countries.

To judge from some of the conclusions being drawn from the New Orleans disaster and the Iraq fiasco, you might well think the neo-cons are on the retreat in the US. One of Bush's more recent speeches evoked echoes of Roosevelt and the New Deal in the interpretations of some commentators, and there has been many an argument that the things that went wrong in New Orleans were the apotheosis of everything that is wrong with the Bush approach -- neglect of the poor, especially the black population; diversion of much needed funds for the infrastructure [those levees] to Iraq; and, let's face it, tax cuts.

Surely, it is maintained that what went wrong in New Orleans, and what is increasingly recognized as having been a disastrous adventure in Iraq, means that finally President George W. Bush, Vice President Dick Cheney, Secretary of Defense Donald Rumsfeld and their associates have to stop interpreting "compassionate conservatism" as meaning "compassion towards conservatives."

Well, we shall see. I suspect there is an awful lot of wishful thinking in these matters. And it is not reassuring to learn that, notwithstanding the way the New Orleans reconstruction bill has escalated from US$10 billion to US$60 billion to US$300 billion, the Republican-dominated Congress is still keen on those tax cuts for the very rich. It is, after all, not so long since Bush and co were re-elected on their neo-con platform.

On mainland Europe, however, we have had the benefit of recent electoral messages which provide more convincing evidence that neo-liberalism may be on the run. Both the French referendum in May this year, and the German election this week were about many things. But a common factor in both cases was dissatisfaction with high unemployment and with right wing solutions, usually labelled "reform" which are perceived to threaten the continental social model.

The German result demonstrated two things in particular. One was the sensational political and campaigning skills of the German Chancellor Gerhard Schroeder, who came up the home straight from way down the field, like a thoroughbred racehorse returning to top form, and was only just pipped at the post. The other key factor was the panic spread in the ranks of the German electorate by Schroeder's adept exploitation of Angela Merkel's flirtation with a highly regressive "flat tax."

It says something for Schroeder's performance, incidentally, that as part of the reaction against neo-liberalism the breakaway party under his former finance minister Oscar Lafontaine did so well, and still Schroeder's Social Democrats did much better than expected.

Beneath all the propaganda the fact of the matter is that Schroeder's government was pursuing a "reform agenda," but one that was not "liberal enough" for Merkel and her colleagues -- it was, though, "liberal" enough for Lafontaine and others to feel the need to breakaway.

Also, the underlying economic position in Germany while certainly not satisfactory, is a lot better than the critics make out. German industry was made hugely uncompetitive first by the terms of the monetary unification of 1990 -- the one to one exchange of marks, and the sharp rises in eastern German wage rates -- and secondly by entering the single currency at an overvalued exchange rate.

But great strides have been made in cutting costs per unit of production and the German economy is becoming much more competitive -- do not forget that it is the world's leading exporter. The problem has been -- and still is -- too much saving and not enough spending. A dearth of what economists call "effective" or "domestic" demand.

So far from requiring "deficit cutting measures" as proposed by Merkel, the situation demands the reverse.

Having voted against neo-liberalism, Germany now needs to re-open the textbooks of John Maynard Keynes and re-learn a few basic economic lessons. One is that you don't get out of a hole by digging deeper.