Why Do Discredited Destabilizing Policies Persist? the Twin Follies of Wage Restraint and Punitive Welfare Reform

From well before the Crisis of 2008 policy elites in Europe have been attracted to the twin competitive strategies of aggregate wage restraint and coercive active labour market policies. Both of these policies are demonstrably unsuccessful for achieving economic growth, increased employment, or social inclusion. Wage-led macroeconomic policies targeted at full employment and generous labour market policies to invest in low-income job seekers could yield both superior economic outcomes and additional social externalities. However, the neoliberal faith that informs these strategies prevails in policymaking at national and supranational levels.

This paper analyses how and why these policies endure despite their effects on business activity and social outcomes. A reconsideration of Marxian theory of the state and the market and Kaleckian approach to the political economy of full employment, and a critique of new institutionalist theories of policymaking, form the central pillars of the argument. In the first theoretical section, we argue that neoliberal ‘financialisation’ is associated with a change in the relationship between the State, capital and the market, which in turn leads to the widespread pushing of destabilising economic policies. . Next, we will present two empirical case studies to illustrate the destabilizing nature of neoliberal austerity, illiberal welfare reforms and wage restraint: i) the case of punitive active labour market policy is used to illustrate a manifestation of continued faith in markets at its most pernicious. ii) the case of policies that create wage restraint (labour market policies such as workfare programmes that generate a low wage sector as well as other institutional reforms, and macroeconomic policies such as welfare state retrenchment, tight monetary and fiscal policy and financialization), which in turn lead to deficiency in demand and potentially a realization problem for capitalism, which is temporarily resolved by fragile growth models based on reliance on household debt-led or export demand. Finally, we conclude with implications.