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From the welfare state to Neoliberalism.docx

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Political Science
Political Science 2211E
Adam Harmes

From the welfare state to Neoliberalism – Jan 16 1. The Stagflation Crisis  Stag-flation = stagnation + Inflation  High inflation and unemployment at the same time  Emerged in the 1970s  It was suppose to be impossible because (according the Keynesian economics) inflation and unemployment are suppose to move in opposite directions o If demand goes up, unemployment decreases and inflation increases and vice versa  Milton Friedman (Neo-liberal approach aka Chicago school) o Conservative professor at university of Chicago o Predicted stagflation in his 1968 Presidential Address to the American Economics Association o This is where he got super famous super fast (10 years before he won Nobel prize) he managed to do what no Keynesian economist was able to do. He not only explained stagflation but he predicted it. o In Freidman's view there was this key problem with how Keynesian believed unemployment and inflation moved in opposite directions in a direct trade-off  Phillips Curve (if inflation goes up by 1 unemployment goes down by 1) o Lower unemployment could be achieved by accepting slightly higher inflation o Keynesian economists believed unemployment was the greatest evil to be fought at any cost o Keynesian-welfare state focused on keeping unemployment very low o Believed inflation would be higher but stable o Us, Canada did this o Friedman argued that the trade-off between unemployment and inflation was NOT stable o Higher inflation that lasted for a while would eventually begin to snowball instead of being stable o If you are a worker or trade union and you know prices are rising by 5 % (inflation is at 5%) then you also know that if you get a wage increase by 5% you have gained nothing  Unions incorporate inflation rate into wage demands o Wage-Price Spiral: More stimulus require to lower unemployment creates more inflation  workers demand higher wages to compensate for inflation higher wages force firms to rise prices and hire less workers  Increased Union Power o Welfare state increased power of unions:  New deal Pro-Labour laws  Fordism  Lower unemployment  Less free trade  Unions and stagflation o Power of unions:  Allowed inflation to be incorporated in wage demands  Prevented governments from raising interest rates  Central banks today operate like the courts (governor bank of Canada is appointed, he can raise or lower interest rates and there is nothing the government can do ) 2. Political Implications o  Stagflation somewhat discredited Keynesian economics and the welfare state  Gave a huge boost to Friedman's free market economics  What depression was to free market, stagflation was to welfare state o  Business mobilized politically  In postwar decades, opposed welfare state but didn't mobilize  Profits still good  Stagflation was last straw  Two-pronged strategy to build support for free market policies among politicians and
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