Political economy: neoliberalism emerges triumphant
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Liberal — even neoliberal (whatever that is) economic policies are correct, and have been followed by Labor and Liberal governments in Australia for 30 years. This is the message of one of Australia’s finest economists, Professor Ross Garnaut, in his new book about the Great Crash of 2008. The Australian’s Michael Stutchbury reports Garnaut as saying Kevin Rudd’s attacks on neoliberalism “risk an expansion of government that could damage the economy and even erode Australia’s democratic values”. By further fuelling excess spending, the Rudd government’s budget stimulus ‘will have to be followed by “hard times” and lower living standards that the government has ‘barely begun to contemplate’.” This is powerful stuff, whose main message is sharply underlined by yesterday’s unexpected (to most) increase in jobs and marginal decline in the “official” rate of unemployment. This increase may be misleading (as ABS employment data is famously dodgy) but the far more reliable jobs data compiled by Roy Morgan and released last week foreshadowed the ABS result. If taken seriously, the Roy Morgan data would have made a brave bond trader as big a fortune as his courage would have allowed. But I digress. The apparent surge in jobs was also foreshadowed by the two months of sharp increases in job ads, and there are several other important bits of data pointing to the same conclusion - the resilience of Australia’s housing market, the rebound in retail sales and the upward revision of investment intentions. The good jobs data (following the RBA’s rate increase) caused stock prices to surge yesterday. Wall Street rose again overnight and today should see new asset inflation here. It is looking increasingly likely that the neoliberal (whatever that is) paradise that is Australia’s economy is powering through the Great Crash with hardly a lost beat. Lots of egg on lots of faces, of course. Treasury’s prediction of a peak rate of unemployment of 8.5 % is looking a bit sick, as is its enthusiastic support of massive fiscal stimulus. “Seriously misguided” Dr Henry? This should be music to Malcolm Turnbull’s ears since, after a slow start, he has banged on about excess stimulus and wasted spending. But Rudd is massively ahead on the issue of best economic manager. The economic strength supports Henry’s call for bold 50 basis point interest rate hikes as recovery builds, starting on the day next month when the Melbourne Cup is contested. And the strength of Australia’s economy will be worrying Glenn Stevens, who may be honest enough to ask himself if he is again moving too little, too late in removing the punchbowl of emergency low interest rates. |
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14 Comments
Could Henry Thornton or Professor Garnaut point to any government anywhere in the world that persisted with neoliberal policies in response to the Global Financial Crisis ?
I am surprised that Professor Garnaut saw Rudd’s piece in the Monthly as anything other, than a bit of of opportunistic political grand standing.
If the Global Financial Crisis taught us anything, it is that ‘neoliberalism’ unfettered let the market rip capitalism, like all other dogmas eventually runs its course leaving others to pick up the wreckage.
Richard McGuire’s “capitalism, like all other dogmas eventually runs its course leaving others to pick up the wreckage” is rather odd, not because inevitably over-simplified models of reality eventually prove inadequate even when they are not susceptible to human feedback and consequent manipulation. The capitalism that has worked so well is, surely the private aggregation of capital for investing in enterprises that animal spirits, or occasionally sober calculation especially by those who have the ear of the government, suggest will be profitable. The contrast is with central control especially in economies clearly too large or too heterogeneous to be effectually controlled or in more prospective cases where too heavy a hand is applied (which wasn’t the case in Singapore but perhaps has been in Iceland - OK on second thoughts nobody knew what they were doing in Iceland). So, capitalism is not a “dogma” at all, or, if it is, what is that dogma?
Henry is usually on the money. I hope though, that he doesn’t start quoting again those economists who advised the Premiers in 1931 that, inter alia, “confidence has to be restored”, as part of a case against the fiscal stimulus. Note please that those economists were a couple of years late and what they said wasn’t actually true either. They said that subsidies and government make-work schemes couldn’t make business profitable. Really? How about the bloke (or his missus) with the home insulation contract and those he bought his materials from?
Richard: “If the Global Financial Crisis taught us anything, it is that …”
I think it is too early to say what it has taught us. But a lot of pretty smart people have been asking did the breakdown result from not enough government participation in capital markets, or too much? It’s not even over yet.
I’ll be taking a closer look at what Garnaut has to say (and trying to understand at least some of it).
In reply to Julias…. I am not opposed to capitalism as such. It’s just that I think it is in the interests of civil and just societies to have a little bit of government oversight occasionally. This is of course anathema to those who support neoliberal dogma.
In reply to James…. It should have taught us that in the absense of appropiate government regulation and oversight, greed and stupidity prevail. If it hasn’t, history will repeat itself.
I concede to Richard McGuire, despite a somewhat Ruddian (though no doubt more honestly motivated) reference to “neo-liberalism”, that I have come across those who are too dogmatically opposed to government regulation, often as latter-day converts, including one I can think of in the who was a clever opportunistic political operator who used to nonetheless think of himself (apparently) as highly principled
[Repeat to complete] I concede to Richard McGuire, despite a somewhat Ruddian (though no doubt more honestly motivated) reference to “neo-liberalism”, that I have come across those who are too dogmatically opposed to government regulation, often as latter-day converts, including one I can think of in the 80s, a clever opportunistic political operator who used to nonetheless think of himself (apparently) as highly principled.
The trouble is that governments are big and strong and clumsy and slow (not least to refine, correct or reverse what they have done badly) so getting a few things right is v. difficult and dangerous to try. Think of the enthusiasms one might have had as a clever teenager or undergraduate. How obvious such devices as proportional representation seemed, just for one common example. Yet how badly it impacts on the political process in many polities where it isn’t just a safeguard against something worse.
The more things you hand to government, the more things you are handing to politicians and bureaucrats to manage and make rules for, only a few of which would ever be within their competence even if you supposed that they became bureaucrats or politicians because they had a set of abilities or skills or knowledge which fitted them for managing anything but a few broad necessities. And even these latter, remember, they handle less than perfectly by a large margin. War? Preventing crime? Sound money (low inflation)? Only since they largely abandoned using interest rates to manipulate other variables and handed the decisions to central banks!
I don’t disagree with you about the need for government counterweights to the influence of human nature as manifested in greed and stupidity - and herd behaviour inter alia - in the major institutions of our society (and where businesses are monopolistic and important - which is not a reason for excusing extortion against Telstra). Given that the judiciary and legal profession in most First World countries don’t lead to great crises there may be something to learn about built-in checks and balances which don’t require too much of current politicians and bureaucrats when the regulation of financial markets is further fine tuned (which appears to be all that is required in Australia though I wouldn’t mind seeing my prejudices indulged by mandating a better equation of risk and reward for executives and directors to the risks and rewards of other stakeholders, particularly shareholders, and that wouldn’t be confined to finance…..).
There are different types of government participation in a capitalist marketplace. Kevin Rudd’s piece of frothing-at-the-mouth anti-capitalist dogma was very vague on what went wrong and how to fix it except “capitalists bad, government good”.
I have no idea what neoliberalism is. But liberalism (which in a nutshell means live and let live) is the idea that the government’s role in markets is to ensure transparency and fair play, and also to stop businesses from cheating the competition game to bring about monopolies. Producing better products and services for a lower price is not necessarily the most cost-effective way to beat the competition to make profits. Deceiving the market, trading inside information, entrapping customers, price fixing, predatory pricing, and so on, are often easier than competing fairly. These violate liberal principles (the second part of the “live and let live” statement) and the government’s job is to stop them from happening.
Liberal theory does not give the government any role to play in deciding that the market has misjudged an asset class and over-exposed itself to certain risks. (Although if asset bubbles result from interest rates set by a non-market-based Reserve bank, maybe we should ask why the Reserve doesn’t use a supply-demand basis to set interest rates, as any market participant would.)
Government might have had a role to play asking if credit rating agencies were subject to conflict of interest. They get paid to rate something, and if they don’t rate it highly, maybe another agency will. It never seems to have occurred to them, for example, that the creditworthiness of a $50 billion market in subprime mortgage products was a far cry from the creditworthiness of a $600 billion market in the things. I would think ratings agencies are a far better target for government review and intervention than banks.
Rudd showed no interest whatsoever in question like these. He just jumped on a bandwagon shouting that unfettered greed should be brought low (eg by taxing the richest people at 90 per cent?) and government was the answer.
Extract from Garnaut’s new book here: http://www.theaustralian.news.com.au/business/story/0,,26184629-643,00.html
including some interesting recommendations at the end of that extract.
@Julius (check spelling)…..”The trouble is that governments are big and strong and clumsy and slow (not least to refine, correct or reverse ,what they have done badly)”
Many would argue that much of the refining and correcting governments have been doing lately, relate directly to their past failure to properly regulate and oversee global markets.
Interesting Julius that you should mention Telstra. If ever one needed an example of neoliberal dogma put into practise, the privatisation of Telstra is surely it.
@James….”I have no idea what neoliberalism is.” Once upon a time James they called themselves economic rationalists until that brand name became tarnished.
Interesting James that you cite the of the failure of the ratings agencies re the sub prime mortgages. Difficult though to imagine the ratings agencies being the target of government intervention, while most governments await their pronouncements with trepidation. Still a case of the tail wagging the dog I’m afraid.
Thanks for the link James. If the views expressed in the extract published in the Australian are typical of those in the rest of the book, I fail to see how Henry Thornton could regard Professor Garnaut’s book as an endorsement of neoliberalism. The six recommendations at the end of extract call for more government supervision and regulation not less.
And clearly I found the suggestions on remodelling ratings agencies particularly interesting.
Adding a bit more detail, I suggest only an NGO cooperative, funded mandatorily by all institutions offering investment products, would be free of conflict of interest.
And only a single global cooperative would have the big picture to see when a whole asset class is getting too big to fail, and therefore needs to have its risk rating reviewed as an asset class. A bit like the global reinsurance companies now using the sort of risk modelling that QBE pioneered, to see what would be the consequences of a plausible catastrophic event or systemic failure.
Also, look at how ratings agencies went beyond assessing creditworthiness and started endorsing investment products with phrases such as “likely to meet its investment objectives”. That implies belief that something will go up not down in price, i.e. endorsement that the current price is a good buy. Opinions on pricing should never have been any of their business, it’s for the market to decide fair price. The whole crisis has been described in a nutshell as resulting from a systemic mispricing of risk.
Richard: “Once upon a time James they [neoliberals] called themselves economic rationalists until that brand name became tarnished.”
Would that include trying to deal with the effects of reduced competition and vertical integration in the grocery and petroleum markets by way of internet price-watch schemes, instead of reviewing the efficacy and enforcement of competition and trade practices laws? Ref Crikey item #10 on Friday.
@Richard McGuire
You say “Many would argue that much of the refining and correcting governments have been doing lately, relate directly to their past failure to properly regulate and oversee global markets.
Interesting Julius that you should mention Telstra. If ever one needed an example of neoliberal dogma put into practise, the privatisation of Telstra is surely it.”
I have a bit of a problem in your first sentence with “global” though you may be right about what many [are] arguing. Better bank supervision in America and a few other countries in terms rather than the erection of some edifice for the globe would have been a good start, and maybe adequate. And that’s without mentioning the positive harm done by the US Congress and succesive administrations in encouraging the lending of money to people on terms that they would not be able to comply with.
As to your second sentence I first translate your use of “neo-liberal” into “economic rationalist” which I have always been and so was happy to find a Ted Mansfield of the Post & Telecommunications Union saying at a conference in 1983 “there is no alternative to economic rationalism”. While private risk assessment and investment decisions are important to making an economy function efficiently I am not sure privatisation could be regarded as central to economic rationalism even if logical thinking based on the premise that competitive private enterprise is generally the best way of making capitalism work well leads to the conclusion that a government business ought to be privatised. After all economic rationalists cannot favour monopoly except perhaps on some special grounds which have little or nothing to do with economic rationalism.
Economic rationalism (or neo-liberalism) is only the best first approximate generalisation for making sense of the economy and promoting good economic policy. If you consider the various starting points that have been promoted by interest groups in the past the point becomes clear. How about putting first the need to ensure that small country towns don’t lose population to the detriment of their local facilities, services etc.? How about starting with the need to ensure that no one who has been in a job for more than 5 years is laid off unless the business is actually broke? Free trade is another good starting point which fits with economic rationalism (neo-liberalism) though Mr Rudd might not like to admit that.