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Neoliberalism: fact or fiction?

By Chris Lewis - posted Thursday, 29 April 2010


As a student of politics, it is amusing to read an academic waffle on with little regard for the complexity of policy. Take Robert Manne’s recent argument about the possibility that healthcare reform in the United States possibly signalling the end of the “greed is good” era, basically another dig at evil neoliberalism (a term which many humanities academics use to describe all that is wrong with recent policy trends) (Robert Manne, ‘Death throes of the neo-liberal delusion’, The Australian, April 10, 2010).

Manne’s analysis suggests that we all got hoodwinked toward a blind acceptance of neoliberalism through the creation of think tanks, converted politicians to the cause, and a new generation of academic economists. The usual political culprits Margaret Thatcher and Ronald Reagan are blamed for initiating flawed policies that would over the next 30 years entrench neo-liberalism (effectively market fundamentalism), especially in the US, UK, Canada, Australia and New Zealand.

To Manne, neoliberalism has dominated government policy with individuals pursuing their self-interest within free markets, the government role strictly limited besides defending property rights and creating the framework of commercial law, and most other state economic interventions and regulations perceived to do harm with business deemed more efficient. 

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But Manne’s article expresses little intellectual honesty in regard to why the policies occurred or what they should have been.

Sure, Manne tells us much of the consequences of recent policy trends in the US with the wealthiest 10 per cent of Americans increasing their share of national income from 35 to 49 per cent between 1980 and 2006 while US GDP trebled. Further, he highlights the disgraceful level of wages earned by CEOs and the disaster that resulted from defaulting subprime mortgages which led to collapse of large US financial companies and the GFC.

I am also disgusted by any nation which would have a health system that would leave 47 million people without access to basic health insurance, as was the case in the US until Obama’s recent policy reform. I also do not support a worsening level of income inequality.

In fact, while Manne (co-editor) includes a Kevin Rudd essay in a new book, Goodbye to All That? On the Failure of Neo-Liberalism and the Urgency of Change, I am also disgusted by the lack of real policy solutions that exist today in lucky Australia to deal with record home unaffordability as government relies on higher levels of immigration.

But, as a political student trying my best to inform the public, I will never adopt a righteous position with little regard to the complexity of policy solutions.

Rarely does Manne ever refer to the difficulties of finding policies that will more effectively balance national and international economic considerations. Instead, we hear about the crisis of the early 1970s (high inflation and unemployment), and how this context gave those evil knights supporting free markets (Hayek and others) their chance to influence government policy and reject Keynesian economics.

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But what did Manne propose as alternative policies in recent decades, and why did few listen?  As Michael Stutchbury reminds us (Goodbye to the notion neo-liberalism caused the global financial crisis’, The Australian, April 17, 2010), Manne once co-edited Shutdown: The Failure of Economic Rationalism and How to Rescue Australia (1992) which blamed Paul Keating’s recession on a calamitous experiment in “radical free-market economics” that aimed to strip “all state intervention from the economy” and predicted “permanent high unemployment” of 15 to 20 per cent when properly measured in the wake of financial deregulation, the dismantling of import protection, privatisation and so on. 

As Stutchbury points out, the Australian economy did experience one of its longest periods of economic growth from 1992 to 2007, a boom that withstood the 1997 Asian financial crisis, the early 2000s sharemarket techwreck and now the GFC. If Australian governments had not pursued the policies it did, then many battlers would now be even worse off. 

But this does not mean that I share Stutchbury’s optimism about Australia’s future just because unemployment rate is still 5 per cent, or that we should sit back and benefit from the mining boom (now again leading to labour shortages).

I do see problems ahead and urge effective centre-left and centre-right policies to emerge to provide an effective balance between compassion and competitiveness. I certainly do not want to live in a world dominated by communist China or in a society where a growing minority will no longer be able to afford homes. I also suggest that Australia’s social welfare system will come under further pressure if Australia remains committed to a similar level of taxation as a proportion of GDP in order to remain competitive in international terms. The trend towards greater difficulties for a growing minority may be indicated by a recent Ninemsn poll (20 April 2010) finding majority support to the question ‘Should the dole be banned for under 30s? (Yes: 70012 (52 per cent) and No: 65186 (48 per cent).

But writing about future policy trends is for another story. I am concerned with Manne’s inability to understand recent policy trends and the difficulties faced by the influential Western nations in responding to the 1970s economic crisis.

Sure references to neoliberalism owe much to the freer economic processes largely initiated under Thatcher and Reagan’s monetarist revolution. But policy trends attributed to neoliberalism were accepted by virtually all Western and developed nations. After the US abolished its own capital controls in 1974 and floated the US Dollar to address its deteriorating trade position and make its currency more attractive against expanding private international finance including Eurocurrency and Eurobonds, various Western nations made their policy choices.

With no other Western nation/s prepared to unilaterally introduce exchange controls due to the enormous costs involved, many (which also experienced adverse economic conditions during the 1970s from higher oil prices; unemployment and inflation; and a worldwide collapse in property markets) eventually supported floating exchange rates and market discipline 

While Manne (and others) whinged and watched as the world change before their eyes, Western publics mostly supported recent policies at the electorate box, notwithstanding the ongoing struggle for political dominance between centre-left and centre-right political parties and their supporters.

Western societies were not hoodwinked. While Manne’s disdain for totalitarianism in the past has given way to virtually ignoring the role played by public support (for better or worse), most Australians accepted the argument that freer trade would promote both national and international prosperity. This was despite lower taxation rates for both companies and high-income earners, greater labour market flexibility, and a growing reliance upon debt (public and/or private) to pay for imports and aid domestic consumption patterns.

In a world where even Western nations have hardly enjoyed a long period without some chaos or misery, the failure of Keynesian policies by the early 1970s meant that new players would have a greater say, notably the private sector as governments could no longer be all things to all people.

Sure, Manne and others would have preferred that Australia adopt policies more in line with their beloved social democracy examples (Sweden, Norway and Denmark) who did manage to maintain high standards of living with much higher levels of taxation (and still generous social welfare systems). 

But this is Australia. While some Australians expressed opposition to so-called neoliberal policies, with One Nation 1998 also attracting support by denouncing economic rationalism and globalisation while advocating the restoration of import tariffs to revive Australian industry, small business and the rural sector, it worth noting that party’s demise after greater scrutiny of its economic policies.

In other words, with per capita national income increasing substantially in all OECD nations between 1994 and 2007, there were few reasons why many democracies would oppose recent policy trends, especially given that greater trade also helped reduce poverty by half a billion people since 1980, albeit mostly in Asia.

I do not deny that immense problems lie ahead, but what is achieved by Manne just bagging recent policy trends, certain political leaders or parties, or even the public itself as it supports certain policies in a world of hard choices.

While the US housing crisis was fuelled by unscrupulous lending, what ideas does Manne offer to help the US now achieve its housing needs given its own struggle to balance old and new issues, including international military and economic leadership?

Whereas Manne criticises the US, as if that nation has done nothing positive for the world, I note the US’s past importance to the international economy. With the US current account deficit reaching $US731 billion in 2007, this was equivalent to about half of the combined $US1.5 trillion current account deficits held by 127 deficit nations that year, while the UK had the second highest current account deficit ($US145 billion) and Australia fourth ($US56 billion) (IMF 2008). Those stupid nations, as Manne implies, were largely responsible for another 63 nations enjoying a surplus with China leading the way ($US371 billion) followed by Germany ($US252 billion) and Japan ($US210 billion).

Manne should not simply criticise but offer real ideas that can make a difference that take account of national and international considerations. While we too do not offer any radical policy alternatives, as greater protection will bring its own consequences, we do suggest difficult policy difficulties ahead. A recent study of 200 years of economic data in 44 countries concluded that economic growth declines (on average by two percentage points) once external debt reaches 60 per cent of GDP with growth rates barely existent when debt reaches 90 per cent of GDP (Carmen Reinhart and Kenneth Rogoff, ‘Growth in a Time of Debt’, 31 December 2009).

It remains to be seen what policy mix will occur in the future given that debt in Australia reached $56,000 for every man, woman and child in Australia by late 2009 (equal to 100 per cent of GDP) even higher than the $A50,000 debt attributed to every American (Nick Gardner, ‘Household debt tops national income for first time’, The Sunday Telegraph December 27, 2009).

As a political scholar committed to the truth, or at least highlighting the complexity of a situation, I am embarrassed by Robert Manne. Manne should express some humility and recognise the difficulty of finding real policy solutions in a competitive world which must balance national and international aspirations. I suspect, however, it will all be too hard for him as preaching a simple message (that he knows best) is that much easier.

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About the Author

Chris Lewis, who completed a First Class Honours degree and PhD (Commonwealth scholarship) at Monash University, has an interest in all economic, social and environmental issues, but believes that the struggle for the ‘right’ policy mix remains an elusive goal in such a complex and competitive world.

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