On Budget Day, much of the talk about economics is trapped in a “rationalist” or neoliberal approach that assumes that budgets simply must be balanced – or preferably in surplus – most or all of the time. It’s an inherently conservative approach that denies governments the possibility of going into deficit to fund expensive, long-term infrastructure projects which will have overwhelming benefits for the community. It’s the approach taken by Tony Abbott, who is telling everyone who will listen that Australia must “urgently” redesign its budget so as to “live within our means”. The two biggest problems for Abbott are Labor’s debt and high taxes.
Not only is this simply rubbish; the experience of the rest of the world suggests that it is also economic madness. We can see that Abbott’s arguments are rubbish by simply looking at the figures. Public debt in Australia is not a problem. The ratio of public debt to GDP is about 27 per cent, compared with an average of about 90 per cent for developed economies. And Australia is well down the list of effective taxation rates among OECD nations.
Indeed, on the standard economic measures, Australia is not only performing better than the rest of the world, but Australia is also performing better now, under Labor, than it was when Labor took office from the Liberal-National Coalition in 2007. Since then, GDP per capita is up 13 per cent. Real wage levels are up 27 per cent. Household savings are up 7 per cent. Labour productivity is now at an all-time high, and is a clear eight index points higher than in 2007.
Pension levels; superannuation; international credit ratings; the value of the Australian dollar; industrial production growth; foreign exchange reserves; the balance of trade; the current account as a percentage of GDP; the government 10-year bond rate: on all these measures, Australia has improved its economic situation since 2007, while the rest of the world has fallen in the opposite direction. Perhaps most strikingly, the national interest rate, which according to Liberal Party propaganda is always lower when it’s in government, is now 3 per cent, compared with an average of 6 per cent under the Howard government. And five years on from the “Global Financial Crisis”, Australians are living with an unemployment rate of 5.6 per cent, compared with well over 7 per cent in Canada, the USA and Britain.
Abbott’s electoral strategy since he took over as Opposition leader in 2009 has been unlike anything we’ve ever seen in Australia: tell bald-faced porkies about the current state of affairs, and hope that untruths repeated often enough will become common sense to enough people to tip him into the Lodge. Anyone listening to Abbott would assume that Australia is on the verge of economic basket-caseness. In essence, Abbott has told us that we’re at real risk of going the way of Europe unless we elect him to “stop the taxes”. That is madness.
The reason Abbott’s strategy has worked to date is that problems do exist for people; just not in the way that he portrays them. The experience of hardship in the suburbs exists, despite the fact that the national figures show that we’ve never had it so good, precisely because of the decades of fundamental neglect by a succession of governments and parliaments committed to the now-defunct ideas of the ideologically-driven “free marketeers”. For dual-income families paying off excessive mortgages to which they should never have been entitled, living in huge, under-insulated houses whose energy efficiency matches that of the electrical consumer goods with which they’ve been allowed by the “free market” to surround themselves, in new suburbs chronically under-serviced by public transport, while they’re struggling to pay their children’s private school fees because the government system has been so run-down, and pay their private health insurance and to get their heads around their share portfolios in the privatised pension system we call superannuation, life is far from easy. It is this dissatisfaction that Abbott is tapping into; dangerously, he’s proposing precisely the wrong solutions.
Firstly, there are huge structural deficits which emerge over time which cause very real social – and therefore democratic – problems. The hollowing out of the public institutions favours the bottom-line profits of existing corporates, but relegates government to the role of mere manager. Deregulation means more of the stuff that’s not good for people, like fatty and sugary food, alcohol, gambling and clothes made in third-world sweatshops, is pushed onto consumers by increasingly forceful marketing. The privatisation we never talk about is that of risk, as our pension plans have now been opened to the vagaries of the stock market. Housing becomes less affordable. Governments find it increasingly difficult to draw up meaningful budgets, as revenues are tied to the vagaries of international prices. The gap between the richest and poorest in deregulated, privatised societies has grown wider. And the concept of a public sphere is all but gone, a whole generation growing up in a world in which they’re encouraged to think only about how to succeed for themselves in a game whose rules have been dictated by massive private interests.
The second, more immediate, consequence of neoliberal theory in practice can be seen in the effects of Europe’s embrace of the austerity doctrine in the wake of the GFC. A short recap of recent economic history is useful here. First, in 2008, the consequences of too much “deregulation” in the global finance industry became apparent when thousands of low-income earners had to walk away from their homes after their so-called “low-doc” loans were revealed as toxic assets (read: liabilities) on the imaginary books of financiers. The subsequent collapse of globally significant companies led to a cessation in the flow of liquid capital, which then turned national debt into disastrous impending liabilities for countries across Europe and elsewhere.
Initially the proponents of the “neoliberal” orthodoxy tried to shoot the blame home to those who hadn’t properly listened to their prescriptive advice. The problem was not too much deregulation; it was that too much regulation remained in the finance and other industries. And if governments hadn’t tried to fund their expenditure with debt they wouldn’t be in strife. Rather, governments should have pursued budget surpluses at all costs, to ensure that public spending remained less than public revenue. Given that the proponents of neoliberalism had also been arguing for massive decreases in taxation on corporate profits and personal income, the cuts to public spending they required had to be deep and dramatic.
By about 2009-10, governments had a stark choice: either accept the prescriptions for “rationalisation” from the orthodox economists, and cut spending deeply; or try to tackle their looming fiscal crises with pro-growth strategies which would hopefully work to simply inflate the debt away. The choice was framed as an ultimate Battle for the Century between two dead economists, Milton Friedman and John Maynard Keynes.
Governments responded in one of three different ways. The first, which was the response of the European governments, was to continue to adopt the so-called “free market” mantra and impose severe austerity on their populations with the aim of bringing national debt under control. The second, which was the response of the Australian government, was to pour public dollars into key growth industries (such as construction) which would hopefully tide the economy over until consumer and business confidence recovered. The third, which was the American response, was to be caught hopelessly betwixt and between these approaches, a consequence of a Congress which wanted the former and a President who wanted the latter.
Five years on from the “global financial crisis”, we have the provisional results of these strategies. Europe has not recovered. Its public debt has crystallised into a real problem because, in an environment of structurally low economic growth and hence inflation, governments cannot rely on price increases over time to in part inflate that debt away. Europe is now facing another desperate choice: does it continue to attempt to repay the debt (which means more cuts and no more spending – and no more growth), or does it default on the debt which would presumably cause havoc on the international money markets?
The United States is seeing a very slow recovery. Unemployment remains insistently high, and there’s not much more that can be done from a monetarist perspective because the interest rate is about as low as it can go. That country also faces a choice: does it go the way of Europe and cut public spending, or does it risk the inflationary bogeyman and stimulate the economy with debt-funded public spending?
In Australia, the story is so different that its people didn’t even know there was a problem.
On any sensible analysis, then, the unorthodox approach by the Rudd-Gillard overnment has been well and truly vindicated. It’s worth pausing, then, to ask why we’re about to turf his political party out of government, in favour of the Liberal Party led by a man who continues to insist that the problems are debt and high taxes. Of course Labor hasn’t helped itself. For years Wayne Swan was running around the country promising a neoliberal surplus come hell or high water. Only recently has he begun to explain that cutting spending will only invite unemployment and a recession.
Recent weeks have seen one high-ranking European official after another admit that austerity, after all, doesn’t work. The belief among economists that it should work derives from the experience of western policymakers in the aftermath of the 1974 “stagflation” crisis, which proved Keynesian theory didn’t have all the answers when unemployment rose together with inflation. The alternative policy of monetarism – the strategic targeting of the cash interest rate instead of attempting to address unemployment directly – as advocated by Friedman and Friedrich von Hayek in the post-war era seemed to work. So western policymakers adopted the entirety of their prescriptions with the zealousness of recent religious converts. The first administrations to openly advocate the full program comprising “deregulation”, “privatisation”, lower taxes, even lower spending, budget surpluses, inflation control and “free” trade were those of Thatcher in Britain and Reagan in the United States. Soon after, the nominal Left followed suit under Hawke/Keating in Australia, Clinton in the USA and Blair in Britain.
But the “age of austerity”, it seems, is drawing to a close in Europe. This should also mean that the experiment of neoliberalism is over. The time is now well and truly nigh for a reinvigoration of strong institutions of state, to encourage common civic-mindedness in the population, to begin work on the massive backlog of neglected infrastructure projects, and to ensure that the most valuable of all twentieth-century inventions – the welfare state – is not further corroded by more mindless implementation of ossified economic theory. In Australia, as the election approaches, we need to be asking all candidates just how they will respond to these new economic realities. Unfortunately, much of the discourse remains trapped in an empirically-unsound regurgitation of neoliberal dogma about “structural budgetary deficits”. To the contrary, Australia should be using its AAA credit rating, the low price of money and its very sound public debt levels to borrow, in order to fund much-needed social programs and public infrastructure.