THE END OF NEO-LIBERALISM?
COMMENTARY ARCHIVES, 21 March 2009
It’s a sign of the unholy alliance between journalists and political classes that we are so often told that radical, epoch-shifting change is in the air. Eras are regularly brought to an end. Every election represents an ‘historic choice’, even when the differences between parties are relatively slight. Every conflict puts our very survival at stake, when in fact there are many sensible steps we could easily take to reduce any danger we face. In keeping with this excitable tendency, neo-conservatism, the ‘Bush doctrine’ of interventionist US foreign policy, was pronounced dead, with the triumph of Barack Obama in the race for the White House – but what about neo-liberalism?
Neo-liberalism is the set of policy prescriptions arising from the diagnosis of economic ills put forward by orthodox economic theory. It’s a broad church but, in general, it’s characterised by faith in the power of markets, so broad swathes of public goods and services have been monetised, marketised and liberalised by politicians persuaded or coerced to apply its strictures. Students of neo-liberalism refer to the two stages of ‘roll-back’ and ‘roll-out’: these policies rolled back social democracy in the rich world, in the 1980s, and were then rolled out to the rest of the world, via the International Financial Institutions, in the 1990s and beyond.
The news today is full of gloomy predictions – another journalistic favourite – this time courtesy of the International Monetary Fund, with a warning that the global financial crisis of the past six months or so is about to escalate into a deep worldwide recession, bringing its woes to all developed countries, at least. Millions now face the loss of homes and jobs as the end result of a sequence of events that began with the unrestrained selling of credit, a market enthusiastically deregulated by governments following neo-liberal policies. It’s become commonplace to observe that, while markets may be a good servant, they have proved, in this case, a bad master.
Yesterday’s front page headlines in the two broadsheet daily newspapers on sale here in Sydney captured, between them, something of the political zeitgeist. The Sydney Morning Herald announced that the Labor government of Kevin Rudd was to “take action on bosses’ pay”. Discontent over excessive ‘compensation’ for top executives had been a visible signal of continuing subterranean awareness, even in times of plenty, that the system for sharing out risks and rewards was somehow ‘out of whack’ with public expectations.
By now, the case of AIG, the American Insurance Group, which faced ruin, then rescue, courtesy of a colossal taxpayer bailout, then promptly passed on $250m of public money in executive bonuses, had come to symbolise the ills of the day. Over in Washington, President Obama was limbering up to take on the issue, while Mr Rudd sent his own signal that things had to change. Except the “action”, in his case, turned out to place the onus on company shareholders, who were to be given “more power to control the size of exit payments granted to executives”.
Alongside it on the newsstand, the Australian newspaper led on a different angle. “Nation building funding crisis” was a story about the government’s plans to invest its way out of the looming recession by bringing forward spending on infrastructure projects. Problem – “a lack of available financing from the private sector”. In a sidebar piece, the paper focused on one scheme in particular, for a luxury residential development on a prime slice of Brisbane real estate. The developer was being pressed to borrow from a special government fund for commercial property, or “Rudd Bank”, but was now reluctant because of the dwindling prospect of finding buyers for the completed apartments, once built. The Federal Treasurer, Wayne Swan, was reduced to “pleading”, the paper reported, in a bid to sustain his ideas to “keep credit flowing” in the Australian economy.
The picture here, as elsewhere, is reminiscent of Christopher Hitchens’ famous remark about the so-called ‘third way’ pursued by the Clinton Administration, which tried to give political concessions to both Left and Right. However, Hitchens wrote, “the Left gets words; the Right gets deeds”.
The elastic snaps
A few weeks ago, one of the first high-profile casualties of the economic downturn was a company called Pacific Brands, which ran several Australian factories producing underwear, chiefly for the home market. To keep manufacturing going here, rather than export the work to China, it received multi-million dollar subsidies from the government. Last month, it announced seven of its plants were to close, with the loss of 1,850 jobs. Six of the seven were actually making a loss, a company spokesman told me, while the other, the best-known as the source of ‘Bonds’ underpants, was “not doing well enough to keep it open”.
In the logic of neo-liberalism, that’s that. The company’s explanations at the time focused on the need to “restructure” the business. They could keep on struggling to manufacture profitably in Australia, they implied, but the money invested in the plants could earn higher returns elsewhere. Question, then: could – and should – the Australian government have taken the factories into public ownership, perhaps regarding their past subsidies as a down-payment on the plant and machinery?
There’s an inconvenient little clause in Australia’s constitution, prohibiting the Commonwealth from doing anything to interfere with trade between the States, which is sometimes invoked as a reason for inaction in these circumstances, but that is slightly beside the point. The proposition of nationalising the industry sounds bizarre because it is at odds with everything we’ve been told about how economics works, for a generation or so.
At the same time, an opinion poll commissioned by the Australian Council of Trade Unions showed that a majority of respondents wanted more intervention to protect jobs. That was in the context of debates over the Rudd government’s promise to sweep away anti-union laws introduced by its Liberal coalition (conservative) predecessor, and the horse-trading required to get the new legislation through the Senate, where Labor does not command an outright majority. This was finally passed, enabling ministers to deliver in three key areas, responding to public opinion as reflected in the ACTU poll:
· 77% of Australians support restoring unfair dismissal protections for all workers.
· 74% support collective bargaining rights for all workers.
· More than three quarters of Australians (76%) want to get rid of laws that restrict workers from accessing advice from unions in their workplace.
These are important protections but, in the context of the neo-liberal onslaught of the past three decades, they amount to little more than tinkering at the edges. To intervene in such a way as to counteract the signals being sent by pricing in a ‘free market’ – to save Bonds underpants for Australia, in this case – would have been to take on neo-liberalism directly, exempting the Rudd government from the scorn transmitted by Hitchens’ formula.
The most influential economic ‘guru’ of recent times, Milton Friedman, emphasised the power of markets to accomplish three important tasks – transmit information, allocate resources and distribute incomes. When Friedman died in November 2006, the Global Financial Crisis was a tiny cloud on a distant horizon. Everything that has happened since should cause us to question his nostrums, however.
The highly incentivised structure of financial services led sales teams, in pursuit of bonuses, to entice consumers to take on more debt than they could afford. Not only was there nothing to stop them, because of the bonfire of regulations in the industry, but the dynamics of the corporate world around them actually mandated such behaviour. Will Hutton, the UK economics writer who is now Chief Executive of the Work Foundation, explains how, in a business environment such as that prevailing in the UK, US and Australia, every company is implicitly ‘in play’, just one set of bad results away from being subject to a hostile takeover bid. Hot money – “footloose capital”, he calls it – seeks out the highest short-term returns and, before the ‘credit crunch’ that presaged the GFC, there was plenty of it around.
In his book, The World We’re In, Hutton chronicles the fortunes of General Electric, which delivered 80 consecutive quarters of profit growth, under its legendary Chairman and CEO, Jack Welch. Welch presided over a tenfold increase in GE’s market value, but transformed it, in the process, “into a half manufacturing, half financial services company”. At the same time, spending on research and development, once the centrepiece of the firm’s vitality, fell below the US corporate average and continued to decline.
This is one of the weaknesses of orthodox economic theory. Its account of how markets distribute incomes pays no heed to structural conflicts such as that between generations. In the last few decades, assets patiently built up in previous eras have been stripped, in a gigantic piggy-bank raid. In the English-speaking neo-liberal heartlands, state enterprises have been privatised, savings institutions de-mutualised and manufacturing industries de-layered, broken up and outsourced – all in the name of reducing obstacles to the operation of free markets. It leaves governments, wanting to invest in the fabric of the country – houses, roads, hospitals and schools – at the mercy of private capital, as Mr Swan found to his cost.
This, Hutton reminds us, was a political project, heavily influenced by business lobbies, also known as the “shareholder value revolution”. A famous speech by Welch himself, Growing fast in a slow-growth economy, delivered in New York in 1981, is often regarded as a landmark contribution to the debate. The heavy gearing of Welch’s own ‘compensation’ towards stock options typified the new “alignment”, Hutton records, between the interests of managements and shareholders.
Now, as we emerge, blinking, at the other end of this journey, the mind-boggling taxpayer ‘bailouts’ of financial services industries are effectively mortgaging the future. The perception of a raw deal, writ large in the so-called ‘700-Euro revolution’ in Greece – as even skilled graduates were forced to contemplate a lifetime of struggle on meagre weekly salaries – can only grow.
The bolder governments and legislators demand some assurances in return for the money. The US Congress passed legislation to tax the AIG bonuses at rates of 90 or even 100 percent – after all, Representatives reasoned, we now own four-fifths of the company, so what the hell? If you nationalise, you see, you can dictate terms.
In Australia, Mr Rudd has given a guarantee, unmatched anywhere in the world, that his government will repay 100% of bank deposits if any financial institution hits real trouble, and people start taking their money out. That, coupled with the actual spending of AUD$8 billion of public funds on mortgage-backed securities, has kept the champagne flowing in the Big End of town, as Sydney’s CBD – where the financial industry literally towers over passers-by – is sometimes known. (A minute fraction of this largesse would have been sufficient to keep the Bonds workers at their sewing machines).
Despite this, the government stood meekly by as the ANZ bank exported 500 back-office jobs to Bangalore recently; this coming after the announcement of AUD$3.3 billion in annual profits and reports of still further growth in earnings, even in the first troubled quarter of this year.
Jack Welch gave an interview earlier this month to the Financial Times, in which he recanted his earlier doctrine: “On the face of it, shareholder value is the dumbest idea in the world,” he said. “Shareholder value is a result, not a strategy… Your main constituencies are your employees, your customers and your products”. He was speaking shortly before it was confirmed that General Electric had lost its triple A credit rating from Standard & Poor’s.
The Friedmanite deification of free markets has led to massive misallocations of resources and maldistributions of income and wealth, and we will all be paying the price for many years to come. A previous Australian Labor government, the reforming and, in some ways, radical ministry of Gough Whitlam, took power in the 1970s having campaigned on the simple but highly effective slogan, ‘It’s time’. It is, clearly, ‘time’ once again, both here in Australia and elsewhere. Question is, what for?
This article originally appeared on Transcend Media Service (TMS) on 21 March 2009.
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