ECONOMIC AFFAIRS: by Colin TeeseNews Weekly
Thirty-year experiment with non-intervention
, June 26, 2010
John Hewson's recent article in the Australian Financial Review was headlined: "Fiscal policy is too important to be left to politicians". Dr Hewson is dead wrong. Actually, the opposite is true.
Fiscal policy - the framing of a national budget - is too important to be left to economists. ln a democracy, that's the job of politicians. The same is also true of monetary policy, i.e., the management of so-called "official" interest rates, with the intention of controlling inflation.
Current orthodoxy says otherwise: it decrees that monetary policy should be set by central banks. In fact, our country follows that principle and our Reserve Bank of Australia fixes our rates.
But political influence still intrudes. Supposedly independent officials at the RBA were not immune from the pressure of politics as they wrestled with the management of their interest rate responsibilities at the time of the last election.Wedded to orthodoxy
Hewson - a former economics professor and leader of the federal Liberal Party - is, of course, wedded to the orthodox line on globalisation, deregulated free markets and "small government". Nobody seems to ask how all of this is reconciled with democracy, let alone, in today's global slump, with better economic outcomes.
But the issue having been raised, it is perhaps appropriate to take a look at the whys and wherefores of free market ideology, and how our embracing it led us into the global financial crisis which engulfed most of the world a couple of years ago - and which is still with us.
Some 35 years ago, the West, under the powerful influence of the United States, set sail on a new economic course. Its architects insisted that the postwar political consensus of managed capitalism and the welfare state be abandoned in favour of deregulated capitalism and strictly limited government. This type of "reform", they argued, was not merely desirable but essential, if living standards were to keep rising in both developed and under-developed countries.
Its most strongly committed supporters were the then US President Ronald Reagan and British Prime Minister Mrs Margaret Thatcher.
Reagan advocated deregulated free market capitalism as the vehicle for opening up new economic opportunities for US business, especially in the area of what came to be called services: banking, insurance, telecommunications and what were previously publicly-owned utilities such as power generation and public transport. But his program also had political objectives.
The new buzz-word to describe all this was globalisation. It is seldom remarked that globalisation was an old concept originally developed late in the 19th century. It collapsed by World War I in the face of the rising tide of democracy and trade unionism as it spread throughout the then developed world.
President Reagan saw globalisation from at least two different perspectives - an opportunity to capture economic gains for US business, and a means of paving the way for business rather than government to play a more prominent role in guiding economic life.
In his first inaugural address on January 20, 1981, he famously said, referring to interventionist capitalism, "Government is not the solution to our problem; government is the problem." Individuals and businesses, he said, should be allowed to pursue their own objectives without government intrusion. His views were widely supported at home, though they were accepted more cautiously outside the US.
Britain throughout the 1970s faced huge economic problems. Mrs Margaret Thatcher and her Conservative Party came to power after militant trade union strike action during the 1978-79 "Winter of Discontent" made Britain ungovernable and brought down James Callaghan's Labour Government.
Mrs Thatcher and her team were convinced that Britain's problems could not be solved within the existing economic framework. Instead she pursued a program of tight credit policy to bring down inflation, and public spending and tax cuts, along with economic deregulation, to spur economic activity. She proclaimed triumphantly, "There is no alternative" (or TINA, as the phrase came to be known).
She also promoted the idea of individualism. "There is no such thing as society", she said in 1987. "There are individual men and women, and there are families."
Still, the motivations behind the deregulationist experiment extended beyond the narrow political and economic changes outlined above. They are diverse and complicated - embracing important Western political objectives, including the idea of entrenching capitalism as the dominant economic philosophy in the context of Cold War politics.
Especially was this so for Reagan's Republicans, who had come, misguidedly, to regard interventionist capitalism as a dangerous drift towards socialism.
An influential body of US academic opinion, both Republican and Democrat, also held that government intervention in the economy did more harm than good. Without much supporting evidence, this same group pushed the idea that government intervention in the economy originated with the ideas of the British economist, John Maynard Keynes (1883-1946).
This was a travesty of Keynes's thinking. Keynes never preached intervention as an unvarnished economic virtue. Intervention was needed, in his view, when market economies, left to their own devices, failed to deliver high and stable levels of employment. Keynes argued that, during periods of prolonged and severe unemployment, such as the 1930s Great Depression, governments should be prepared to increase total demand through tax cuts and/or increased public spending in order to stimulate economic output and employment.
Keynesian economics, influential though it was, was only one factor behind the development of interventionist capitalism. More important was dissatisfaction on the part of voters with the dismal performance of more or less unbridled capitalism between the world wars.
By the end of World War II, a new form of capitalism had evolved. In important ways it had been influenced by the demonstrated success of necessary interventions in the war economies by the governments of Britain and the United States. After the war, intervention continued to deliver beneficial economic and social outcomes. Indeed, interventionist capitalism in the Western world delivered unparalleled growth and prosperity for the 25 years following World War II.Destabilisation
This success seriously discredited socialism. The Soviet Union and its communist satellite states were unable to conceal from their peoples the fact that people in the West were much better off. More than any other single factor, that reality hastened the destabilisation and ultimate destruction of the Soviet Union and its eastern empire.
All of this the self-styled reformers in the US and Britain might have recognised, had they not been put off by distractions.
They had been dismayed by the turn of US economic fortunes in the early 1970s, and had mistakenly attributed this to a combination of Keynesian economics and government intervention.
US economic and political influence was undermined by two fundamental changes that the country had recently undergone. During the 1960s, President Lyndon Johnson, having embarked on his big-spending Great Society program, found that he could not simultaneously finance the US's escalating involvement in the Vietnam War except by printing money. This introduced large-scale inflation into the world economy and undermined the value of the US dollar. Second, after 1970, the US could no longer be the dominant influence over global oil prices.
The weakness of the US dollar weakened the US as a global power. Up until then, much of global trade had been backed by the US dollar, which ensured a large degree of integration among the Western capitalist economies. These elements had been a driving force in Western economic success up to that time.
All of these facts were now overlooked, and instead all of the failures and none of the successes were attributed to intervention.
Capitalism, the critics said, needed to be freed from the bonds of regulation to be able to generate wealth. Especially, there should be no barriers to the free global movement of capital and goods.
Did revisiting what was, after all, the failed 19th-century experiment of globalisation, deliver better outcomes for nations and people? Those advocating unbridled free markets certainly said so, but by relying more on assertion than on fact.
The Washington-based Center for Economic and Policy Research (CEPR) certainly disagreed with this assertion, and said so in a study released in November 2000, based exclusively on International Monetary Fund and World Bank data.
Of 116 countries analysed, it was revealed that only 11 experienced a better national income growth rate per capita in the period 1980-2000 compared with 1960-1980. (Remember, interventionist capitalism was the dominant economic philosophy during the first period, and the free market experiment prevailed during the second). Of the 11 countries that did better, only two - India and China - made significant advances in the 1980-2000 period. And neither was following the deregulated free market experiment.
The other 100-odd economies lost ground so far as national income growth per capita was concerned.
It is also true that the period 1980-2000 enjoyed all the advantages of the communications technology revolution. It can only be imagined how much worse would have been this period without the technology revolution.
Drawing upon the same data, CEPR also revealed that real wages overall have been more or less static for around 27 years before 2000.
Income growth rates not being maintained and no gains in real wages over the entire period 1980–2000 are not much of an advertisement for the free market experiment.
The CEPR quite properly asked: how could the disruption that the free market experiment caused to so many individuals and communities be justified on the basis of these outcomes? No satisfactory answer has been given to its question.Harm done
We now have, quite apart from the CEPR study, decisive evidence from around the world of even greater harm done by globalisation and the unregulated market experiment. It is the global financial crisis which came close to destroying the world economy, and whose impact is still to be dealt with.
After this 30-year experiment, what did we have to show as the new century dawned? More unemployment than at any time in the postwar period; stagnant real wages in most of the prosperous Western economies stagnant during 1980–2000; evidence, as revealed in the only serious research study so far conducted into this, demonstrating that national income growth rates slowed in most countries during this period; and, for good measure, seven years on, a financial meltdown of calamitous proportions that is still holding free market capitalism to ransom.
One has to wonder who has been fooling whom for all these years. But the emerging facts do perhaps explain why those so strenuously defending the globalisation experiment take such refuge in assertion and bluster when it comes to defending it.Colin Teese is a former deputy secretary of the Department of Trade.