After Neoliberalism

Quiggin, John Book After Neoliberalism Global Thinkers Series Provided in Cooperation with: ANU Press, The Australian National University Suggested Citation: Quiggin, John (2024) : After Neoliberalism, Global Thinkers Series, ISBN 9781760466527, ANU Press, Canberra, https://doi.org/10.22459/AN.2024 This Version is available at: https://hdl.handle.net/10419/312682 Standard-Nutzungsbedingungen: Die Dokumente auf EconStor dürfen zu eigenen wissenschaftlichen Zwecken und zum Privatgebrauch gespeichert und kopiert werden. Sie dürfen die Dokumente nicht für öffentliche oder kommerzielle Zwecke vervielfältigen, öffentlich ausstellen, öffentlich zugänglich machen, vertreiben oder anderweitig nutzen. Sofern die Verfasser die Dokumente unter Open-Content-Lizenzen (insbesondere CC-Lizenzen) zur Verfügung gestellt haben sollten, gelten abweichend von diesen Nutzungsbedingungen die in der dort genannten Lizenz gewährten Nutzungsrechte. Terms of use: Documents in EconStor may be saved and copied for your personal and scholarly purposes. You are not to copy documents for public or commercial purposes, to exhibit the documents publicly, to make them publicly available on the internet, or to distribute or otherwise use the documents in public. If the documents have been made available under an Open Content Licence (especially Creative Commons Licences), you may exercise further usage rights as specified in the indicated licence. https://creativecommons.org/licenses/by-nc-nd/4.0/ ‘John Quiggin is the intellectual equivalent of a dazzling fireworks display. I walk away from every encounter with a bright new insight, and this book is no exception. Agree or disagree, Professor Quiggin is a veritable trove of fresh insights. ‘Spanning nearly four decades, this volume brings together some of Professor Quiggin’s most provocative contributions, driven by a deep commitment to equity. It will pique your curiosity and encourage you to work towards abetter world.’ Andrew Leigh, Parliamentarian and author of The Shortest History of Economics AFTER NEOLIBERALISM GLOBAL THINKERS SERIES AFTER NEOLIBERALISM JOHN QUIGGIN Published by ANU Press The Australian National University Canberra ACT 2600, Australia Email: [email protected] Available to download for free at press.anu.edu.au ISBN (print): 9781760466510 ISBN (online): 9781760466527 WorldCat (print): 1434597312 WorldCat (online): 1434597367 DOI: 10.22459/AN.2024 This title is published under a Creative Commons Attribution-NonCommercial- NoDerivatives 4.0 International (CC BY-NC-ND 4.0) licence. The full licence terms are available at creativecommons.org/licenses/by-nc-nd/4.0/legalcode Cover design and layout by ANU Press This book is published under the aegis of the Public Policy editorial board of ANUPress. This edition © 2024 ANU Press Contents List of tables ix Acknowledgements xi Abbreviations xiii Introduction 1 1. White trash of Asia? 9 2. The evolution of neoliberalism 27 3. Neoliberalism in Australia 47 4. Privatisation and nationalisation in the 21stcentury 63 5. Looking back on micro‑economic reform: asceptical viewpoint 77 6. What have we learned from the Global Financial Crisis? 105 7. The lost golden age of productivity growth? 123 8. Financial markets: mastersorservants? 139 9. Basic or universal? Pathways for a universal basic income 155 10. The case for a four‑day standard working week 169 Afterword 181 Index 185 1 Introduction Since we emerged from the lockdown phase of the COVID-19 pandemic that began in 2020, it is clear that something important has changed. Oldcertitudes about work and life, government and politics, and the way the economy works were being questioned even before the pandemic. Nowthey appear to have collapsed altogether. The contrast between our current situation and that at the turn of the 21st century is startling. As the sun rose on New Year’s Day 2000 and it became apparent that the much-predicted ‘Millennium Bug’ had failed to bite, the world seemed to have entered a new era of capitalist prosperity. That new era had been prophesied in numerous writings, ranging from academic works such as Francis Fukuyama’s The End of History (1992) to airport bestsellers like Thomas Friedman’s The Lexus and the Olive Tree (1999). Many terms have been used to describe the set of ideas and policies that held sway at the beginning of the 21st century. In most cases, these terms were initially positive or neutral, but they became primarily pejorative over time. This reflects the fact that critics of a ruling ideology need terms to describe it. By contrast, those who accept and implement such an ideology rarely see it as such. Terms used to describe the newly dominant ideology included ‘economic rationalism’, the ‘Washington Consensus’ and ‘market liberalism’. Political and economic commentators finally settled on ‘neoliberalism’. As is usual with any widely invoked political concept (for example, ‘democracy’ or ‘socialism’), the term neoliberalism has been used and misused in many different ways. The range of different uses of ‘neoliberalism’ has led some (primarily supporters of neoliberal ideas) to suggest that the term is nothing more than a slur, applicable to anything left-wingers dislike. AFTER NEOLIBERALISM 2 But it is still true, as US Supreme Court Justice Potter Stewart famously said of obscenity, that even if we can’t define neoliberalism precisely, we can recognise it when we see it. Properly understood, it is the ideological underpinning of the era of financialised capitalism that emerged from the economic crises of the early 1970s and remained dominant for the rest of the 20th century. The central idea of neoliberalism was that markets, particularly financial markets, generally outperform governments in the allocation of resources and investments. Neoliberalism came in a variety of forms, reflecting the variety of liberalism itself, but was different from preceding forms ofliberalism because of the need to respond to the successes and failuresof social democracy in the second half of the 20th century. In one form or another, neoliberalism became the unquestioned basis for the thinking ofboth centre-right and centre-left parties around the world. My own academic career has coincided almost exactly with the era of neoliberalism. My first journal article was published in 1979, the year Margaret Thatcher became prime minister of the United Kingdom (UK) and inaugurated the program of radical reform that became known as Thatcherism. I began work on this retrospective volume in late 2022, just after Liz Truss ended her brief and disastrous stint in the same position. Her sole accomplishment in that period was to demonstrate that a Thatcherite policy program was no longer acceptable, even to financial markets. Between those endpoints, neoliberalism surged around the world, taking different forms in different countries and reaching a triumphal high point in the 1990s. Successive financial disasters, culminating in the Global Financial Crisis (GFC) of 2008, discredited the central ideas underlying neoliberalism. However, these ideas remained part of the mental equipment of the political and policymaking classes. As soon as the immediate crisis was over, neoliberalism re-emerged in zombie form,1 driving disastrous policies of austerity that produced a decade of miserable economic performance throughout the capitalist world. It is only in the last five years or so that new thinking has begun to fill the gap left by the failure of neoliberalism. Ideas like universal basic income, afour-day working week and autonomous remote work have moved from 1 My book Zombie Economics: How Dead Ideas Still Walk Among Us (Quiggin 2010) developed this trope, describing the life cycle of zombie ideas, from birth through life and death to reanimation in undead form. 3 INTRODUCTION the margins to the centre of the policy debate. The movement towards gender equity has extended to encompass measures including parental leave and expanded provision of childcare. Privatisation has been replaced by an expansion of public enterprise in a variety of fields. Serious efforts are finally being made to bring global financial markets under control. Over the 40 years of neoliberalism, I have written hundreds of journal articles, book chapters and opinion pieces presenting a critical view of the dominant ideology and, more recently, advocating alternatives. In this book, I have picked a representative selection of these, running from the 1990s to the last couple of years. The book is organised as follows. Chapter 1, originally published in 1987, was my first venture into the public debate over productivity and economic growth. It was published in the Current Affairs Bulletin, a peer-reviewed journal produced by the Workers Educational Association. The journal made valuable contributions to Australian public debate from its inception in 1947 until 1998. The gap created by its departure has been filled by online publications, most notably The Conversation. The article was a response to a string of jeremiads put out by supporters of what came to be known as ‘micro-economic reform’, predicting economic disaster if the policies they proposed were not implemented. The supposed poor performance of the Australian economy relative to that of Japan was of particular concern. My central observation, repeated in different forms in much of my subsequent work, was that the supposed decline of Australia’s relative living standards was largely a statistical illusion, and that the apocalyptic scenarios in which Australians were doomed to become the ‘white trash of Asia’2 were unlikely to eventuate. Rereading the article after nearly 40 years, I would change almost nothing. Ihave deleted two figures that I could no longer reproduce from the available data and that added nothing to the analysis. 2 As Dobell (2015) observes in relation to the ‘white trash of Asia’ catchphrase, ‘Pinning down great quotes can be an experience as ephemeral and exasperating as hunting the snark.’ Nevertheless, Dobell ultimately attributes the phrase to Lee Kuan Yew, former prime minister of Singapore. AFTER NEOLIBERALISM 4 Chapter 2 is a retrospective, examining the rise and decline of neoliberalism from the 1970s to the COVID-19 pandemic. I present a ‘three-party’ model, in which the main movements driving contemporary politics are categorised as neoliberal (soft or hard), Trumpist3 and leftist. In conclusion, I discuss the requirements for a successful left response to the crisis and offer some suggestions for a way forward. Chapter 3, drawn from my 1996 book, Great Expectations, turns the focus back to Australia. I describe the background of Australian neoliberalism (referred to at the time as ‘economic rationalism’ or ‘micro-economic reform’). The growth of the state from the Second World War to the Whitlam government is contrasted with the subsequent retreat under Fraser, Hawke and Keating. The chapter ends with a discussion of the National Competition Policy, which turned out to be the last major instalment of micro-economic reform. Chapter 4, written for the Committee for Economic Development of Australia and published in their journal Growth, deals with what is arguably the most distinctively neoliberal policy project, that of privatisation. The Thatcher government, in particular, focussed heavily on reversing the growth of public enterprise that had taken place over the course ofthe 20th century. By 2002, when this chapter was written, the project was running out of steam. The promised benefits of privatisation had not been delivered, and new privatisation proposals were facing increased opposition. My article proposed a revival of the concept of the mixed economy, in which both privatisation and nationalisation were available as policies to achieve an appropriate balance between the public and private sectors. Twenty years later, with large-scale Australian government initiatives in telecommunications and energy infrastructure, including the National Broadband Network (NBN) and public investment in renewable energy, such a policy seems to be emerging. Chapter 5, first published in The Economic and Labour Relations Review, was notable at the time for treating neoliberal micro-economic reform as a policy agenda with a fixed beginning and end. Most commentators agree that micro-economic reform in Australia began with the floating of the dollar by the Hawke government in 1983. When the chapter was originally 3 I formerly used the term ‘tribalist’, which is unsatisfactory in various ways, as is Piketty’s ‘nativism’. Donald Trump leads and exemplifies the political tendency I am talking about, so ‘Trumpist populism’ seems the best term to describe it. 5 INTRODUCTION published, the dominant assumption was that ‘reform’4 was essential and would continue indefinitely. By contrast, I argued that the process had already ended with the introduction of the goods and services tax (GST) in 2000 and that, for the most part, the reform agenda had been exhausted. Over time, this latter point has become conventional wisdom. Calls for a return to ‘reform’ are obligatory in various contexts but are no longer taken seriously by anyone. The main point of the chapter was that the benefits of reform had been oversold in various respects. Most relevantly to contemporary debates, Istressed the role of unsustainable increases in working hours and work intensity as a driver of the brief and illusory ‘productivity miracle’ of the early 1990s. In the wake of the pandemic lockdowns, issues of this kind are coming to the fore, with the rise of remote work and calls for a four-day standard working week. Chapter 6, first published in the Australian Economic Review, was written in the aftermath of the GFC and summarised the key arguments of my book, Zombie Economics: How Dead Ideas Still Walk Among Us. I argued that the crisis provided sufficient evidence to reject the dominant models in academic macro-economics and finance theory, as well as policy claims such as the ‘trickle-down’ hypothesis and the case for comprehensive privatisation. Inreality, few of these lessons were learned, and much of the policy response to the crisis has been irrelevant or counterproductive. Asa result, we have learned some unflattering lessons about the economics profession, including policymakers, commentators, central bankers and academic economists. In Chapter 7, which is based on a paper presented to a Reserve Bank conference, I return to the topic of productivity growth. By the time the paper was presented in 2011, it was clear that the supposed ‘productivity miracle’ of the 1990s was, at best, a temporary blip, and that all the measured gains had subsequently been lost. By this time, Australians recognised that calls for ‘reform’ and ‘improved productivity’ were little more than code words for ‘work harder with fewer resources, and produce more’. As these calls were increasingly ignored, work intensity declined, and productivity slowed. In further writing, not included in this volume, I made the case that productivity growth in Australia is mainly driven by improvements 4 The word ‘reform’ is frequently used with a positive connotation, implicitly assuming that change is beneficial. However, this usage requires some level of agreement on the desirable direction of change. I use it to mean simply ‘a change in form’, without any implication as to the desirability of that change. AFTER NEOLIBERALISM 6 in information and communications technology (Quiggin 2017; 2018). Since we import most of the associated equipment, technological progress is manifested in improved terms of trade rather than measured multifactor productivity. The main lesson from this analysis is that Australian workers increasingly value work–life balance over increasing material living standards. Chapter 8, based on an article in a special issue of Politics & Society, deals with the rise of financial markets to dominate the global economy in the era of neoliberalism. I contrast the adulation accorded to the ‘Masters of the Universe’ in the 1990s with the disastrous reality of the Global Financial Crisis and offer a number of suggestions for constraining the size and activity of the financial sector. Chapters 9 and 10, written as the era of neoliberalism was drawing to aclose, look forward rather than backward to possibilities for radical, even utopian change. Chapter 9 deals with the idea of a universal basic income (UBI) and advocates what has been called a Livable Income Guarantee (Quiggin, Klein, and Henderson 2020). The central idea is to approach a UBI by focussing initially on extending a livable income to larger groups of people. This would be done by raising inadequate benefits like JobSeeker to a livable level and expanding eligibility to support activities such as volunteering. This ‘Basic first’ approach may be contrasted with a ‘Universal first’ approach of making a payment to everyone in the population but setting it at a level insufficient to support a living standard above the poverty line. Chapter 10 presents arguments for a four-day standard working week. Working arrangements of many kinds were upended by the COVID pandemic. This experience showed that different ways of working were possible, notably including remote work. More broadly, the experience of the pandemic has restarted debates about reducing standard working hours that have been frozen under neoliberalism. Standard working hours fell steadily from 1850 to the 1980s but have been virtually unchanged since then. A four-day week is long overdue. 7 INTRODUCTION Bibliography Dobell, Graeme. 2015. ‘Lee Kuan Yew, Australia and “white trash”’. Australian Journal of International Affairs 69: 363–72. Friedman, Thomas. 1999. The Lexus and the Olive Tree: Understanding Globalization. New York: Farrar, Strauss and Giroux. Fukuyama, Francis. 1992. The End of History and the Last Man. New York: The Free Press. Quiggin, John. 2010. Zombie Economics: How Dead Ideas Still Walk Among Us. Paperback Edition. Princeton: Princeton University Press. doi.org/10.1515/ 9781400842087. Quiggin, John. 2017. ‘The Productivity Commission’s Multi-factor Problem’. Inside Story. 31 October 2017. insidestory.org.au/the-productivity-commissions-multi- factor-problem/. Quiggin, John. 2018. ‘The Not-So-Strange Death of Multifactor Productivity Growth’. Australian Economic Review 51, no. 2: 269–75. doi.org/10.1111/1467- 8462.12275. Quiggin, John, Elise Klein, and Troy Henderson. 2020. ‘Meet the Liveable Income Guarantee: A Budget-ready Proposal That Would Prevent Unemployment Benefits Falling off a Cliff’. The Conversation. 1 October 2020. theconversation. com/meet-the-liveable-income-guarantee-a-budget-ready-proposal-that-would- prevent-unemployment-benefits-falling-off-a-cliff-146990. 9 1 White trash of Asia? First published in 1987 as Quiggin, John. ‘White Trash of Asia’. Current Affairs Bulletin 64: 18–25.1 Introduction In recent years it has often been claimed that in the absence of radical changes in economic policies and social attitudes, Australians will soon be the ‘poor white trash’ of South-East Asia. The phrase itself appears to be due to SirRoderick Carnegie, chairman of the mining company Conzinc RioTinto Australia, but other commentators ranging from Max Walsh, editor of the Australian Financial Review, to Lee Kuan Yew, prime minister of Singapore from 1959 to 1990, have made the same general claim.2 In1984, the claim was the subject of a conference of the Australian Institute of Political Science (AIPS), whose proceedings have recently been published as Poor Nation of the Pacific?: Australia’s Future? (Scutt 1985). The basis of the claim is the fact that, since about 1870, when Australia’s income per capita was the highest in the world, Australia’s rate of growth in per capita gross national product (GNP) has been slower than that of most other nations, with the result that we have fallen to about twelfth on the international ladder (depending on how the measurements are made). 1 I wish to thank Pat Quiggin for extensive help with the provision and interpretation of demographic data, and Bruce Chapman, Steve Dowrick, Fred Gruen and Tom Nguyen for useful discussions on the issues examined here. None of these should be assumed to share the views expressed here. 2 As noted in the Introduction, subsequent analysis has suggested that Lee Kuan Yew was probably the first to use the term. AFTER NEOLIBERALISM 10 This relatively poor performance is illustrated by statistics such as those in Tables 1.1–1.3. Table 1.1 (taken from Hughes 1985) illustrates the relative per capita GDP of Australia and other developed nations over the period 1870–1976. At least at first sight, it gives evidence of a dramatic decline in Australia’s relative standard of living. Table 1.2 (taken from Dowrick and Nguyen 1986) gives more estimates of per capita GDP for the countries of the Organisation for Economic Co-operation and Development (OECD) over the postwar period. Table 1.1 Relative GDP per capita (USA=100) Year Growth rate Country 1870 1890 1913 1929 1960 1976 GDP GDP p. cap. Australia 173 145 107 74 75 80 3.2 1.1 Austria 53 58 48 54 69 2.6 2.1 NA Belgium 123 104 82 75 66 84 2.1 1.5 Canada 80 77 81 70 78 91 3.8 2.0 Denmark 69 66 73 64 66 76 2.9 1.9 Finland 52 42 41 39 54 71 3.1 2.2 France 87 71 67 66 67 87 2.2 1.9 Germany 68 60 58 51 70 81 2.5 2.0 Italy 69 46 42 37 43 53 2.3 1.6 Japan 35 33 29 32 35 77 3.8 2.6 Netherlands 123 87 69 70 69 80 2.7 1.4 Norway 63 52 47 50 65 85 2.9 2.1 Sweden 54 48 55 61 79 88 3.0 2.3 Switzerland 104 88 74 85 85 78 2.4 1.6 UK 103 81 67 70 67 124 1.8 1.3 USA 100 100 100 100 100 100 3.5 1.9 Source: OECD The main interest of these type of data for advocates of the white trash thesis is the relative ranking of different nations, and, here again, Australia seems to have performed poorly. By contrast, over about the last 30 years, the nations of South-East Asia have enjoyed very rapid growth in per capita incomes. Obviously, if these trends are extrapolated, these nations will, at some point, overtake us. Hughes (1985) has undertaken such an extrapolation, and the results are presented in Table 1.3. 17 1. WHITE TRASH OF ASIA? for growth rates to be higher for those nations that are initially worse off. Thus, during the period when she specialised in ‘copycat’ manufacturing, Japan recorded annual growth rates of the order of 10per cent. WhenJapan became a technological leader in the 1970s, her growth rates fell to 3or 4per cent, and it was poorer South-East Asian nations that recorded strikingly rapidgrowth. It is worth considering the extrapolations presented by Hughes in the light of this convergence effect. They are based on the assumption that the ASEAN nations can continue their current (or, rather, 1970–81) growth rates long after they have caught up to and surpassed Australia, and, for that matter, the other developed nations. Such an extrapolation implies that, by the year 2131, Singapore would have a per capita GDP nine times as large as that of the OECD nations but would still be growing more than twice as fast. Dowrick and Nguyen (1986) cite a number of estimates showing that, all things being equal, a poor nation should catch up two-thirds of the difference with a rich one over a period of 25 years. As levels of GDP converge, so, in general, do rates of GDP growth. An important consequence of this ‘catch-up’ effect is the sharp decline in the variance of per capita GDP among the developed nations. Since 1973, differences in rates of growth have also fallen sharply. The other major factor that has been shown to affect the rate of growth of per capita GDP is population growth. In general, studies of comparative growth indicate that a 1per cent increase in the rate of population growth is associated with an increase in total GDP of between 0.3 and 0.9per cent. Since this is less than the increase in population growth, per capita GDP growth is reduced as population growth increases. One noteworthy issue that can only be mentioned briefly is the relationship between economic growth and spending on armaments. In the classical theory of economic growth, armaments expenditure is a straightforward subtraction from savings devoted to productive investment. On the other hand, there has been an influential school of thought suggesting that ‘military Keynesianism’ has played a vital role in preventing stagnation and promoting growth. Looking at the best and worst performers in Table 1.2, the United Kingdom and Japan, it is noteworthy that one has struggled to maintain Imperial pretensions, while the other has been forcibly prevented from making AFTER NEOLIBERALISM 18 major arms expenditures. Of all possible paths to greater worldwide prosperity, areduction in arms spending seems both the most appealing and one of the most practical. In general, however, the most important point to be derived from the study of international growth rates is the fact that differences in both total levelsof GDP and the rate of growth of GDP have become generally smaller over the postwar period. Differences in growth rates among the developed nations since 1973 have been very small indeed, with 15 of the 24 nations, including Australia, falling in a range of only 1.5per cent. As regards the developed nations, relative growth is an issue whose time has passed. Assessing Australia’s performance 1870–1930 In light of these general comments on international comparisons, what can be said about Australia’s economic performance? Perhaps the most importantfeature of Table 1.1 is that the period of sharpest decline is the 60 years from 1870 to 1930. Since 1930, Australia’s per capita GDP has moved broadly in line with that of other developed countries, although it has been slightly below average. Several observations may be made at thispoint. First, there is not much value in scrutinising our present institutions for the sources of poor economic performance in a period before many of these institutions were formed. For example, many commentators place a great deal of stress on highly protected industries such as motor vehicles and textiles. Yet the motor vehicle industry only dates from the Second World War, while the first tariffs on textiles were imposed in 1926. If comparisons of relative growth are to be the touchstone of economic performance, itwould seem that the high protection of these activities has greatly improved our performance. Even such a venerable body as tthe Arbitration Commission (previously the Arbitration Court) only dates from 1904, towards the end of the period of sharpest decline. Second, while Australia’s comparatively poor performance since 1870 is blamed on various defects in our sociopolitical system and, particularly, on government policies, no corresponding analysis is given to the previous century. During this period, European Australia was transformed from astarving convict settlement imposed on a continent occupied by hunter– 19 1. WHITE TRASH OF ASIA? gatherers3 to the richest society (in terms of measured per capita GDP) the world had ever seen. It is rarely suggested that this spectacularly good performance was the result of brilliant management by the rulers of the time. Rather, it is attributed to luck in the form of our endowments of natural resources. For many writers it is this endowment of natural resources that makes our decline in relative growth rates since 1870 so difficult to believe. This betrays muddled thinking. The price of primary commodities relative to other goods has fallen significantly over the last century so our endowment of natural resources is much less of an advantage now than it was in 1870. Therefore, contrary to the popular view, it would have been surprising if Australia (or any other primary commodity exporter) had maintained higher than average rates of growth over this period. The discussion so far has implicitly incorporated the assumption that measured GDP per capita is a useful basis for comparison. However, some features of the Australian data make it particularly unreliable for this purpose. First, the data presented by Hughes are based on population counts that exclude Aboriginal people,4 although their (low-paid or unpaid) labour made a significant contribution to measured GDP. Since Aboriginal people formed 9per cent of the population in 1870 and only about 1 per cent in 1930, both the initial level of per capita GDP and the subsequent decline are exaggerated to this extent. Second, the European population in 1870 was very atypical, reflecting a frontier society with high rates of immigration (predominantly by young adult males) and a small initial population. In particular, the masculinity ratio (the ratio of males to females) was much higher than for other developed countries. Furthermore, this ratio was highest in the most productive age group (those between 15 and 65). Since measured GDP is dominated by the work of men and excludes much of the work done by women, it is not surprising that Australia’s measured GDP per capita should be very high. Over the period 1870–1930, Australia’s masculinity ratio approached that of the USA (Table 1.4). The Australian population was also significantly younger on average than that of other nations. For example, in 1870 the 3 Since this article was published, scholarly and public discussion of Aboriginal land management has emphasised the role of active practices, including forms of agriculture and aquaculture and the use of fire to manage landscapes (Gammage 2012; Reeder-Myers, L, Braje, TJ, Hofman, CA, et al. 2022). Nevertheless, monetary measures such as GDP, the central topic of this chapter, are not applicable toAboriginal society before European contact. GDP measures are only meaningful in the context of a market economy. 4 The term ‘Aboriginal’ also encompassed Torres Strait Islanders. AFTER NEOLIBERALISM 20 proportion of Australians aged over 65 was only 1.7per cent compared with 3.6per cent for the USA and 7per cent for the UK. While this was offset by a correspondingly higher number of children, the workforce overall was substantially younger than that of other countries. In an era when capacity for hard physical work was essential, this was conducive to high per capita GDP. Once again, Australia approached the international norm in this respect over the period 1870–1930, and this was reflected in a decline inrelative per capita GDP. Table 1.4 Masculinity ratios 1870–1930 AUSTRALIA UK USA 1870 121 95 102 1880 117 95 104 1890 116 94 105 1900 110 94 104 1910 108 91 106 1920 103 92 104 1930 103 92 102 Sources: US Bureau of the Census—Vital statistics: Rates (various years); UK General Register Office Census Reports (various); ‘Population of Australia’; ESCAP Country Monograph 9 Australia now appears not as an extreme outlier but as a member of a group of leading nations, including the UK and the Low Countries. While it is apparent that the USA overtook this group between 1870 and 1930, and that several other countries have caught up, the picture of dramatic relative decline derived from GDP per capita may be seen to be greatly exaggerated. 1930 to the present Although the data presented in Table 1.1 have been shown to be misleading, there is no doubt that Australia’s economic performance before about 1930 was somewhat unusual. For most policy purposes, however, it is more useful to consider the subsequent period, and in particular the period since the end of the Second World War. During this period, Australia’s per capita GDP growth perfor mance was anything but unusual. As Table 1.2 shows, it was within 0.5per cent of the average for the 12 richest nations in each of the three sub-periods. 21 1. WHITE TRASH OF ASIA? Dowrick and Nguyen (1986) provide a more formal test of performance. They estimate several equations that relate per capita GDP growth in a range of countries to initial income levels and population growth rates. Australia’s growth rate is almost exactly that predicted by the equations, with the deviation ranging from +0.5per cent to −0.3per cent. Similar results are obtained by Gruen (1986), using a slightly different dataset. How can this be squared with the dire statistics of our slip down the international ladder presented by advocates of the white trash thesis? Aswehave seen, convergence means that differences between income levels should shrink. Thus, it is not surprising that Australia’s per capita GDP has grown more slowly than that of nations that were initially poorer. However, this alone cannot account for the fact that some nations have overtaken us. The explanation offered by the international growth models is that Australia’s population has been growing about 1 per cent faster than the OECD average. This implies a reduction in relative per capita GDP growth of about 0.4per cent. Because differences in income levels among developed countries are now very small, even such a small difference implies a large slip down a ladder of comparative levels. In essence, this says more about the pointlessness of such league tables than anything else. A point of particular relevance in the assessment of Australia’s economic performance is that, until recently, Australian policy has focussed on absolute as much as per capita GDP. This has reflected defence concerns andthe existence of a generally shared ideology of development. Thus, while it may be suggested that immigration and tariff policies have led to alower per capita GDP than might otherwise have been possible, it should be recognised that these policies were implemented with a general acceptance that some constraints in average income were a reasonable price to pay for more rapid absolute growth. This acceptance is quite explicit, for example, in the Brigden Report, and is implicit in the rejection of standard economic criteria for the assessment of projects seen as promoting ‘development’, notably through irrigation and Northern development. Current views, including my own, tend to place a low or even negative value on development and population growthperse. In assessing past performance, however, we should be clear that our predecessors did not miss the target. Rather, they aimed at, and hit, a different target. AFTER NEOLIBERALISM 22 One aspect of the relative growth debate and the current economic crisis has been a series of conflicting claims on the role of migration. Geoffrey Blainey and others have called for restrictions on migration as a response to recession, while Helen Hughes and others have proposed a return to the mass immigration policies of the 1950s and 1960s as a response to poor relative performance. The debate has been confusing and, frequently, confused. One major source of confusion has been a failure to distinguish between short-term macro-economic effects of migration and longer-term effects on growth in per capita incomes. Oddly enough, the evidence here suggests that both sides have got their arguments back to front. The critics of immigration have generally focussed on short-term employment effects, but the evidence here suggests that these are neutral or slightly favourable. On the other hand, advocates of mass immigration have frequently focussedon long-term effects, but the evidence, including that provided by Gruen, and Dowrick and Nguyen, supports the view that high population growth tends to reduce per capita GDP growth. It is likely that the effects ofmigration will be somewhat more favourable than those of high ratesof natural increase, since migrants are likely to be people of working age. Nevertheless, the evidence does not support the proposition that mass immigration is likely to promote high rates of growth in per capita (asopposed to total) GDP. Both sides of the debate share the view that migration policy should be determined primarily by fairly narrow economic considerations. This is a natural consequence of the ‘relative growth’ approach. In my view, policy should primarily reflect social decisions on the costs and benefits of greater cultural diversity, higher population densities and other such effects of expanded migration. We should view with suspicion any claim that our economic circumstances necessitate either sharp reductions or massive increases in immigration. Playing the relative growth game In the preceding sections, the specific contentions made by the ‘poor white trash’ school have been criticised. The object of this section is to examine the general implications of this mode of argument. The misleading claims made by users of these arguments reflect the biases inherent in their manner of assessing economic performance. 23 1. WHITE TRASH OF ASIA? One noteworthy feature is a strong tendency to select and present statistics in such a way as to make relative economic performance for any particular country look bad. Conversely, it is possible to select statistics that make any particular country look good, and this exercise is occasionally undertaken by governments facing re-election. However, in most countries, the purpose of international comparisons is typically to demonstrate the poor relative performance of the country concerned, and hence to emphasise the urgency of adopting whatever policies the person making the comparison wishes to advocate. Viewed simply as a way of emphasising the urgency of one’s case, the relative growth game may seem harmless enough. In fact, however, ityields a seriously distorted attitude to economic policy issues. For example, it would be generally agreed that Australia’s economic performance since 1973 has been considerably worse than during the postwar period from 1945 to 1973. However, a concern with relative growth rates yields precisely the opposite conclusion. During the relevant period, Australia’s per capita growth rate has been much closer to the OECD average than in earlier periods. A second feature of this approach is that it focusses attention on narrow measures of GNP without any concern for quality of life. In a general context, even the most rigidly orthodox economist would recognise that increases in GNP are not necessarily beneficial if they are obtained at the expense of increased working hours. In mainstream economic theory, what matters is that the allocation of resources should reflect individual preferences regarding the relative value of increased leisure and higher income. Distortions arise when outcomes diverge from these preferences. Yet, in the context of the relative efficiency debate, Hughes feels free to write that in Australia, ‘a high preference for leisure distorts the allocation of resources’. Calls for increased working hours, shorter holidays and other improved conditions have been common. Less tangible aspects of the quality of life, such as the protection of the environment, are typically ignored completely in this debate, except as sources of needless regulation. The distribution of income is another issue that goes by the board in this approach. Indeed, players of the relative growth game such as Michael Porter are concerned to decry disputes over the distribution of income as a major obstacle to the good of ‘the community as a whole’, which is typically measured by average per capita income. In the context of very poor developing countries, one could perhaps argue that an increase in the size of AFTER NEOLIBERALISM 24 the cake matters more than more equitable sharing, since the achievement of an average income comparable to that of the developed world would make almost everyone better off. It is, however, very difficult to apply this argument to the developed world. The wellbeing of the poor in a range of developed countries is largely independent of the minor variations between them in average income. For example, the USA has a per capita income 20per cent larger than that of the other developed countries, but its performance on measures such as infant mortality and homelessness, which are closely related to levels of deprivation, are among the worst in the developed world. A more subtle feature of the relative growth game is the way in which key policy issues are prejudged. For example, there is considerable scope for debate over the importance of external competitiveness as compared to measures of domestic wellbeing such as unemployment levels. The relative growth approach implies a single-minded concern with competitiveness on the assumption that everything else will come right in the end. This is seen at its worst in the prolonged deflation imposed by Margaret Thatcher, which, after her serving two terms in office, has yet to produce tangible domestic benefits. A second important feature of the relative growth game is that issues relating to the overall world economy are largely ignored. This is despite the fact that, among the developed countries, the worst performers prior to 1973 did almost as well as the best performers since 1973. Insofar as the sharp downturn since 1973 is discussed at all in the relative growth literature, it is typically regarded either as the result of an exogenous shock in the form of the increase in Organization of the Petroleum Exporting Countries (OPEC) oil prices or as the result of mistaken domestic policies adopted independently (but simultaneously) by a large number of different countries. The most important topic of economic analysis should attempt to analyse the problems of the world economy and seek to propose remedies at a global level. The relative growth approach totally excludes this task from the agenda. Severe difficulties, particularly in the form of intractable trade deficits, have been encountered by countries that have attempted to maintain growth rates substantially in excess of those of their trading partners. Examples include countries as diverse in their institutional structure and policy background as France, Australia and the USA. 25 1. WHITE TRASH OF ASIA? Against this backdrop, supporters of the relative growth approach point to the success of the East Asian countries in maintaining high growth rates. In the last two years, however, the Philippines has entered a seemingly intractable economic crisis, South Korea has encountered significant balance-of-payments problems, and Singapore has issued forecasts of negative real growth. All of these problems may be traced to low export demand associated with the poor performance of the world economy as a whole. Players of the relative growth game have essentially nothing to say about this issue. Concluding comments Prophets of all kinds have long found predictions of impending doom an indispensable aid in gaining and holding the attention of their audiences, especially when they can promise that careful obedience to the prophet’s commands is the only method of averting this doom. The prediction that Australians will soon be the poor white trash of Asia has been used in precisely this fashion. While shock tactics may sometimes be salutary, it is extremely unfortunate that the advocates of this approach have chosen to focus on minor, and rapidly decreasing, differences in growth rates at a time when growth throughout the developed world has been painfully slow. The prospect of significant worldwide falls in rates of growth, and even in the actual level of per capita income, is uncomfortably close. In this light, arguments about which nation is doing the least badly are not merely irrelevant but positively damaging to prospects for international cooperation. There is, no doubt, substantial scope for improvement in Australian economic performance within the constraints imposed by the world economy. Efforts towards such an improvement are likely to be more rewarding if they are motivated by the desire to improve the lives of Australians rather than aneed to keep up with the international Joneses. AFTER NEOLIBERALISM 26 Bibliography Castles, Ian. 1986. ‘Is Australia’s Slide Down the “League Table” a Myth?’. Paper presented at the Centre for Economic Policy Research, The Australian National University, Conference on Recent Australian Economic Growth, November 1986. Dowrick, Steve and Duc-Tho Nguyen. 1986. ‘Australia’s Post-war Economic Growth: Measurement and International Comparison’. Paper presented at the Centre for Economic Policy Research, The Australian National University, Conference on Recent Australian Economic Growth. November 1986. Gammage, B. 2012. The Biggest Estate on Earth: How Aborigines Made Australia. Sydney: Allen & Unwin. Gruen, Fred. 1982. ‘How Bad Is Australia’s Economic Performance and Why?’. Economic Record 62: 180–93. doi.org/10.1111/j.1475-4932.1986.tb00893.x. Hughes, Helen. 1985. ‘Australia and the World Environment: The Dynamics of International Competition and Wealth Creation’. In Poor Nation of the Pacific?: Australia’s Future?, edited by Jocelynne E. Scutt, 1–17. Sydney: Allen & Unwin. Kasper, Wolfgang. 1986. ‘Structural Change for Economic Growth’. Economic Affairs 6, no. 5 (June–July): 8–13. doi.org/10.1111/j.1468-0270.1986.tb01773.x. Norton, WE and Robin McDonald. 1981. ‘Implications for Australia of Cross- Country Comparisons of Economic Performance’. Economic Record 57, no. 159: 301–18. doi.org/10.1111/j.1475-4932.1981.tb01067.x. Porter, M. 1985. ‘The Labour of Liberalisation’. In Poor Nation of the Pacific?: Australia’s Future?, edited by Jocelynne E. Scutt, 37–61. Sydney: Allen & Unwin. Quiggin, John. 1987. ‘White Trash of Asia’. Current Affairs Bulletin 64: 18–25. Reeder-Myers, Leslie, Todd J. Braje, Courney A. Hofman, Emma A. Elliott Smith, Carey J. Garland, Michael Grone, Carla S. Hadden, et al. 2022. Indigenous oyster fisheries persisted for millennia and should inform future management. Nature Communications 13, Article no. 2383. doi.org/10.1038/s41467-022- 29818-z. Scutt, Jocelynne E., ed. 1985. Poor Nation of the Pacific?: Australia’s Future? Sydney: Allen & Unwin. 33 2. THE EVOLUTION OF NEOLIBERALISM With this growth in activity came hugely increased power and profitability. As early as 1987, financial firms were being described as the ‘Masters of the Universe’, a phrase coined in Tom Wolfe’s (1987) novel, The Bonfire of the Vanities. The rise of the financial sector, and the concomitant decline of the trade union movement, tipped the balance of political power in favour ofneoliberalism. Hard neoliberalism Although the rising political power of the financial markets facilitated the general shift towards neoliberalism, this development also depended on a resurgence of neoliberal policy ideas. In sharp contrast with social democrats, the advocates of neoliberalism were ready with answers to the crisis of the 1970s. In macro-economics, the monetarist critique of Keynesianism developed by Friedman (1968) was rapidly accepted, eventually evolving into the inflation-targeting regime that remained in effect until the GFC. In fiscal policy, the ‘tax revolts’ of the 1970s led to a consensus on the need to restrain the growth of government. The perceived success of airline deregulation in the USA led to a broader movement in favour of deregulation and privatisation. To emphasise the distinction from macro-economic policy, these policies were frequently referred to as ‘micro-economic reform’ (Quiggin 1996). This phrase captured the positive connotations of ‘reform’, a term long used to describe liberal and social democratic policy innovations while reversing the substantive content. The advocacy of Friedman (1962), and Friedman and Friedman (1980), played a crucial role in promoting free market conservatism in the USA. Many of these ideas had been developed by economists associated with the University of Chicago, where Friedman worked for most of his long career. In the UK, a crucial role was played by ‘think tanks’ such as the Institute of Economic Affairs (Cockett 1995).3 The ideas developed by these think tanks formed the basis for the first systematic implementation of a neoliberal policy program, undertaken by the government of Margaret Thatcher in the UK from 1979 onwards. 3 The same was true in Australia (Cahill and Beder 2005). AFTER NEOLIBERALISM 34 The core goals of the program were to: 1. abandon Keynesian macro-economic stabilisation, based on active fiscal policy, in favour of an independent central bank with a directive to control inflation at all costs 2. remove the state altogether from ‘non-core’ functions through privatisation of government business enterprises and the sale of public housing 3. reject redistribution of income except for a basic ‘safety net’ 4. minimise the role of the state in core functions such as health, education and income security through contracting out, voucher schemes and soon. Thatcher attained the first and second of these goals very successfully. Although policies of monetary contraction implemented in 1979 produced a deep recession, with millions left unemployed, the government persisted and succeeded in bringing an end to the inflationary upsurge of the 1970s. Most of the publicly owned infrastructure sector (electricity, water, telecommunications, airports and railways) was privatised. The UK government made considerably less progress on the third and fourth objectives. There were also substantial reductions in the progressivity of the tax system, but Thatcher’s most ambitious move in this direction, the replacement of council rates with a poll tax, was a disaster, leading, eventually, to her downfall. The attempt to wind back public involvement in health and education was similarly limited, meeting particular resistance in the case of the National Health Service. The result was that, although the scope of public sector activity was wound back through privatisation, the size of government was not. The century-old trend of growth in the share of national income going to the government was halted in the 1970s but not reversed. Thatcher’s ideas formed the core of a hard neoliberalism that rapidly becamedominant throughout the English-speaking world. It was embodied in such documents as the Fightback! plan put forward by the Liberal and National parties in Australia in 1993 and the Contract with America proposed by the US Republican Party led by Newt Gingrich in 1994. Although neither of these programs produced immediate electoral success, most of the policies they proposed were eventually implemented. 35 2. THE EVOLUTION OF NEOLIBERALISM Beyond the English-speaking world, the global spread of neoliberalism was driven less by political advocacy and more by international institutions. Thedebt crises of the 1990s produced what Williamson (1990) described as the Washington Consensus, a term that reflected the shared views of the US Treasury, the International Monetary Fund (IMF) and the World Bank, all based in Washington DC. Less remarked upon, but equally significant, was the Europe-based consensus of the OECD, the European Commission and the European Central Bank (ECB). The ECB, created in the 1990s as part of the political project of unifying Europe around a common currency, represents a particularly pure institutional embodiment of hard neoliberalism (Palley 2013). The rise of neoliberal ideas reinforced, and was reinforced by, the resurgence of faith in the financial sector. During the ascendancy of social democracy, banking had been boring, safe and tightly regulated. The emblems of capitalism in the mixed economy were industrial firms like General Motors and General Electric.4 By contrast, the breakdown of social democracy in the 1970s saw the rise of financialised capitalism, dominated by global banks like Citibank, and Wall Street investment banks such as Goldman Sachs. The key idea here was the efficient (financial) markets hypothesis. Inits strong form, put forward by Fama (1970), the hypothesis states that financial markets provide the best possible estimate of the value of any investment. Although there was never any good supporting evidence for this claim, itbecame part of the ‘common sense’ of the neoliberal era. Oneresult was the trepidation with which governments awaited the verdict of ‘the markets’ on budgets and other policy decisions. Soft neoliberalism The resurgence of a financialised form of global capitalism from the 1970s onwards came as a shock to the left. There were some attempts at resistance, notably by the Mitterand government, which came to office in France in 1980, but all such attempts failed in the face of the power of global capital markets. By the 1990s, the triumphalist decade that followed the collapse of 4 By the early 2000s, General Motors was a shadow of its former self, while General Electric had become, in essence, a finance company, dominated by its GE Capital business. AFTER NEOLIBERALISM 36 the Soviet Union, the dominance of neoliberalism was clearly re-established. Over the course of the 1980s and 1990s, most social democratic parties accommodated to the new realities. As noted above, this accommodation was often presented as a new Third Way, allegedly transcending the dispute between social democrats and hard neoliberals. In reality, however, the Third Way amounted to little more than a soft version of neoliberalism (Callinicos 2001). Soft neoliberalism involved acceptance of most of the core elements of the neoliberal program, including privatisation, attacks on trade unions, uncritical acceptance of the dominant role of the financial sector, and attempts to halt or reverse the growth of the public sector. Over the course of the 1980s and 1990s, most social democratic and liberal parties in the English-speaking world adopted soft neoliberalism in one form or another. Some examples, significant in themselves, but also symbolic of the shift in economic thinking include: • the decision by the Hawke–Keating government in 1983 and 1985 to float the Australian dollar and deregulate the financial system • the Clinton Administration’s support for ‘the end of welfare as we know it’, demanded by the Gingrich-led Republican party in 1994. This measure was initially seen as successful because its adverse effects were masked by the strong growth of the 1990s. After growth slowed in the 2000s, however, the absence of welfare support contributed substantially to the growth of poverty. Even more striking were increasing mortality rates among significant groups, such as middle-aged white Americans • Tony Blair’s creation of a ‘New Labour’ party, in which the socialist objective formerly stated in Clause IV of its Constitution was abandoned (Labourcounts 2023). Before the change, the objective was stated as: [t]o secure for the workers by hand or by brain the full fruits of their industry and the most equitable distribution thereof that may be possible upon the basis of the common ownership of the means of production, distribution, and exchange, and the best obtainable system of popular administration and control of each industry orservice. • This changed to: a dynamic economy, serving the public interest, in which the enterprise of the market and the rigour of competition are joined with the forces of partnership and co-operation to produce the 37 2. THE EVOLUTION OF NEOLIBERALISM wealth the nation needs and the opportunity for all to work and prosper, with a thriving public sector and high quality services, where those undertakings essential to the common good are either owned by the public or accountable to them. The rejection of public ownership embodied in the New Labour platform was reflected in policies of privatisation and private ownership of public infrastructure. Along with faith in the efficiency of financial markets, and acquiescence in, or support of, anti-union policies, support for privatisation represented one of the most consistent areas of agreement between soft and hard neoliberals. This support persisted, despite outcomes that ranged from mediocre to disastrous. The Private Finance Initiative, pursued with vigour by the Blair government in the UK, was one of the most notable examples of failure. Despite accepting the core elements of hard neoliberalism, soft neoliberals attempted, in various ways, to mitigate the growing inequality that inevitably resulted from the implementation of the neoliberal program. In particular, soft neoliberal governments attempted to improve the functioning of the social welfare system rather than eliminating it or stripping it down to a minimal safety net. Nevertheless, the egalitarianism of traditional social democracy was abandoned, with arguments about the distribution of income and access to community services being replaced by discussion ofsafety nets or the efficient provision of services to ‘customers’. This shift was frequently expressed in terms of older debates about equality of opportunity as opposed to equality of outcomes. However, although the advocates of soft neoliberalism are particularly friendly to the upwardly mobile, the hostility to inherited privilege that characterised earlier advocates of equality of opportunity largely disappeared. Some supporters of soft neoliberalism took the argument to its logical conclusion, rejecting even the idea of equality of opportunity (Cavanagh 2003). This is at least consistent. In the presence of serious inequality of outcomes, it is impossible to prevent parents from passing their advantages on to their children. Under these circumstances, it is therefore impossible to achieve equality of opportunity. More marked divisions arose in relation to social issues, particularly those related to multiculturalism, feminism and environmentalism. In the USA and Australia, the sharpness of these divisions, commonly referred to as ‘culture wars’, masked a substantial convergence on economic policy (Frank2007). AFTER NEOLIBERALISM 38 The most successful implementation of soft neoliberalism was probably that of the Hawke–Keating Labor government in Australia between 1983 and 1996. The platform on which Labor was elected was an interventionist one, centred on the idea of an ‘accord’ on prices and wages. The Accord was negotiated between the Labor Party and the Australian Council of Trade Unions, of which Hawke had been a successful president, although it was hoped that a bargained consensus incorporating business groups could be achieved (Gruen and Grattan 1993). The combination of financial market pressure and the spread of neoliberal ideas ensured that the government took a different direction, beginning with the decisions, in 1983 and 1984, to float the dollar and undertake substantial deregulation of the financial system. However, the success of the Accord in constraining wage growth and allowing a non-inflationary recovery from the recession of the early 1980s was an important countervailing force. Another example was the failure of the hard neoliberal reform of the tax system favoured by the then treasurer Paul Keating, based on the idea of using a goods and services tax (GST) to finance cuts in the top marginal rate of income tax. In the face of resistance from the union movement, and a lack of support from business, Prime Minister Bob Hawke rejected Keating’s preferred option. Instead, the government implemented a reform program with substantial progressive elements such as a capital gains tax. The Hawke–Keating government also redesigned the social welfare system, integrating it with the tax system and maintaining or improving its progressive redistributive effects (Gruen and Grattan 1993). The relative success of soft neoliberalism under Hawke and Keating was not sufficient to prevent growth in inequality over time, or the development of abloated and dangerously unstable financial system. Nevertheless, a measure of their success can be gained by looking at the disastrous performance of New Zealand, where both the Labour government elected in 1983 and the National Party government that succeeded it from 1990 to 1999 embraced hard neoliberalism in a particularly doctrinaire form and with substantially worse economic outcomes (Hazledine and Quiggin 2006). Thus, the differences between hard and soft neoliberalism, while not as significant as claimed by advocates of the Third Way, were more than cosmetic and cultural. Neoliberalism reached its peak of political and economic success in the 1990s. Neoliberal globalisation was seen as an unstoppable force, by both enthusiasts (Friedman 1999) and critics (Martin and Schumann 1997). 39 2. THE EVOLUTION OF NEOLIBERALISM Social democratic parties were in retreat throughout the world. Financial markets were booming in developed and developing countries alike. Thecollapse of the Soviet bloc had finally discredited the alternative offered by communism. The crises of the 21st century Amid the triumphalism of the 1990s, many predicted that the 21st century would be one of hypercapitalist prosperity. The results have turned out verydifferently. The century began with a spectacular crash: the bursting of the US stock market bubble, focussed on ‘dotcom’ internet stocks, in 2000. The ‘dotcom’ bubble-and-bust was notable because it occurred at the centre of global capitalism, rather than in peripheral countries where financial capitalism was a recent arrival, as had been the case with the Asian financial crisis of 1997 and earlier emerging market crises. The expansionary monetary policy allowed a reasonably rapid recovery from the dotcom bust but fuelled a speculative boom, focussed on real estate, that culminated in the GFC of 2008. Far from being the omniscient Masters of the Universe, the financial sector was shown up as corrupt and incompetent. As well as bringing an end to the widely shared prosperity of the 1990s, the stock market collapse undermined the central tenet of neoliberalism, namely, the efficient (financial) markets hypothesis (Quiggin2011). The GFC was followed by years of austerity, in which the costs of bailing out the financial sector were borne by the overall population in theform of wage stagnation and reduced public services. Bankers and the financial system were bailed out, while ordinary people were made to pay theprice. The situation was worst in the Eurozone, where the design ofthe ECB made it virtually impossible to adopt any policy except austerity, acounterproductive focus on cutting budget deficits and controlling the non-existent threat of inflation. The result has been a decade of recession in most of the developed world. Even in the USA and the UK, which have, on some measures, recovered, living standards have never returned to the previous growth path, and the inequality of income has been more evident. AFTER NEOLIBERALISM 40 Despite its death as a credible theory of economics and politics, however, neoliberalism has stumbled on in zombie form for nearly a decade, maintaining its hold over major political parties and organisations such as the OECD, the IMF and the European Commission. In general, the economics profession has learned almost nothing from the GFC (Quiggin 2013). Ideas like austerity that should have been decently buried long ago continue to wreak havoc throughout the world and, most notably, in Europe (Blyth 2012). Finally, in 2020, just as the long and grinding recovery from the GFC seemed to be nearing completion, the COVID-19 pandemic smashed the global economy. The management of the pandemic varied from competent to disastrous, but it depended almost entirely on governments. The financial sector played virtually no role on the management of the pandemic but came off unscathed, as usual. Political implications Just as the economic ideology of neoliberalism lumbers on in zombie form, so, until recently, has the political system it supported. Insurgents of various kinds have gained support nearly everywhere, but the alternation between different versions of neoliberalism continued for nearly a decade after the crisis, only coming to an end in 2016. During the decades of neoliberalism that began in the 1970s, the political system, nearly everywhere, was based on electoral competition between the hard and soft versions of neoliberalism, typically represented by (nominally) conservative and social democratic parties, respectively. Within the political class, and among business leaders and policymakers, there was a nearuniversal consensus in support of neoliberal ideas. To take any position outside the spectrum defined by the soft and hard variants of neoliberalism guaranteed marginalisation and exclusion from serious political debate. Yet, despite its dominance, neoliberalism hardly ever achieved broad support among the public at large. Rather, the seeming success of neoliberalism concealed the continued strength of currents that remained submerged for decades, becoming politically significant only in occasional eruptions. 41 2. THE EVOLUTION OF NEOLIBERALISM The most important of these submerged currents was what may now be called Trumpism, after its most successful exponent (so far). The core of Trumpism is a form of negative or default identity politics best understood using the idea of the ‘unmarked category’, from linguistics and sociology. Campos (2019) illustrates this: An unmarked category is present when the category is considered so normal or ordinary in a particular context that it goes unnoticed. Thecategory is the default setting in regard to social expectations, and it in a sense remains invisible precisely because it is so dominant … For example, if you had asked a lawyer in 1960 to name three characteristics that every current Supreme Court justice shared, it is very likely the lawyer would not have mentioned either race or gender. As Campos further observes: What ‘identity politics’, so-called, has done is to slowly and painfully and partially transform being a white man in America into a marked category. And makes a lot of the people who have become white men rather than members of society’s invisible default category very uncomfortable. We may usefully add the unmarked categories ‘Christian’, where ‘Christian’ is interpreted in a sense of cultural identification rather than any specific religious belief, and heterosexual, among others. The most politically potent form of default identity politics, and the relevant one here, is that of a formerly unchallenged dominant group facing the real or perceived prospect of becoming a politically weak and economically declining minority. Trumpist default identity politics is closely linked to support for ‘strongman’ rule, exemplified by current practitioners such as Erdogan, Orban, Putin and, of course, Trump himself. This may be because the one universal feature of default identity politics is a worship of masculinity. Theatrical displaysof masculinity are a standard feature of Trumpist politics (Trump himself is absurd enough, but Putin’s bare-chested horseback rides take these displays to the point of parody and beyond). During the period of neoliberal dominance, hard neoliberals pandered to Trumpists in rhetorical terms but ignored them wherever their views conflicted with the neoliberal policy agenda, most obviously in relation to AFTER NEOLIBERALISM 42 trade and migration. Now, the balance has been restored. The Trumpists are in charge but use tax cuts and handouts to favoured cronies to maintain business support. Opposed to the Trumpists in critical ways, but similar in others, is a disparate group that may be called, for want of a better term ‘the left’. As well as asmall group who adhere to Marxist or other radical critiques of capitalism, the ‘left’ in this sense includes environmentalists, feminists, unionists, old-style liberals and social democrats, and a wide variety of groups whose personal or cultural identity is threatened by Trumpism. Although the left has not been as successful as the Trumpists in political terms, the issues raised by the left, including inequality, racial injustice, gender roles and global heating, have now replaced the concerns of neoliberalism, such as markets and competition, at the centre of the policy agenda for centre-left parties. Rather than advancing a positive agenda of their own, as they did in 1980s and 1990s, the opponents of the left have relied primarily on electoral pragmatism, arguing that a small-target strategy is the best way to election wins. The way forward The failure of neoliberalism poses both challenges and opportunities for the left. The greatest challenge is the need to confront Trumpist populism as a powerful political force in itself, rather than as a source of political support for hard neoliberalism. Given the dangers posed by Trumpism, this is an urgent task. One part of this task is that of articulating an explanation of the failure of neoliberalism and explaining why the simplistic policy responses of Trumpist politicians will do nothing to resolve the problems. The other is to appeal to the positive elements of the appeal of populism, such as solidarity and affection for longstanding institutions, and to counterpose them to the self-seeking individualism central to neoliberalism, particularly in the hard version with which rightwing populism has long been aligned. The great opportunity is to present a progressive alternative to the accommodations of soft neoliberalism. The core of such an alternative must be a revival of the egalitarian and activist politics of the postwar social democratic moment, updated to take account of the radically different technological and social structures of the 21st century. In technological 49 3. NEOLIBERALISM IN AUSTRALIA Justice Henry Higgins, laid down the principle that the basic wage should be sufficient to provide for the needs of a family of five, estimated at 42shillings a week. The ideas of the New Protection were given intellectual substance by the report of the Brigden Committee (1929). The committee argued that, while protection yielded a lower per capita income than would free trade, itincreased the demand for labour, and, therefore, the size of the population that could be supported at a given real wage, such as that laid down in the Harvester judgment. More generally, this point may be restated as saying that protection of a labour-intensive industry leads to an increase in the equilibrium real wage. This result was formalised as the Stolper–Samuelson theorem (Stolper and Samuelson 1941). The attempt to secure social equity through the wages system was supported by a series of innovative welfare policies, including age pensions, workers’ compensation and the beginnings of a system of unemployment relief. These policies were based on the assumption that families with an employed (male) breadwinner would be adequately protected by the arbitration system and sought to assist those who temporarily or permanently fell outside this group. Thus, it has been described as a ‘wage-earners’ welfare state’ (Castlesand Mitchell 1994). Australian social welfare policies were most distinctive in the period from the Federation to the Great Depression. Hancock’s classic study Australia, first published in 1930, critically examined features of the political economy of Australia, including tariffs, the arbitration system, public enterprises and the role of the State as a driving force in economic development: The Australians have always disliked scientific economics and (still more) scientific economists. They are fond of ideals and impatient of technique. Their sentiments quickly find phrases and their phrases find prompt expression in policies. What the economists call ‘law’ they call anarchy. The law which they understand is the positive law of the State—the democratic State which seeks social justice by the path of individual rights. The mechanism of international prices, which signals the world’s need from one country to another and invites the nations to produce more of this commodity and less of that, belongs to an entirely different order. Itknows no rights, but only necessities. The Australians have never felt disposed to submit to these necessities. They have insisted that their governments must struggle to soften them or elude them or master them. (Hancock1930, 66–67) AFTER NEOLIBERALISM 50 It is this set of attitudes that recent advocates of micro-economic reform haveset out to overcome. At one level they have been successful. Over the past 20 years, the tariff has been virtually abolished for most industries, thestructures of financial regulation have been swept away, public enterprises privatised or prepared for privatisation, and the power of the arbitration system has been greatly reduced. The need to become ‘internationally competitive’, and the package of policies this implies, is accepted by political leaders of both major parties, by bureaucrats and business leaders, and by the majority of economic commentators. Yet, on the whole, the Australian public remains unconvinced. The view that governments must struggle to ‘soften, … elude … or master’ the harsh demands of the marketplace remains part of the Australian ethos.2 Almost without exception, when the policies of micro-economic reform have been put to the electoral test, they have been rejected.3 Popular opposition to reform crystallised in the late 1980s around the phrase ‘economic rationalism’ (Pusey 1991) and does not appear to have abated significantly. In the absence of any clear economic benefits from reform, policies have not been implemented with popular support but have rather been imposed on the basis that ‘there is no alternative.’ The clash between public and elite opinion makes the economic assessment of micro-economic reform an issue of more than academic interest. Given the chance, many Australians would willingly turn back the clock of reform. A careful assessment of the gains and losses of micro-economic reform, and of the areas in which reform has succeeded and failed, may help to guide the path of reform and to identify policies that would yield greater benefits to ordinary Australians than the policies adopted in the past. 2 The extent to which Australians are unique in this respect may be debated. Henderson (1995) gives an interesting discussion of popular resistance to reform in Australia and abroad. 3 The clearest example is the 1993 federal election, which was a rejection of the Coalition’s package of reforms as a whole, including the labour market reform package Jobsback and changes to Medicare. It was not merely a rejection of the proposed goods and services tax (GST). The reforming Greiner government in New South Wales was reduced to a precarious minority status by its first electoral test, and, under the leadership of John Fahey, defeated outright at its second. The defeats of the Field government in Tasmania and the Goss government in Queensland were also due largely to popular hostility to reform. So far, the Kennett government in Victoria is the only reforming state government to have been returned with an outright majority. However, because of the bipartisan commitment to reform, the defeat of one reforming government means nothing more than its replacement by another. 51 3. NEOLIBERALISM IN AUSTRALIA The Australian settlement? One of the most comprehensive presentations of the case in favour of micro-economic reform is given by Paul Kelly, former editor of TheAustralian newspaper. Kelly (1992) describes what he calls ‘the Australian settlement’, which he claims dominated Australian society and economic policy from 1901 until the 1980s. Kelly identifies the economic elements of the settlement as consisting of industry protection, arbitration, and State paternalism. He links these economic policies with White Australia and Imperial benevolence, which he initially defines as ‘dependence on a great power, (first the UK, then the USA) for its security and finance’, but subsequently describes exclusively in terms of attitudes to the UK.4 Kelly’s package represents an extension of the ‘Federation trifecta’, consisting of protection, arbitration and White Australia, criticised by Henderson (1990). The link between interventionist economic policies, and the ideas of imperialism and White Australia is misleading. The ideas of White Australia and Imperial benevolence certainly dominated policy up to World War II— the White Australia policy was, in fact, a British Australia policy, and it was regularly claimed that Australia was ‘98per cent British’ (Hancock 1961, 128). However, the fall of Singapore in 1942 spelled the end of political reliance on the UK, and of Australia’s role as a British outpost. The White Australia policy was undermined by the mass migration programs after World War II, which drew large numbers of southern European migrants, who, before the war, had been regarded as ‘a semicoloured race’, to be subject to the most stringent controls (Hancock 1961, 126). Throughout the postwar Keynesian boom, both the White Australia policy and the Imperial connection were steadily eroded. The term ‘White Australia’ had been officially dropped in 1941, and the end of the policy came in 1966, when both the Liberal–Country Party government and the Labor opposition committed themselves to a non-discriminatory immigration policy. 4 If one focusses instead on dependence on the USA, it would be apparent that this aspect of the settlement is alive and well. Indeed, both the blowout in foreign debt and the MX missile crisis, whenfinancial markets fell sharply in response to Australian attempts to assert a limited degree of independence in foreign policy, suggests that financial deregulation reinforced Australia’s position asaclient state of the USA. AFTER NEOLIBERALISM 52 By the early 1970s, when economic interventionism reached its peak, the last vestiges of the White Australia policy were swept away, and the UK, which entered the European Community in 1973, became irrelevant in economic as well as political terms. The link between the White Australia policy, the Imperial connection and interventionist economic policy is long dead. All were widely supported policies of the Federation era, but in the current policy debate, most prominent opponents of micro-economic reform are also opponents of racially discriminatory immigration policies and of a nostalgic emphasis on Britishness. The attempt by advocates of micro-economic reform, such as Kelly and Henderson, to link the policies they oppose with the White Australia policy is a rhetorical device, exploiting the principle of guilt by association. A more fundamental difficulty with the idea of an Australian settlement put forward by Kelly and Henderson is the failure to take any account of the changes in the political and economic framework brought about by the 30 years of full employment that followed the Second World War (Smyth 1998). No adequate explanation of this exceptional period in our economic history has yet been developed. At the time, however, full employment was seen simply as the result of the adoption of Keynesian macro-economic policies. The belief that government intervention could guarantee full employment naturally translated into broad confidence in the capacity and responsibility of governments to manage other aspects of the economy. On the other hand, the apparent capacity of fiscal policy to maintain full employment undermined the main rationale for tariff policy as a device for protecting employment. Increasingly, economists came to see tariffs as an indirect and inefficient micro-economic approach to what was properly seen as a macro-economic problem. If anything of value is to be derived from ideas of an Australian settlement, a proper account must be taken of the role of Keynesian full employment policy. The White Paper and the postwar boom From World War II onward, Australia’s social and economic institutions became more like those of the rest of the developed world. In part, the pressures of the Great Depression forced Australian governments to pay greater attention to the economic logic of the marketplace. Unprofitable state enterprises such as butcher shops and tobacconists were abandoned, 53 3. NEOLIBERALISM IN AUSTRALIA and the doctrine that wage rates should be based on an industry’s capacity to pay became the central determinant of wage setting. More notably, other countries became more like Australia. Whereas Australia’s state-owned railways and public utilities were an exception in the 19th century, by the early postwar period it was the USA’s insistence on retaining such enterprises in private ownership that looked exceptional. After World War II, the early Australian experiments with the social welfare system were matched, and on most measures outmatched, by European welfare states. Nevertheless, the period from 1945 to 1975 was one of steady expansion of the role of government in Australia. The enhanced micro-economic role of government was underwritten by radical changes in macro-economic policy. Australia entered the postwar world with an explicit commitment to the maintenance of full employment, embodied in the 1945 White Paper on Full Employment in Australia. The White Paper was the defining document for economic policy between 1945 and 1975. For the first and possibly the only time, the Australian government accepted an obligation to guarantee full employment and to intervene as necessary to implement that guarantee. Particularly with respect to trade policy and financial regulation, the perceived demands of macro-economic management overrode any concerns about micro-economic efficiency. A noteworthy example of these priorities was the adoption of quantitative import controls by the Menzies government as a response to balance-of-payments difficulties. At the same time, the apparent success of governments in maintaining stable full employment where markets had failed supported the view that government judgements of social needs were likely to be superior to reliance on market outcomes. The Liberal–Country Party governments that held office through most of thepostwar boom advocated a middle course between the laissez-faire doctrines of conservative parties before World War II and the socialist objective proclaimed by the Labor Party. In the intellectual climate of the times, this led to a gradual expansion of the role of government. However, government policy lacked any real coherence or intellectual basis. The advocates of intervention were ill-prepared to meet the critique of their policies advanced by supporters of micro-economic reform from the 1970sonward. The most notable example was the ‘protection all round’ policy advocated in particular by the Country Party under Sir John McEwen. In practice, this policy involved assisting the import-competing manufacturing sector AFTER NEOLIBERALISM 54 and those segments of the rural sector oriented to the domestic market at the expense of the major exporting industries. However, the fact that nearly everyone received some assistance obscured the fundamental point that assistance to one industry is, in effect, a tax on others. It is not surprising that the concept of the ‘effective rate of protection’ was first developed in Australia. A variety of defences can be advanced for protectionist policies, but ‘all round’ is difficult, if not impossible, to rationalise. The Whitlam government The Whitlam government was elected in 1972 with a program based on amixture of incompatible elements. On the one hand, at the aggregate level, Whitlam favoured Keynesian macro-economic policies and a substantial expansion of the role of government. On the other hand, the government’s stance on tariff policy and, to a lesser extent, with respect to government business enterprises, foreshadowed later developments in micro-economic reform. Whitlam pursued an essentially free-market industry policy and, indeed, boasted that his was the first genuine free enterprise government in Australian history. The most noteworthy examples of Whitlam’s free market approach to industry were the 25per cent across-the-board tariff cut of July 1973 and the bitterly resented decision to abolish the bounty paid to farmers for purchases of superphosphate. Of more long-term significance was the establishment of the Industries Assistance Commission (later the Industry Commission) in 1973, replacing the old Tariff Board. Since its establishment, the commission has acted as a public advocate of micro-economic reform in every area of the economy. Another important decision, the significance of which was not recognised at the time, was the abolition of the old Postmaster-General’s Department, through which telephone and postal services were supplied, and its replacement by two statutory corporations, Australia Post and Telecom Australia (now Telstra). This decision may be seen in retrospect as the beginning of a process in which large numbers of government services have been first corporatised and ultimately privatised. It should be emphasised, however, that the Whitlam government saw the creation of statutory authorities as a method of increasing the efficiency of public sector provision, and, therefore, of supporting the continued expansion of the public sector. 55 3. NEOLIBERALISM IN AUSTRALIA In other areas of policy, the Whitlam government took a more interventionist stance. It pioneered the imposition of requirements for environmental impact statements. The establishment of the Medibank health insurance system represented a major expansion of direct government involvement in an area where policy had previously been confined to the use of subsidies and tax concessions. Whitlam greatly increased public expenditure and the role of the national government in areas such as education. Most notably, the government’s policies with respect to international capital flows were diametrically opposed to its position in favour of free trade in goods. Foreign direct investment was restricted, and devices like the variable deposit requirement were used to control short-term capital flows. The mixture of interventionist and laissez-faire ideas in the Whitlam program seems intellectually incoherent and has certainly never received an adequate defence. It might be possible to construct such a defence around the idea of a large, but rationally organised, public sector operating in areas characterised by scale economies and externalities, complementing a private sector in which unrestricted competition prevails. But if such an idea is present in Whitlam’s defence of his government’s record (Whitlam 1985), it is hard to discern. The retreat of the State since 1975 Despite some important micro-economic reforms, the Whitlam government remained expansionist and interventionist until 1975. In some respects, the Hayden budget of 1975, which embodied a reduction in the budget deficit at a time of high unemployment, may be seen as signalling a retreat from this position. Nevertheless, the era of the retreat of the State began in earnest with the election of the Fraser government. The Fraser government, 1975–83 The election of the Fraser government in 1975 marked the abandonment of the goal of full employment. Macro-economic policy under Fraser was based on the slogan ‘fight inflation first’. Although it was not recognised at the time, the abandonment of the full-employment objective had the effect of undermining government intervention in general, and, hence, of laying the basis for micro-economic reform. More generally, the Fraser AFTER NEOLIBERALISM 56 government was the first since World War II to translate the traditional Liberal rhetoric of free enterprise into an explicit commitment to cut back the role of government. Fraser’s macro-economic policy focussed primarily on the need to reduce aggregate real-wage levels. This view had some plausibility at the time. Real wages had risen substantially under the Whitlam government. Treasury introduced the concept of the ‘real wage overhang’, representing the rise in real wages above that which could be justified by productivity growth. Labour market policy under Fraser was dominated by the attempt to drive average real wages down, and, more generally, to weaken the power of the trade unions. The passage of sections 45D and 45E of the Trade Practices Act 1974, prohibiting secondary boycotts, certainly had this effect. Although the intention was to restore the authority of the Arbitration Court, sections45D and 45E have proved useful to employers seeking to bypass arbitration and push through labour market reforms.5 Finally, Fraser sought to roll back the growth in government expenditure and taxation that had occurred over the postwar period. Success in this area was limited. Although there was plenty of public support for tax cuts (the‘tax revolt’ in the USA dated from this period) and some support for the general idea of reduced government spending, there was little support for specific cuts in expenditure. Moreover, growth in unemployment and in the proportion of the population aged over 65 implied a substantial increase in welfare expenditure without any change in policy. Although the primary focus of the Fraser government was on retrenchment at the aggregate level, the government undertook several initiatives that may be seen in retrospect as important steps towards micro-economic reform. The most notable was the establishment, in 1979, of the Campbell Committee to inquire into the financial system (the Australian Financial System Inquiry). Progress on implementing the recommendations of the committee, which reported in 1981, was limited by several factors, including the opposition of the Labor Party and the Democrats, who controlled the Senate. Nevertheless, the record of the Fraser government was one of substantial financial deregulation. 5 The fact that the push for labour market reform relies heavily on legislation creating new civil and criminal offences, and on the revival of common law offences, underlines the point that the use of the term ‘deregulation’ is a misnomer. 57 3. NEOLIBERALISM IN AUSTRALIA The Fraser government did not achieve its main objectives. Unemployment fluctuated between 5 and 6per cent until the 1981–83 recession, when it peaked at above 10per cent. Although inflation came down from the peaks experienced under the Whitlam government, policies based on control of the money supply failed to deliver a return to the low inflation rates of the 1960s. After some success in cutting back public expenditure as a share of gross domestic product (GDP), the recession of 1981–83 led to a blowout in unemployment benefits and labour market programs. As a result of this lack of success, and of the government’s mixed record on tariff policy, it became fashionable, particularly in Liberal Party circles, to see the Fraser period as a ‘missed opportunity’ for micro-economic reform. This view, which may be traced back to Henderson (1983), gains some credence from the fact that Fraser himself has emerged as a critic of many aspects of micro-economic reform. Nevertheless, the ‘wasted years’ view of the Fraser period is essentially anachronistic, since it projects the concerns of a later period back onto the policy debates of the past. At most, this view may be relevant to the government’s final term, dominated by the 1981–83 recession. As Kelly (1992, 38) observes: It was after 1980 that the radical liberals launched their revolt and the demand grew for free market reforms. It is wrong to attack Fraser for failing to implement these policies in 1976 and 1977 when, frankly, virtually nobody was calling for them. Even in the period 1980–82, the key disagreements concerned macroeconomic policy. Fraser was criticised primarily for resorting to Keynesian expansionary policies in response to the recession that commenced in 1981. Few participants in the policy debate at this time placed much weight on the set of policy issues that were subsequently labelled as micro-economic reform. In subordinating these issues to macro-economic policy concerns, the Fraser government adhered to the economic orthodoxy of the day. AsPuplick (private interview 1990, quoted in Kelly 1992, 98) observes: ‘Amythology started to be built up by his former close associates about what Fraser had failed to do in office at their urging.’ Most of these points are effectively conceded by Henderson (1994, 256–60). The myth of ‘the wasted years’ under Fraser is important, primarily because it gives support to a ‘crash through or crash’ approach to reform. Any willingness to compromise will, it is argued, open the floodgates to the interest group pressures which were seen as responsible for Fraser’s alleged AFTER NEOLIBERALISM 58 policy weakness. This approach, drawing on public choice theory for additional support, was responsible for the refusal, until it was too late, of former Liberal leader Hewson to compromise on any detail of the Fightback program, and therefore ultimately for the Liberals’ loss of the ‘unlosable’ 1993 election. The Hawke–Keating governments The election of the Hawke–Keating Labor government in 1983 was a pivotal event in the history of micro-economic reform. During the Fraser government’s term of office, the Labor Party had generally opposed reform and advocated a continuation of the policies of the Whitlam era, though with a preference for a slower pace of change and greater attention to economic constraints. The Hawke–Keating government was elected on the basis of a fairly traditional social democratic program, embodied in its 1982 platform. The centrepiece of the platform was the idea of a Prices and Incomes Accord. Although it was subject to flexible interpretation over time, the Accord implied an expansion of the ‘social wage’ in the form of community services and welfare benefits, and government intervention in the interests of workers, in return for restraint in real and nominal wages. The first Hawke government took several steps along these lines. However, the leaders of the Labor Party were influenced more and more by the intellectual climate of the time, which strongly favoured micro-economic reform, particularly in the areas of tariff policy and financial deregulation. With the conversion of the leading figures in the government, signalled by the float of the dollar in October 1983, the cause of micro-economic reform had bipartisan support for the first time. Those members of the public opposed to reform, although numerous, had nowhere to go. The floating of the dollar was a significant step in itself. Acceptance of other micro-economic reforms, and of the general desirability of cutting back the public sector, soon followed. The next important step was made in the Trilogy commitments of 1984. The commitments were: • Commonwealth tax revenue would not be permitted to grow as a proportion of GDP. • Commonwealth spending would not grow faster than the economy as a whole. 65 4. PRIVATISATION AND NATIONALISATION IN THE 21st CENTURY early trading. In both the private and the public sectors, there are incentives for the organisers of IPOs to set prices below the expected market price, thereby allowing those participating in the float to benefit from first-day ‘stag’ profits. First, the negative consequences associated with a ‘failed’ float (one in which not all shares on offer are taken up) are generally greater than for a float that is oversubscribed. This is particularly true in relation to politically controversial privatisations, where a failure to purchase shares can be represented as a lack of confidence in the government. Second, the allocation of underpriced shares provides opportunities to give favours to individuals and groups whose goodwill may be valuable in future. Such favours were a prominent and controversial feature of the recent stock-market bubble in the USA. The allocation of discounted shares to employees and others has been a common feature of privatisation in Australia and elsewhere. Transfers have also arisen in relation to privatisation by trade sale. In many developing and transitional countries, privatisation by trade sale has been the occasion for large-scale expropriation of public wealth. Australian experience has been more favourable, from the viewpoint of the public. Although some assets, such as the New South Wales State Bank, appear to have been sold at unreasonably low prices (Walker and Walker 2000), there have been other instances, such as the sale of Victorian electricity distribution enterprises, where the price paid appeared unreasonably high in the light of the regulatory regime that determined subsequent earnings. In some cases of this kind, such as the privatisation of airports, regulations have been relaxed to allow higher profits, retrospectively validating high saleprices. Quality of prices and service The impact of privatisation on prices and service quality has varied, depending particularly on the nature of regulatory changes introduced at the time of privatisation. In general, direct impacts on prices have been small, except where governments have sought to increase the sale price of assets by raising costs to consumers. The most notable recent example was the leasing of Australian airports, which was accompanied by large increases in landing charges (up to 100per cent) and other charges such as parking fees, and the introduction of a range of new charges, such as taxi levies. AFTER NEOLIBERALISM 66 The privatisation of monopolies, when combined with price regulation, has typically led to a reduction in service quality, as monopoly firms seek opportunities to reduce costs and raise profits. Over time, the introduction of steadily more intrusive regulation has reduced both the incentives for lower service quality and the differences in operational efficiency between private and public monopolies. In some other instances, privatisation has led to the adoption of a more business-like and ‘customer-focussed’ approach. This has typically been associated with an increase in the quality of service for profitable customers, but also with attempts to discard unprofitable customers and uncompensated community service obligations. Safety and reliability Privatisation has generally been accompanied by a decline in the safety and reliability of infrastructure services, particularly when account is taken of exogenous technological trends, which have generally improved the reliability of equipment of all kinds. The cost reductions associated with privatisation and, to a lesser extent, corporatisation, have focussed particularly on reductions in overstaffing in areas such as maintenance, and on the elimination of redundant capital capacity, frequently referred to as ‘goldplating’. All things being equal, cost savings achieved in this way must involve some loss of reliability and, in some cases, safety. The shift from public to private ownership reduces incentives for safety and reliability. The political costs of failures in infrastructure systems can be severe. By contrast, the costs to private infrastructure owners of occasional breakdowns are relatively modest. Hence, if such outcomes are to be avoided, intrusive regulation is likely to be necessary. Another possible response is the introduction of a legal regime based on the strict liability of infrastructure providers for economic losses associated with system failures. A current class action against Esso in relation to the consequences of the Longford explosion and system failure in Victoria may set a precedent in this respect. Surprisingly, relatively few supporters of the adoption of the US model of private provision of infrastructure services seem to welcome the arrival of a system of regulation in which the threat oflitigation plays a central role, as in the USA. 67 4. PRIVATISATION AND NATIONALISATION IN THE 21st CENTURY None of the discussion above establishes whether the net impact of reductions in maintenance expenditure is positive or negative. Terms like ‘goldplating’ and ‘redundancy’ tend to imply that there is too much reliability, but goldplating makes sense in some contexts (computers) and redundancy in others (aircraft control systems). Wages, conditions and work intensity Like other aspects of micro-economic reform, privatisation has imposed costs on workers in the form of increased stress and a faster pace of work. Although anecdotal evidence of increases in work intensity abounds, statistical evidence is limited. The Australian Workplace Industrial Relations Survey undertaken in 1995 found that most employees reported increases in stress, work effort and the pace of work over the previous year, while less than 10per cent reported reductions in any of these variables (Morehead et al. 1997). Dawson, McCullough, and Baker (2001, 4) examine the increase in working hours for full-time workers and conclude: For many Australian workers, their families and communities, extended working hours have led to increased levels of fatigue and decreasing levels of social support. This in turn has the potential to compromise safety and the long-term health and wellbeing of workers and the organisations that employ them. Another source of evidence comes from the supply side. The combination of increased work intensity and longer hours of work has rendered fulltime employment increasingly unattractive. The full-time participation rate (full-time employment plus those seeking full-time work as a proportion of the population aged between 15 and 64) fell during the 1990s for both males and females. The decline in female participation in the full-time labour force represents the reversal of a long-term trend towards increased participation. Efficiency gains and losses Once all transfers to and from workers, consumers and taxpayers have been netted out, the impact of privatisation can be assessed by comparing the value of the enterprise in private ownership, measured by the sale price, with its value in continued public ownership, measured by the present AFTER NEOLIBERALISM 68 value of the earnings that would have been realised under continued public ownership. The starting point for any such assessment is what may be called the equivalence hypothesis, namely, that in the absence of some specific source of efficiency gains or losses, the value of the asset will be the same in public or private ownership. Hence, in the absence of transfers such as those discussed in the previous section, privatisation will have no effect on the net worth of the public sector (Forsyth 1993). In this section, a range of possible sources of efficiency gains and losses are considered. Although it is difficult to assess them individually, a market test is provided by a comparison of sale prices with earnings foregone through privatisation. Operational efficiency One of the strongest claims for privatisation is that it will increase the operating efficiency, and therefore the profitability, of the enterprises concerned. Empirical studies have yielded mixed results, although the balance of evidence favours the hypothesis that privatisation increases operating efficiency. Borcherding, Pommerehne, and Schneider (1982) surveyed the literature on municipal services and reported that, in most studies, either the private sector was found to be more efficient, or no significant difference was observed. However, in studies of electricity and water services, either the public sector has been found to be more efficient (Pescatrice and Trapani 1980; Bhattacharyya, Parker, and Raffiee 1994), orno significant difference has been discovered (Byrnes, Grosskopf, and Hayes 1986). Historically, public enterprises have had a wide variety of objectives, and it is reasonable to assume that many of the enterprises in the studies surveyed by Borcherding, Pommerehne, and Schneider (1982) had neither a profit-maximisation objective nor a cost-minimisation objective. One result of this diversity of objectives is the common finding that the variance of performance measures is higher for public than for private firms (Bhattacharyya, Parker, and Raffiee 1994). A central feature of public sector reform in Australia has been the attempt to replace the diffuse objectives of traditional public enterprises with an objective of profit maximisation subject to the satisfaction of clearly defined community service obligations. This has most commonly been achieved 69 4. PRIVATISATION AND NATIONALISATION IN THE 21st CENTURY through corporatisation. Corporatised government business enterprises have competed effectively with private firms in many industries, suggesting that any differences in operating efficiency must be modest. It should also be noted that many of the wealth transfers associated with privatisation, such as uncompensated increases in the intensity of work, also arise in corporatised government business enterprises. Regulatory risk In some instances, such as cases where governments have owned firms trading in competitive markets, privatisation involves no changes in regulation. However, such cases, typically arising from public rescues of failing firms, have been relatively infrequent. As public ownership expanded during the first 80 years of the 20th century, nationalisation was used primarily as a method of regulating industries that were, or were seen to be, characterised by market failures such as natural monopoly or externality. In these circumstances, privatisation creates a regulatory risk that does not exist under public ownership. Small differences in the rates of return determined by regulation imply large transfers between consumers and private monopolists. By contrast, under public ownership, this risk is internalised, since, for most regulated infrastructure services, consumers and taxpayers (or, more precisely, residents of the relevant jurisdiction) are the same people. This analysis directly contradicts a widely held view of public policy inAustralia, namely, that there is, in some sense, a conflict of interest in governments both owning and regulating business enterprises. This view lacks any analytical basis. It is analogous to an argument that a conflict arises when a private company contracts with, or directs the actions of, a wholly owned subsidiary. The costs of regulatory risk are substantial. In Victoria, the failure of private buyers to take regulatory risk into account led to the overoptimistic prices paid for Victorian electricity assets. These purchases have been followed by resales and lower prices, and by vigorous rent-seeking activity aimed at validating the original purchase prices by securing more favourable regulatory treatment. AFTER NEOLIBERALISM 70 Cost of capital The crucial efficiency difference in favour of public ownership arises from differences in the cost of capital. The return demanded by investors in private equity in the average large company includes a risk premium of around six percentage points to compensate for the company’s exposure to aggregate economic risk. If the rate of interest on government bonds is 5per cent, investors in a typical stock will expect a return of around 11per cent. The equity premium is smaller for companies with stable returns, or for those that are only weakly correlated with the economy as a whole, and larger for those with highly cyclical returns, such as companies involved in construction. The market’s aversion to risk is reflected in the difference between the return demanded by investors in private equity and the rate of return on government bonds or good-quality corporate bonds. This difference is called the equity premium, and its size represents a longstanding puzzle for economists. Most economic models imply that if capital markets spread all relevant risks efficiently and at a low cost, the equity premium should be no more than one percentage point, and probably less. A variety ofexplanations for the ‘equity premium puzzle’ have been offered, most of which incorporate the failure of private capital markets to spread risk as well as is assumed in neoclassical models of the financial sector. As Grant and Quiggin (2003) observe, if the demand for a high rate ofreturn on equity arises from failures in private capital markets, there is no reason to apply this rate of return in evaluating public investments or determining the present value of income streams flowing from government business enterprises. An assessment of Australian privatisations As has been argued in this paper, the effects of privatisation can be assessed by examining the difference between the sale price realised for an asset and the present value of earnings foregone under public ownership, after netting out transfers to and from workers, consumers and buyers of assets. Such analyses of actual and prospective privatisations have been performed for the Commonwealth Bank (Quiggin 1995), Commonwealth Serum Laboratories (Hamilton and Quiggin 1995), Telstra (Quiggin 1996a), the New South Wales State Bank (Walker and Walker 2000) and the Victorian electricity industry (Quiggin 2002a), among others. 71 4. PRIVATISATION AND NATIONALISATION IN THE 21st CENTURY In all cases, the analysis indicated a net welfare loss from privatisation. In the case of Victorian electricity, however, the loss was borne by the buyers (mainly US electricity companies) who paid prices that were, at least in retrospect, excessive. Hence, the net impact on Victorian residents was roughly neutral, with gains to taxpayers being offset by losses to workers and consumers. Based on this evidence, it seems unlikely that the privatisation of efficiently run government business enterprises in core areas of government activity such as infrastructure is ever likely to be beneficial, except during market bubbles, when buyers may be willing to pay prices that exceed the long-run private market value of assets. The case for renationalisation Thinking the unthinkable Until about 1980, the idea of a substantial reduction in the scale and scope of public sector economic activity lay outside the realm of acceptable public debate. Cockett’s (1995) classic study of the British think tanks that first advocated privatisation, such as the Institute for Economic Affairs, was aptlytitled Thinking the Unthinkable. Such is the power of conformism in human affairs that within a decade of its entry into the public debate, the insurgent idea of privatisation had become an orthodox dogma, and theconcept of nationalisation was, literally, unthinkable for many. This point may be illustrated with reference to the Australian debate. Criticisms of privatisation, such as those of Quiggin (1995) and Walker (1994), have been the subject of vigorous debate (Hathaway 1997; Officer 1999). However, until recently, arguments that the appropriate response to the failures of privatisation is a return to public ownership (Quiggin 2000) have simply been ignored. This position is slowly changing, although the public debate is lagging behind events in the real world. Renationalisation in various forms has taken place in numerous countries, sometimes as a deliberate attempt to offset excessive privatisation, but more frequently in response to the failures of privatised firms and the associated regulatory structure. AFTER NEOLIBERALISM 72 In Australia, Minister for Small Business Joe Hockey recently suggested that it might be necessary for state governments to re-enter the insurance business following the collapse of HIH Insurance and United Medical Protection. The unthinkable is becoming thinkable once again. The mixed economy In most OECD countries, governments, and government business enterprises, produce around 30 per cent of total output. This proportion has tended to grow over time, reflecting the increasing economic importance of the sectors in which government activity is concentrated, such as health and education. Large-scale privatisation has offset or reversed the trend towards a larger government sector in several countries, including the UK. Nevertheless, it seems clear that, for the foreseeable future, OECD countries will have mixed rather than free-market economies. In a mixed economy, even supporters of further privatisation should welcome the availability of nationalisation as a policy option. If privatisation is, as is sometimes supposed, irreversible, it should be undertaken with great caution. By contrast, if both privatisation and nationalisation are feasible, it is possible to adjust the boundary between the private and public sectors optimally in response to new information and changed circumstances. Nevertheless, the policy relevance of nationalisation is greatest in cases in which privatisation has already gone too far. The evidence cited in this paper suggests that this is the case in Australia, and that a number of privatisations already undertaken have reduced both public sector net worth and the welfare of the community as a whole. It follows that, in the absence oftransactions costs, renationalisation would improve welfare. Targets for renationalisation The strongest candidate for renationalisation in Australia at present is Telstra. Even supporters of privatisation, such as Treasurer Peter Costello, agree that the current state of partial privatisation is highly unsatisfactory. When the current government’s proposal for partial privatisation was under consideration, the same view was expressed in Quiggin (1996b) and derided by members of the government. On the other hand, given Telstra’s monopoly power, full privatisation would be acceptable to other market participants only if it was accompanied by more stringent regulation. The implied 73 4. PRIVATISATION AND NATIONALISATION IN THE 21st CENTURY regulatory risk reduces the market value of Telstra, which is well below any reasonable estimate of the value of future real earnings, discounted at the real bond rate. The privatisation of Telstra could be financed in part by the sale of peripheral assets, such as Telstra’s pay-TV interests and joint ventures in Hong Kong. This idea, along with proposals for more extensive structural separation, has been discussed by Quiggin (2002b) and Tanner (2002), and criticised by Eason (2002). Renationalisation of infrastructure assets that have been fully privatised is further off, except in cases such as that of Railtrack, in which the private operator fails completely. Nevertheless, it would be highly desirable to restore full public ownership of the road system and to replace the present arbitrary patchwork of tolls with a rational system of road-user charging. Less urgent, but still highly desirable, is the renationalisation of natural monopoly infrastructure such as water supply in South Australia, and electricity distribution in South Australia and Victoria. Concluding comments The limitations and failures of privatisation are widely recognised, but the obvious implication—namely, that at least some privatised enterprises should be renationalised—remains unthinkable for many. Thus far, renationalisation has occurred primarily as an emergency response to the failure of private firms providing essential services. As instances of this kind break down the notion that privatisation is irreversible, it may be possible to undertake a more systematic and rational reconsideration of the appropriate roles of the public and private sectors. Bibliography Bhattacharyya, Arunava, Elliott Parker, and Kambiz Raffiee. 1994. ‘An Examination of the Effect of Ownership on the Relative Efficiency of Public and Private Water Utilities’. Land Economics 70, no. 2: 197–209. doi.org/10.2307/3146322. Borcherding, Thomas, Werner Pommerehne, and Friedrich Schneider. 1982. ‘Comparing the Efficiency of Private and Public Production: The Evidence from Five Countries’. Supplement 2, Zeitschrift für Nationalökonomie / Journal of Economics: 127–56. AFTER NEOLIBERALISM 74 Byrnes, Patricia, Shawna Grosskopf, and Kathy Hayes. 1986. ‘Efficiency and Ownership: Further Evidence’. Review of Economics and Statistics 68 (May): 337–41. doi.org/10.2307/1925517. Cockett, Richard. 1995. Thinking the Unthinkable: Think-Tanks and the Economic Counter-Revolution 1931–1983. London: HarperCollins. Dawson, Drew, Kirsty McCulloch, and Angela Baker. 2001. Extended Working Hours in Australia: Counting the Costs. Woodville: Centre for Sleep Research, University of South Australia. Eason, Ros. 2002. ‘What Role for Telstra?’. Evatt Papers 41, Evatt Foundation. Forsyth, Peter. 1993. ‘Privatisation: Private Finances and ublic Policy’. In Privatisation: The Financial Implications, edited by Kevin Davis and Ian Harper, 8–22. StLeonards: Allen and Unwin. Friedman, Thomas. 1999. The Lexus and the Olive Tree: Understanding Globalization. New York: Farrar Strauss and Giroux. Fukuyama, Francis. 1992. The End of History and the Last Man. New York: The Free Press. Gingrich, Newt. 1994. Contract with America. New York: Republican National Committee. Grant, Simon and John Quiggin 2003. ‘Public Investment and the Risk Premium for Equity’. Economica 70, 1–18. www.jstor.org/stable/3548814. Hamilton, Clive, and John Quiggin. (1995). ‘The Privatisation of CSL’. Discussion paper no. 4, The Australia Institute, Canberra, June 1995. Hathaway, Neville. 1997. ‘Privatisation and the Government Cost of Capital’. Agenda 4, no. 1: 1–10. doi.org/10.22459/ag.04.02.1997.03. Morehead, Alison, Mairi Steele, Michael Alexander, Kerry Stephen, and Linton Duffin. 1997. Changes at Work: The 1995 Australian Workplace Industrial Relations Survey. Melbourne: Addison Wesley Longman Australia. Officer, Robert. 1999. ‘Privatisation of public assets’. In Privatisation: Efficiency of Fallacy? Two Perspectives, edited by CEDA (Committee for Economic Development of Australia): 1–22. Pescatrice, Donn and John Trapani III. 1980. ‘The Performance and Objectives of Public and Private Utilities Operating in the United States’. Journal of Public Economics 13: 259–76. doi.org/10.1016/0047-2727(80)90016-x. 81 5. LOOKING BACK ON MICRO-ECONOMIC REFORM Getting prices right In the early phases of micro-economic reform, much attention was focussed on ‘getting prices right’ and, in particular, on eliminating policies that unnecessarily ‘distorted’ the production and consumption decisions of private firms and households. The paradigmatic example of a ‘distorting’ policy was tariff protection. The case for tariff reform was bolstered by the argument that, if a government wished to assist particular industries, itshould do so through subsidies, which did not distort the prices faced byconsumers. Under the policy of ‘protection all round’, the impact of tariffs on agricultural producers had been partially offset by a range of price stabilisation and support policies. The gradual removal of these policies began with the Whitlam government’s controversial abolition of a bounty on purchases of superphosphate and the 25per cent cut in tariffs, introduced in July 1973. The consensus in favour of ‘protection all round’ had marginalised both advocates of the traditional free-trade alternative to protection, and supporters of strategic industry policies and micro-economic planning. As a result, advocates of more comprehensive and systematic government intervention, such as Whitlam, initially made common cause with those who favoured extensive free-market reform. Both groups were classed as ‘economic rationalists’1, that is, advocates of rationally designed policy, asopposed to the advocates of the status quo, in which policy was driven by a mixture of historical precedent, lobbying, and ad hoc responses to crises. Under the Fraser government, the free-market element of economic rationalism became dominant, and the term came to imply a desire to reduce the role of government, rather than, as under Whitlam, to apply the power of government more rationally and systematically. Much later, following the popular critique of Pusey (1991), ‘economic rationalist’ acquired a primarily pejorative connotation. Under the case-by-case approach pursued during the 1970s, proposals for tariff reform were initially most successful in industries with relatively low protection. In the highly protected industries most threatened by import competition, such as motor vehicles and textiles, clothing and footwear, tariffs were supplemented by quotas. As a result, the variance of effective 1 For further discussion of the genesis of the term ‘economic rationalism’, see Quiggin (1997a). and Schneider (1998). AFTER NEOLIBERALISM 82 rates of protection increased substantially during the 1970s, as shown in Table 5.1. The first two rows of data show the mean and variance of tariff rates from 1971 to 1991. Table 5.1 Effective rates of protection (%) 1971–91 1971 1973 1983 1988 1991 Mean effective protection rate 36 27 25 19 15 Standard deviation of effective protection rates 25 20 43 36 29 Source: Industry Commission It was not until 1988 that the case-by-case approach was replaced by ageneral program of reducing tariff rates across the board, a process that is still incomplete. Corporatisation and privatisation A second strand of micro-economic reform focussed on improving the efficiency of government business enterprises. One of the first, and most successful, instances was the creation of the statutory authorities Australia Postand Telecom Australia from the former Postmaster-General’s Department, apublic service department under direct ministerial control. More generally, the reform of government provision of marketed services may be seen in terms of a spectrum. At one end is the traditional departmental structure of national, state and local governments. At the other end is a privatised firm, subject only to normal commercial regulation. The points on the spectrum include: 1. full cost pricing 2. competitive tendering 3. commercialisation 4. corporatisation 5. privatisation. Each step along the reform spectrum involves an increase in reliance on profit as the primary guide to management decisions, and a reduction in direct public accountability. These two changes are directly linked: increases in profitability arise precisely because managers are not subject to constraints imposed through public accountability and are therefore free to manage enterprises so as to increase revenues and reduce costs. 83 5. LOOKING BACK ON MICRO-ECONOMIC REFORM From the perspective of advocates of micro-economic reform, the object of reform has been to move as far towards privatisation as possible, subject to constraints arising from potential market failures or political restrictions. Under the National Competition Policy (NCP), traditional arrangements are considered, prima facie, to be anti-competitive, and governments are required to consider options such as commercialisation and corporatisation. For much of the 1980s and 1990s, it seemed that movement along the reform spectrum led inexorably to full privatisation. By the late 1990s, however, political resistance to privatisation had hardened. A central element in the decline of support for privatisation was the realisation that the budgetary arguments that had been used to justify early privatisations in Australia and the UK were spurious. The budgetary conventions prevailing until the mid-1990s allowed the proceeds of asset sales to be treated as current revenue or, in some cases, negative expenditure. In assessing the fiscal impacts of privatisation, the appropriate comparison is between the sale price and the present value of income foregone as a result of privatisation. In most cases, if this comparison is undertaken using the real bond rate as a discount rate, sale proceeds are less than the present value of earnings foregone on any reasonable estimate (Quiggin 1995; Walker and Walker 2000). The divergence is primarily due to the ‘equity premium’, that is, the difference between the real rate of interest on bonds and the rate of return demanded by investors in private equity. This difference, about six percentage points on most estimates, is too large to be consistent with the standard consumption-based capital asset-pricing model, under which asset prices are determined by consumers rationally optimising the expected utility of lifetime consumption in efficient asset markets (Mehra and Prescott 1985; Kocherlakota 1996). Moreover, the equity premium is independent of any divergences in public and private discount rates arising from differential taxation treatmentand from transfers that may be associated with underpricing in cases of privatisation by public float. Differences arising from the latter sources should be netted out in the evaluation of privatisation. There are strong grounds for supposing that observed market imperfections, such as transaction costs in household borrowing and lending (Constantinides, Donaldson, and Mehra 1998), and the absence of insurance markets for systematic risks such as unemployment and business failure (Mankiw 1986; Weil 1989; Grant and Quiggin 2002), play an important role in explaining AFTER NEOLIBERALISM 84 the anomalously large equity premium. If so, as Grant and Quiggin (2003) observe, the appropriate discount rate for evaluating privatisation is likely to be close to the real bond rate, implying that most Australian privatisations have reduced welfare. Supporters of privatisation have argued for a presumption in favour of the market rate (Hathaway 1997) or have sought to change the focus of the argument away from fiscal impacts to broader efficiency effects (Officer 1999). In the absence of evidence supporting the use of the market rate, the first position is purely ideological. As regards the second, it is important to take account of impacts on consumers, employees and others. However, assuming the sale price is equal to the private market value of earnings under privatisation, a comparison of this sale price with the present value of expected earnings under continued public ownership captures the main efficiency effects of privatisation. Deregulation and reregulation The first big instance of deregulation in Australia was the deregulation of financial markets in the 1980s, following the recommendations of the Campbell and Martin Committees of Inquiry and the decision to float the Australian dollar in 1983. Deregulation of the airline industry, and the abandonment of the long-standing two-airlines policy, followed in 1990. Reforms to telecommunications and energy markets in the 1990s are also commonly referred to as deregulation. In these cases, in which a relatively simple, although highly restrictive, regulatory regime, based on publicly owned statutory monopolies, has been replaced by a complex set of regulations designed to facilitate competition, ‘reregulation’ might be amore appropriate term. Continued use of the term ‘deregulation’ reflects, in part, the idea that the new regulatory structures are interim measures, paving the way for the emergence of a fully competitive market. Measured against the, admittedly ambitious, objective of a competitive outcome requiring only the basic regulatory functions of standard company law, deregulation in Australia has been almost uniformly unsuccessful. In banking, the position of incumbent firms has been strengthened, most notably by mergers allowed in anticipation of deregulation. Entry by foreign banks, regarded ex ante as the main source of competition, has been limited and transient. Competition has been further reduced by the virtual disappearance of the building society sector when the regulatory 85 5. LOOKING BACK ON MICRO-ECONOMIC REFORM costs of a banking licence were removed, while the implicit Commonwealth government guarantee, arising from the Reserve Bank’s role as lender of last resort, remained in place. This trend has been partially offset by the emergence of non-bank mortgage originators in the 1990s. The abolition of the two-airlines policy induced a number of competitors to enter the market from 1990 onwards. The first two entries, both using the name Compass, were costly failures. Although external factors such as the first Gulf War played a role, the entrants were poorly capitalised, and there were extensive barriers to entry, notably including the incumbents’ control of terminals. Pressure to liberalise access to terminals developed in the wake of the Compass failures, but the incumbents built up alternative barriers to entry such as frequent flyer schemes. Several other enterprises announced plans to enter the market during the 1990s but failed to secure the necessary finance. A third failure was the attempt by regional airline Impulse to enter the capital city market, beginning in 2000. Shortly after Impulse commenced service, the fourth (and so far the only successful) entrant, Virgin Blue, also entered the market. Unlike previous entrants, Virgin Blue had the backing of an international carrier. The success of Virgin’s entry depended on a series of adverse events that had fatally weakened one of the incumbent airlines, Ansett. The last of these was the terrorist attack of September 11, 2001, which occurred immediately after Ansett’s declaration of bankruptcy and ensured that attempts to refloat the airline would not succeed. Thus, the competitive entry of Virgin has resulted in the replacement of the symmetrical duopoly imposed underthe two-airline policy with a Stackelberg leader–follower model, in which the dominant firm (the leader) sets the conditions under which its rival (thefollower) competes. The outcome in the telecommunications sector has been similar, with Telstra acting as a Stackelberg leader. Of course, this outcome represents an increase in competition relative to the starting point of statutory monopoly. Similarly, in the electricity sector, although there are more firms than before, most retail consumers are effectively dealing with monopolists. Even under the more limited criterion of reductions in prices, success has been limited. The interest rate margins charged by banks to household customers rose in the aftermath of the speculative boom and bust of the 1980s. Although margins have subsequently fallen, this has been offset by asteady increase in fees and charges. AFTER NEOLIBERALISM 86 Business class and standard economy airfares have generally risen, but the proportion of discount fares and the size of discounts have increased. Using an index number approach, Quiggin (1997b) concluded that there had been no significant change in the cost of a standard basket of airfares, consisting of a mixture of business-class, full economy and discount fares. Forsyth (1998) criticised the claim that discount fares should be treated as aseparate commodity and concluded that average fares had fallen as a result of deregulation. Bailey (2003) finds little change in prices between 1992 and 2003.2 Prices of telecommunications services have fallen in real terms, but this reduction has merely continued a trend that prevailed throughout the 20th century. More precisely, the regulatory constraints on Telstra’s prices embody a requirement to continue the rate of price reductions observed before the advent of competition. In most years, this constraint has been binding, implying that the aggregate impact of reregulation on prices has been zero. As with airlines, there has been a redistributive effect. Consumers with more elastic demand and lower marginal costs of service have benefited at the expense of those with less elastic demand and higher marginal costs. In this case, unlike that of airlines, the redistribution has generally favoured business at the expense of households. (In both cases, it must be assumed that reductions in business costs ultimately flow through to households.) The most striking single outcome of deregulation was the speculative boom and bust in equity markets in the 1980s, the magnitude of which was largely attributable to financial deregulation. The rise of ‘entrepreneurs’ engaged in speculative takeovers was widely seen as a positive outcome of financial deregulation, imposing market discipline on lazy incumbent managers (Bishop, Dodd, and Officer 1987). In retrospect, however, it is apparent that the entrepreneurs had little capacity to improve the value of the enterprises they controlled and primarily illustrated the maxim, attributed to JK Galbraith, that ‘genius is a rising market’. When equity prices declined after 1987, the corporate structures built up by the entrepreneurs collapsed with heavy losses. 2 A more relevant comparison would be the change in airfares compared to that which would have taken place under continued regulation. Presumably, this would have been relatively modest over the short period assessed by Quiggin and Forsyth, but it might have been significant over the 1990s as a while. 87 5. LOOKING BACK ON MICRO-ECONOMIC REFORM No accurate estimate of the welfare loss associated with this episode has been made. However, Sykes (1994) estimates the volume of losses incurred by creditors and bondholders at A$20billion or around 5per cent of annual GDP in the 1980s.3 As was noted by Milbourne and Cumberworth (1991), much of this loss was transferred to retail customers of the banks in the form of increased margins between borrowing and lending rates. Another substantial welfare loss arose from the parallel rollouts of hybrid fibre optic cable undertaken by Telstra and Optus in the mid-1990s. At a cost greater than would have been incurred in an orderly rollout of cable for all metropolitan areas, Telstra and Optus produced two sets of cables, each covering about half the population, with an overlap estimated at 90per cent. The total welfare loss was at least A$4billion and possibly as much as A$8billion (1 to 2per cent of GDP). Against these losses must be set improvements in operating efficiency, associated with reductions in overstaffing and the elimination of restrictive work practices. Based on observed changes in prices, the net impact appears to be about neutral in the case of telecommunications and airlines. On the other hand, as noted above, financial deregulation produced a substantial welfare loss in its first decade from 1983 to 1993. Outcomes since 1993 appear more favourable, but a final evaluation must await the end of the current economic cycle. Competition and competition policy During the 1990s, the process of micro-economic reform changed radically, as did its content. Increasing public resistance to policies such as privatisation, combined with an upsurge of hostility to ‘economic rationalism’ in general, made it difficult to implement reform through political processes, except in a crisis atmosphere such as that following the collapse of state banks in Victoria and South Australia. As a result, reform in the 1990s was often implemented without open political debate. The most notable example was the NCP, which grew out of the report of the Hilmer Committee (Hilmer, Rayner and Taperell 3 Since other losses were incurred by employees, customers and others, this is likely to be a lowerbound estimate of welfare costs. On the other hand, in a complete analysis it would be necessary to take account of gains to entrepreneurs. Despite most of the leading entrepreneurs having incurred personal as well as corporate bankruptcy, it appears that a number of them managed to retain significant personal wealth after the crash, in addition to consumption expenditure during the boom in housing prices. AFTER NEOLIBERALISM 88 1993), appointed in 1992 to inquire into, and advise on, appropriate changes to legislation and other measures in relation to the scope of the Trade Practices Act 1974 and the application of the principles of competition policy. Advocates of reform within federal government policy circles used the Hilmer Report as the basis for a renewed push for public sector reform, centred around the Council of Australian Governments (COAG). By virtue of its reliance on intergovernmental negotiations and remoteness from open political debate, the COAG process permitted further extensions of reform to be presented as a fait accompli, embodied in the Commonwealth Competition Policy Reform Act 1995 and the associated Competition Principles Agreement. By the time its implications were realised, the NCP was both Commonwealth and state law, backed up by the power of the National Competition Council (NCC) to penalise recalcitrant or tardystates. This process in turn produced a counter-reaction, in which NCP became a scapegoat for all the adverse consequences of micro-economic reform and for many trends independent of that reform. A typical example was the closure of banks in country towns, which was due in part to financial deregulation and in part to long-standing demographic trends but had nothing to do with NCP. The NCP program had three main components. The first was a once-off review of all state and federal legislation, requiring that any legislation with anti-competitive effects should be justified on the grounds of public benefit. A notable outcome was the deregulation of the dairy industry, discussed by Edwards (2003). The second was a requirement for government business enterprises to adopt prices based on the principle of ‘competitive neutrality’. The third, and in the end the most significant, was the creation of a new system of regulatory oversight for public and private enterprises declared as monopolies. At least at first sight, it may appear paradoxical that the ultimate outcome of NCP was a substantial expansion of regulation. The implementation of NCP required the establishment of the NCC and the formation of a more powerful Australian Competition and Consumer Commission (ACCC) from the former Trade Practices Commission and Prices Surveillance Authority. In addition, each of the states established regulatory bodies. In one sense, this expansion of regulation represents a retreat from the original aspirations of advocates of micro-economic reform, who hoped to 89 5. LOOKING BACK ON MICRO-ECONOMIC REFORM replace government monopolies with competitive markets. In most cases, it has now been recognised that the core functions historically performed by government monopolies are, in fact, natural monopolies, just as the advocates of government intervention had claimed. However, the regulatory functions now being performed by bodies like the ACCC are not new. In the past, these functions were performed by the same statutory monopolies that provided the relevant services. From an engineering viewpoint, such integrated management has obvious advantages. In most cases, however, the accountability that arises from external regulation has yielded net benefits. Labour market reform As has already been noted, labour market policy under the Hawke government was an exception to the general trend towards more marketoriented policy. The Accord on Prices and Incomes strengthened the role ofcentral wage fixation through the Arbitration Commission. Moreover, the policy deals through which the government and the Australian Council of Trade Unions reached an agreed position involving low or negative growth in real wages typically included interventionist policy initiatives, of which the most notable were Medicare and compulsory superannuation. The centralised approach was gradually abandoned in favour of a system of enterprise bargaining, which remains the most important institutional framework for wage-setting. Subsequent reforms, such as the introduction of Australian workplace agreements (individually negotiated employment contracts) have had only a modest effect. The effects of labour market reform, in the strict sense of changes to industrial relations policies and institutional frameworks, appear to have been modest. However, the changes in labour markets arising, directly or indirectly, from micro-economic reform have been dramatic. They include declining union membership and a reduction in the proportion of the workforce with traditional full-time jobs (35–45 hours per week), offset by growth in both part-time (mostly casual) employment and in jobs with long working hours (45+ per week). Policies that have affected labour market outcomes directly have included competitive tendering, reductions in industry assistance, and corporatisation or privatisation of government business enterprises. Indirect but equally profound effects have arisen from financial market deregulation and the resulting increase in the influence of financial markets. AFTER NEOLIBERALISM 90 Micro‑economic reform and macro‑ economic policy The term ‘micro-economic reform’ reflects a conscious contrast with the macro-economic policies that dominated economic policy in Australia from World War II to the late 1970s. However, perceptions of the relationship between micro-economic reform and macro-economic policy have changed over time. The focus on micro-economic reform in the early 1980s reflected the failure of Keynesian stabilisation policies, and the monetarist alternative of monetary growth rules, to reverse the rise in unemployment that took place during the 1970s. Along with the rapid growth of the current account deficit following the floating of the dollar, persistent high unemployment was seen as the product of structural rigidities ensuring that policies of macro-economic stimulus would result in higher inflation rather than growth in output. Thus, micro-economic reform was initially advocated as an expansionary policy, to be combined with stimulatory fiscal policy and the wage and price restraint generated by the Accord on Prices and Incomes. The favourable experience of the policy response to the ‘Banana Republic’ crisis of 1986, when a short-lived increase in interest rates succeeded in reducing the current account deficit without generating a recession, led to a new hypothesis regarding the impact of micro-economic reform. Many commentators, such as Higgins (1991), suggested that the economy had become more ‘flexible’ in its response to economic shocks. Among other things, the optimistic view of the benefits of reform reflected in Higgins’s assessment was used to justify the maintenance of high interest rates during 1989, as a response to inflationary pressures and current account problems. The resulting recession showed that the economy was not as flexible as had been hoped. The recession was the longest and deepest in postwar history. The length and strength of the expansion of the 1990s can be explained, in large measure, by the severity of the preceding recession. The 10 years of expansion between 1993 and 2003 were just sufficient to reduce the rate ofunemployment to 5.6per cent, the same rate prevailing in 1989, before the onset of therecession. 97 5. LOOKING BACK ON MICRO-ECONOMIC REFORM Further evidence may be obtained from movements in working hours for full-time workers. To the extent that an increase in working hours reflects a demand by employers for increased work effort, standard micro-economic reasoning implies that work effort per hour will also increase. Thus, we would expect to see work effort and hours of work move together in most cases. Until about 1980, average hours of work for full-time employees had declined fairly steadily for more than a century. Although there are no formal measures for work intensity, any comparison of working conditions between 1980 and, say, 1950 or 1930 indicates a reduction in work intensity. Inadequate work intensity was frequently cited as a reason for poor economic performance by advocates of micro-economic reform, such as Blandy et al. (1985). Average hours of work for full-time employees rose between 1980 and 1994, reaching a peak of 45 hours per week, before stabilising in the late 1990s and declining slightly after 2000. Wooden and Loundes (2002) attribute the increase in working hours to an income effect arising from wage restraint during the Accord period. This seems plausible for the 1980s, but the continued increase in working hours after the end of the Accord is almost certainly due to employer demands. For example, analysis of enterprise bargaining negotiations at this time undertaken by the Australian Centre for Industrial Relations Research and Training (1999) showed that employer claims typically included items that would lead to longer and more flexible (at the employer’s discretion) working hours. Public concern about stress and the intensity of work rose steadily in line with the increase in full-time working hours. Concerns about inadequate work intensity, dominant in the 1980s, were replaced by discussion of excessive work intensity, which reached a high point in the late 1990s. The modest decline in full-time working hours that has been observed since then is consistent with the view that the increase in working hours in the early 1990s was a short-term response to the competitive pressure associated with micro-economic reform and to the increase in employer bargaining power following the recession. Since the issue of increased work intensity as a source of measured productivity growth was first raised in the mid-1990s (see, for example, Quiggin 1996), one of the central points in the debate has been the claim that increases in productivity generated by increased work intensity are unsustainable. The strong form of this claim is that work intensity will eventually return to levels more in line with workers’ preferences, and that the measured productivity increases associated with increased work intensity will be reversed. The weak version is that, if work AFTER NEOLIBERALISM 98 intensity stabilises at a higher level, the measured rate of productivity growth will decline in the absence of continued growth in unmeasured labour inputs. Conversely, as noted by Parham (2002a), continued growth in productivity would imply that unsustainable growth in work intensity was not a major source of measured productivity growth.4 Growth accounting appears to support the strong version of the unsustainability hypothesis. Full-time working hours declined after 1998–99, and it seems likely that work intensity also declined. At the same time, the rate of multifactor productivity growth fell below its long-run average. The implications may be seen by supposing that increases in the pace of work contributed a 5per cent increase in effective labour input during the period from 1993–94 to 1998–99 (roughly equivalent to the loss of two 10-minute tea breaks each day), and that half of this increase in work intensity has subsequently been reversed. If labour’s contribution to MFP is weighted at 70per cent, this would imply that increased work intensity contributed 3.5 percentage points of the 4.8 percentage point increase above the longterm MFP trend observed in the mid-1990s cycle, and that decreased work intensity contributed 1.75 percentage points of the 2 percentage-point shortfall in MFP growth, relative to the long-term trend, observed since 1999–2000. Income and inequality As Parham (2002, 22) observes, inequality in market incomes grew in both decades of the micro-economic reform period: The distribution of earnings among individuals became more unequal in the 1990s. However, the increase was a continuation of the growth in earnings inequality during the 1980s, rather than a step up in the 1990s. This finding is consistent with international evidence suggesting that market-oriented reform is associated with increasing inequality of incomes. Inequality has risen substantially in the USA, the UK and New Zealand. 4 To be more precise, it is necessary to focus on productivity growth in excess of the long-term trend growth rate of 1per cent. 99 5. LOOKING BACK ON MICRO-ECONOMIC REFORM In Australia, until the mid-1990s, growth in earnings inequality was offset, at least in part, by changes in the tax and welfare systems that were, on balance, progressive. Since 1996, a number of these changes have been reversed as a result of the extension of micro-economic reform to the tax– welfare system. The most important single changes have been the cuts in income tax rates for higher income earners introduced along with the goods and services tax, cuts in capital gains taxes and restrictions on access to welfare payments, generically referred to as ‘mutual obligation’. Consumer choice and welfare In most, but not all, cases, micro-economic reform has been associated with an expansion of consumer choice. Although there are few well-established techniques for measurement of the benefits of consumer choice, standard arguments around revealed preference imply that more choice is always beneficial. These arguments are based on the standard model of individual consumer sovereignty. In some cases, communitarian critics of such arguments may argue that the benefits of individual choice are offset by losses of community values. The expansion of shopping hours provides an example. From the viewpoint of individual consumers, an expansion of shopping hours is certainly beneficial. Since this benefit is not taken into account in standard measures of the output of the retail sector, this is an instance where the productivity benefits of micro-economic reform are understated. From a communitarian perspective, however, the expansion of shopping hours has eroded traditional distinctions between weekdays and weekends, and undermined a range of community activities premised on the assumption that nearly everyone will have weekends free of work. Summary In aggregate, micro-economic reform has been associated with a modest increase in the rate of growth of labour productivity, most of which can be attributed to increases in the pace and intensity of work. The extra growth in MFP during the productivity cycle of the 1990s, equivalent to 4.8per cent of GDP, represents an upper bound for the aggregate benefits of micro-economic reform. A correct estimate would be closer to zero, and possibly even negative. AFTER NEOLIBERALISM 100 Rather than seeking to justify a comprehensive program of micro-economic reform in terms of largely spurious productivity benefits, or on the basis of unrelated arguments about macro-economic performance, it is preferable to assess individual reforms on a case-by-case basis. As has been argued above, some reforms have yielded positive net benefits, but others have not. Micro‑economic reform: success or disaster? The set of policy programs advocated under the banner of ‘micro-economic reform’ is too complex, and the associated set of outcomes too varied, to admit any simple characterisation. Micro-economic reform has been neither the success claimed by advocates such as the Productivity Commission, nor the disaster implied by many popular critiques of ‘economic rationalism’. Taking the two decades of micro-economic reform as a whole, the aggregate impact of the reform program on the welfare of the Australian community has been small. Periods of strong growth in productivity and output, such as the mid-1990s, did little more than recover the ground lost as a result of the impact of the activities of ‘entrepreneurs’ in the 1980s, and the associated ‘recession we had to have’. Much of the apparent productivity growth of the 1990s has been dissipated as workers find ways of winding back the increase in the hours and intensity of work extracted through the unilateral repudiation of implicit labour contracts in this period. As with the curate’s egg, the only verdict on micro-economic reform that is both brief and accurate is that it is ‘good in parts’. Bibliography Australian Centre for Industrial Relations Research and Training. 1999. Australia at Work: Just Managing? Sydney: Prentice Hall. Bailey, David. 2003. ‘Is the Australian Airline Market Contestable?’ (unpublished BA (Hons) thesis, University of Queensland). Bittman, Michael and James Rice. 2002. ‘The Spectre of Overwork: An Analysis of Trends Between 1974 and 1997 Using Australian Time-Use Diaries’, Labour and Industry 12, no. 3: 5–25. doi.org/10.1080/10301763.2002.10722021. 101 5. LOOKING BACK ON MICRO-ECONOMIC REFORM Bishop, Steven, Peter Dodd, and Robert Officer. 1987. Australian Takeovers: The Evidence, 1972–1985. St Leonards, NSW: The Centre for Independent Studies. Blandy, Richard, Peter Dawkins, Ken Gannicot, Peter Kain, Wolfgang Kasper, and Roy Kriegler. 1985. Structured Chaos: The Process of Productivity Advance. Oxford: Oxford University Press. Bollard, Alan and Robert Buckle, eds. 1987. Economic Liberalisation in New Zealand. Wellington: Allen & Unwin in association with Port Nicholson Press. Constantinides, George, John Donaldson, and Rajnish Mehra. 1998. ‘Junior Can’t Borrow: A New Perspective on the Equity Premium Puzzle’. NBER Working Paper Series no. 6617, National Bureau of Economic Research, Cambridge, MA, doi.org/10.3386/w6617. Dawkins, Peter and Paul Kelly, eds. 2003. Hard Heads, Soft Hearts: A New Reform Agenda for Australia. St Leonards: Allen & Unwin. Dawson, Drew, Kirsty McCulloch, and Angela Baker. 2002. Extended Working Hours in Australia: Counting the Costs. Woodville: Centre for Sleep Research, University of South Australia. Easton, Brian. 1997. The Commercialisation of New Zealand. Auckland: Auckland University Press. Ebook. Edwards, Geoff. 2003. ‘The Story of Deregulation in the Dairy Industry’, Australian Journal of Agricultural and Resource Economics 47, no. 1: 75–98. doi.org/ 10.1111/ 1467-8489.00204. Forsyth, Peter. 1998. ‘The Gains from the Liberalisation of Air Transport’. Journal of Transport Economics and Policy 32, no. 1: 73–92. Fukuyama, Francis. 1992. The End of History and the Last Man. New York: The Free Press. Grant, Simon and John Quiggin. 2003. ‘Public Investment and the Risk Premium for Equity’. Economica 70, no. 277: 1–18. Green, Francis and Steve McIntosh. 2001. ‘The Intensification of Work in Europe’. Labour Economics 8, no. 2: 291–308. doi.org/10.1016/s0927-5371(01)00027-6. Harberger, Arnold. 1964. ‘Taxation, Resource Allocation and Welfare’. In The Role of Direct and Indirect Taxes in the Federal Reserve System, edited by National Bureau of Economic Research, 25–80. Princeton: Princeton University Press. doi.org/10.1515/9781400875931-003. Hathaway, Neville. (1997). ‘Privatisation and the Cost of Capital’, Agenda 4, no. 1: 1–10. AFTER NEOLIBERALISM 102 Higgins, Chris. 1991. Opening address to the Australian Economic Policy Conference. Centre for Economic Policy Research, The Australian National University, Canberra. Hilmer, Frederick, Mark Rayner, and Geoffrey Taperell. 1993. National Competition Policy (Report by the Independent Committee of Inquiry). Canberra: Australian Government Publishing Service. Industry Commission. 1995. The Growth and Revenue Implications of Hilmer and Related Reforms. Canberra: Australian Government Publishing Service. Kasper, Wolfgang, Richard Blandy, John Freebairn, Douglas Hocking, and Robert O’Neill. 1980. Australia at the Crossroads: Our Choices to the Year 2000. Sydney: Harcourt Brace Jovanovich. Kocherlakota, Narayana R. 1996. ‘The Equity Premium: It’s Still a Puzzle’. Journal of Economic Literature 34, no. 1: 42–71. Mankiw, N. Gregory. 1986. ‘The Equity Premium and the Concentration of Aggregate Shocks’. Journal of Financial Economics 17, 211–19. doi.org/10.1016/ 0304-405x (86)90012-7. Mehra, Rajnish, and Edward Prescott. 1985. ‘The Equity Premium: A Puzzle’. Journal of Monetary Economics 15, no. 2: 145–61. doi.org/10.1016/0304-3932 (85) 90061-3. Milbourne, Ross and Matthew Cumberworth. 1991. ‘Australian Banking Performance in an Era of Deregulation’. Australian Economic Papers 30, no. 57: 171–91. doi.org/10.1111/j.1467-8454.1991.tb00538.x. Morehead, Alison, Mairi Steele, Michael Alexander, Kerry Stephen, and Linton Duffin. 1997. Changes at Work: The 1995 Australian Workplace Industrial Relations Survey. Melbourne: Addison Wesley Longman Australia. Officer, Robert. 1999. ‘Privatisation of public assets’. In Privatisation: Efficiency ofFallacy? Two Perspectives, edited by Committee for Economic Developmentof Australia: 1–22. Parham, Dean. 2002. ‘Productivity Growth in Australia: Are We Enjoying a Miracle?’ Presentation, Conference of the Melbourne Institute and The Australian, ‘Towards Opportunity and Prosperity’. Melbourne, April 2002. melbourne institute. unimelb.edu.au/outlook/assets/2002/ParhamDean-S.pdf. Pusey, Michael. 1991. Economic Rationalism, in Canberra: A Nation-Building State Changes Its Mind. Cambridge: Cambridge University Press. 103 5. LOOKING BACK ON MICRO-ECONOMIC REFORM Quiggin, John. 1995. ‘Does Privatisation Pay?’. The Australian Economic Review 28, no. 2: 23–42. doi.org/10.1111/j.1467-8462.1995.tb00886.x. Quiggin, J. 1996. Great Expectations: Microeconomic Reform and Australia. StLeonards, NSW: Allen & Unwin. Quiggin, John. 1997a. ‘Economic Rationalism’. Crossings: The Bulletin of the International Australian Studies Association 2, no. 1: 3–12. Quiggin, John. 1997b. ‘Evaluating Airline Deregulation in Australia’. Australian Economic Review 30, no. 1: 45–56. doi.org/10.1111/1467-8462.00004. Quiggin, John. 2001. ‘The Australian Productivity Miracle: A Sceptical View’. Agenda 8, no. 4: 333–48. doi.org/10.22459/ag.08.04.2001.04. Quiggin, John. 2004. ‘Looking Back on Microeconomic Reform: A Sceptical Viewpoint’. Economic and Labour Relations Review 15: 1–25. doi.org/ 10.1177/ 103530460401500101. Schneider, Michael. 1998. ‘“Economic Rationalism”, Economic Rationalists and Economists’. Quadrant (October): 48–53. Sykes, Trevor. 1994. The Bold Riders. St Leonards: Allen & Unwin. Walker, Robert and Betty Walker. 2000. Privatisation: Sell Off or Sell Out?: TheAustralian Experience. Sydney: ABC Books. Warhurst, John. 1982. Jobs or Dogma?: The Industries Assistance Commission and Australian Politics. St Lucia: University of Queensland Press. Weil, Philippe. 1989. ‘The Equity Premium Puzzle and the Risk-Free Rate Puzzle’, Journal of Monetary Economics 24: 401–21. doi.org/10.1016/0304-3932 (89) 90028-7. Wooden, Mark and Joanne Loundes 2002. ‘How Unreasonable Are Long Working Hours?’. Working Paper January 2002. Melbourne Institute of Applied Economic and Social Research, Melbourne. 105 6 What have we learned from the Global Financial Crisis? First published in 2011 as Quiggin, John. ‘What Have We Learned from the Global Financial Crisis?’ Australian Economic Review 44: 355–65. doi. org/ 10.1111/j.1467-8462.2011.00661.x. Introduction The Global Financial Crisis (GFC) that brought the world’s financial system to the brink of failure in September 2008 was the most significant economic event since the breakdown of the Bretton Woods system in the 1970s. Three years on, unemployment rates in the USA and the EU remain close to 10per cent. The expenditure required to salvage the system has pushed public debt to dangerously high levels in many countries. Millions of households have faced bankruptcy or foreclosure, and millions more are still at risk. The crisis was not anticipated by the great majority of the economics profession. Even as the financial system began to collapse in 2007 and 2008, central banks insisted that the situation was under control, and that the modest measures they had undertaken would be sufficient to maintain financial stability and economic prosperity. Admittedly, central banks are more or less obligated to maintain a confident stance in public, but there is little evidence of any private misgivings, let alone preparation for a crisis on the scale that ultimately emerged. AFTER NEOLIBERALISM 106 Meanwhile, academic macro-economists were celebrating the convergence between Real Business Cycle and New Keynesian schools (aka ‘freshwater’ and ‘saltwater’), symbolised by the development of dynamic stochastic general equilibrium (DSGE) theory. Dynamic stochastic general equilibrium is the idea that macro-economic analysis should not be concerned with observable realities like booms and slumps, but with the theoretical consequences of optimising behaviour by perfectly rational (or almost perfectly rational) consumers, firms and workers. This convergence of the two schools fitted nicely with the ‘Great Moderation’, a reduction in the volatility of output and other economic variables beginning in the 1980s and first noted in the early 2000s. The results may be seen in the proceedings of a conference on the topic (Woodford 2009). I discuss the Great Moderation and DSGE theory later in this chapter. It is of interest, then, to consider how policymakers and academic economists responded to the shock of September 2008. A large and unexpected macro-economic crisis, originating in financial markets, might be expected to yield important lessons about economic policy, economic theory and the behaviour of crucial economic variables, reflected in substantial changes in the research program of academic macro-economics, the settings of economic policy and the way in which economics is taught. In reality, however, such changes have been modest to the point of invisibility. After a brief, though intense, embrace of Keynesian stimulus policies intheimmediate aftermath of the crisis, policymakers have largely returned tothe policies that produced the crisis. Within academic economics, the effects were even more limited. While Keynesian economists such as Paul Krugman had more influence in the policy debate than before, their criticisms have had little or no impact on the practice of academic economists. Reading recent issues of the leading general journals, it would be virtually impossible to infer that the world economy had approached collapse in late 2008, that US unemployment remains near 10per cent or that economic theory had been affected in any way by these events. The aim of this article is to examine the lessons of the GFC, considered in terms of three different questions: 1. What should we (the economics profession) have learned from the GFC? 2. What, if anything, have we actually learned about economic theory andpolicy? 3. What have we learned about ourselves as a profession? 113 6. WHAT HAVE WE LEARNED FROM THE GLOBAL FINANCIAL CRISIS? Iceland seems like an ideal, if somewhat extreme, test case for this viewpoint. The government has maintained consistent budget surpluses, and pursued liberal economic policies, just as the consenting adults view suggests. On the other hand, even allowing for the volatility associated with a small economy, Iceland’s current account deficits are far beyond the level which should, on traditional views, lead inevitably to an economic crisis. The subsequent collapse of the Icelandic financial sector, and with it the entire economy, showed that the traditional view was correct. Financial markets are valuable but dangerous The dangers of unfettered financial markets have been evident ever since the early 18th century, which saw the South Sea Bubble in Britain and the Mississippi bubble in France. The lessons of these early bubbles have been forgotten and relearned repeatedly over subsequent centuries. Economists as diverse as Fisher, Keynes and Hayek produced analyses of financial market instability. Nevertheless, every new boom produced a new crop of theorists eager to proclaim that ‘this time is different’ (Reinhart and Rogoff 2009). No episode of forgetting was as complete and consistent as that of the 1990s and early 2000s. Not only was the standard claim that ‘this time is different’ repeated with new vigour, but an intellectual cottage industry arose to explain away previous disasters such as the Dutch tulip mania (Garber 2001) and even the Great Depression (Cole and Ohanian 2004). The efficient markets hypothesis, in its various forms, enabled defenders of financial markets to shift between ultra-strong claims, on the one hand, that financial markets provide the best possible guide to investment and asset value, and ultra-weak fallback positions on the other, such as the observation that it is impossible for everyone to bet successfully against the market. The GFC has shattered these beliefs, but progress towards a better understanding of financial markets has been very limited. The result has been a set of contradictory policies. On the one hand, the obvious failures of the light-handed systems of regulation epitomised by the Basel II framework1 have produced a series of initiatives at the national and global 1 The Basel Committee on Banking Regulations, headquartered at the Bank for International Settlements in Basel, was established to enhance financial stability by improving the quality of banking supervision worldwide. The Committee has established a series of international standards for bank regulation, most notably its landmark publications of the accords on capital adequacy, commonly known as Basel I, Basel II and, most recently, Basel III. See www.bis.org/bcbs/history.htm. AFTER NEOLIBERALISM 114 level designed to prevent a repetition of these failures. Most notably, the BaselIII framework has tightened up capital requirements across the board. On the other hand, moves towards more fundamental reform, aimed at reducing the size and cost of the financial system, have gone nowhere. Onthe contrary, the main concern of policymakers has been to restore pre-crisis ‘normality’ as rapidly as possible. We are all Keynesians in a crisis Finally, it seems that we have learned that, whatever the theoretical case for nonintervention, no government or central bank will permit a complete economic collapse of the type that threatened national economies in late 2008. Unlike the conditions of ‘ordinary’ recession governments are willing to tolerate at present, such a collapse threatens everyone, not merely theunemployed. The initial reaction to the crisis was a return to Keynesian fiscal stimulus, even by governments like that of Germany, where Keynesianism has had little support. Broadly speaking, the experience of the crisis supported the Keynesian view. Countries that adopted a large discretionary fiscal stimulus, notably, including China and Australia, performed much better than those that did not. Unfortunately, it is difficult to obtain a clean experiment in fiscal policy. Discretionary fiscal policy is designed to be countercyclical, and automatic stabilisers are countercyclical by definition, meaning that fiscal stimulus will be positively correlated, over time, with recessions. Deriving lessons from comparative performance in the GFC raises a different kind of problem. The strongest discretionary fiscal stimulus was undertaken in countries such as China and Australia, where the shock was entirely external and where policymakers had some warning of its arrival. The good outcomes experienced in these countries might be, and have been attributed to, the absence of a domestic shock. A rather less convincing counterargument, often heard in the Australian debate, is that our relatively good performance depended on strong demand from China rather than on policies of fiscal stimulus. Since China adopted the same policies, this appears to be a claim that Keynesianism works, but only in China. More importantly, perhaps, the fiscal stimulus policy adopted by the Obama Administration in the USA was half-hearted and poorly targeted, and it became confused, at least in the minds of the public, with the equally poorly 115 6. WHAT HAVE WE LEARNED FROM THE GLOBAL FINANCIAL CRISIS? designed bailout of the US banking system undertaken in the dying days of the Bush Administration. As a result, the US fiscal stimulus has been widely regarded as a failure. Unfortunately, therefore, the Keynesian lessons were only half-learned. Assoon as the immediate crisis was past, there was a resurgence of anti- Keynesian and, to a large extent, pre-Keynesian thinking. However, the picture is not entirely bleak. In Australia, the Treasury has adopted aconsistently Keynesian analysis. International bodies such as the IMF have also tended to look at the evidence more broadly and to support an expansionary stance in both fiscal and monetary policy. Nevertheless, the dominant trend in policy has been towards a rapid reversal of Keynesianstimulus. The wrong lesson: austerity As the crisis has continued, the main focus of attention has turned away from the evident failure of financial markets and towards the alleged failings of governments. The underlying ideas can be seen as a revival of the ‘Treasury view’ of the 1920s. The Treasury view embodies two key elements. In fiscal policy, the Treasury view embodies a predominant—indeed, near-exclusive—focus on keeping faith with bondholders, rejecting not only default but any tolerance of inflation as a way of sharing the burden of unsound debt. This position is intertwined with a contractionist macro-economic analysis, in which cuts in budget deficits are supposed to promote ‘business confidence’, particularly if they are achieved through reductions in expenditure. Austerity policies have been adopted even where there is no immediate crisis in public debt, as in the UK and the USA, but the problem has been sharpest in Europe. In the process of bailing out the financial systems and responding to the sharp downturn in economic activity, European governments guaranteed private debt and took on substantial debts of their own. For many peripheral countries, such as Portugal, Ireland, Greece and Spain, these debts have proved unsustainable. Now, the bondholders are demanding that full repayment of their claims should be ensured by the adoption of ‘austerity’ measures that are virtually certain to produce a new recession if implemented as planned. AFTER NEOLIBERALISM 116 Over the last year and a half, Europe has taken a set of stop-gap measures aimed at protecting its weaker economies against pressures from bond markets. European states have sought to propitiate bond markets through enforcing economic austerity and ruthlessly cutting spending. There is considerable pressure, notably from the German government and the ECB, to institutionalise austerity. Institutionalised austerity will badly damage European economies in the short term. However, its long-term consequences will be much, much worse. Even if these measures somehow calm bond markets, they will utterly destroy the EU’s remaining political legitimacy. European politicians worry about the economic consequences of failure. They should be far more worried about the political consequences. The system they are drifting towards is a thinly disguised version of the gold standard that wreaked havoc in the 1920s and will have the same toxic political fallout. The situation in the USA is equally dire. At the state and local level, the combination of declining revenues and balanced-budget requirements has necessitated large-scale reductions in both employment and services. This, in turn, has contributed to the length and depth of the US recession. At the federal level, the same pattern is now emerging. After the initial round of fiscal stimulus in 2009, the Obama Administration took the view thatthe economy would recover without additional intervention. Bythe time the falsehood of that view became clear, the 2010 elections had produced aRepublican majority in the House of Representatives. The new Congress was resolutely opposed to any further fiscal stimulus. Moreover, by threatening to enforce a default on US government debt, the Republicans were able to negotiate a policy package involving large-scale expenditure cuts. The efforts of the Obama Administration to negotiate a ‘grand bargain’, in which these and further cuts would be combined with modest increases in tax revenue, cemented a consensus on the need for immediate adoption of austerity policies, despite weak economic growth and a continuing decline in the US employment–population ratio. Experience under austerity policies has confirmed the validity of the Keynesian analysis. There has been no general recovery, and performance has been particularly disappointing in the USA and UK, where austerity measures have been chosen, even in the absence of an immediate budgetarycrisis. 117 6. WHAT HAVE WE LEARNED FROM THE GLOBAL FINANCIAL CRISIS? What have we learned about ourselves? The experience of the crisis suggests some unflattering lessons about the economics profession, taken broadly to include academic economists, policymakers, central bankers and commentators. The collapse of the Great Moderation, and the near-collapse of the global financial system, provided the profession with an opportunity and, indeed, an urgent imperative for a fundamental reconsideration of ideas that had been taken for granted for30years or more. Unfortunately, like the Bourbon monarchs returning after the fall of Napoleon, we have, for the most part, learned nothing and forgotten nothing. Across a broad spectrum, the economics profession has sought the fastest possible return to pre-crisis normalcy, ignoring the obvious evidence that it was precisely the ‘normal’ assumptions of neoliberalism that produced the crisis. The problems are most evident in the behaviour of central banks, which remain the dominant force in the determination of macro-economic policy. In the years leading up to the crisis, central bankers were congratulating themselves on the creation of an inflation-targeting system that had finally hit both the explicit target of low and stable inflation and the implicit target of steady and stable growth in real output (that is, the Great Moderation). It is a simple matter of record that the policies adopted by central banks during the Great Moderation did not prevent its catastrophic collapse. More seriously, there is a good deal of evidence to suggest that long periods of low and stable inflation are actually conducive to asset price bubbles such as those that led to the GFC. At a minimum, this experience should have suggested a rethinking of the system of inflation targeting. Even assuming a continuation of inflation targeting, the current debt deflation clearly calls for a higher inflation target, at least in the short run. Looking beyond this purely technical adjustment, the use of alternative targets, such as the price level or nominal income, might help to avoid the potential for deflationary liquidity traps inherent in the inflation-targeting approach. AFTER NEOLIBERALISM 118 A more serious response to the crisis would be the recognition that a single instrument, such as a short-term interest rate, is insufficient when the central bank must not only achieve a balance between inflation and output growth, as proposed by the Taylor rule, but must also maintain the systemic stability of the financial system. The latter requirement suggests the need for a reconsideration of the separation between monetary policy and prudential regulation that was a central feature of the reforms of the neoliberalism era. The general policy community, including economic commentators, think tanks and policymakers, has done little better. The fact that Australia escaped the GFC largely unscathed has meant that economic commentators have felt free to ignore it. As Terry McCrann (2009, 21) wrote in dismissing proposals for an inquiry into the financial system: ‘Not many dead or even injured in Australia. From any systemic fault, that’s to say.’ As the GFC has faded further into memory, attention has returned to the tired micro-economic reform agenda of the 1980s. Misleading statistics on productivity have been used to argue the need for a new round of reform. It would be far more useful to focus attention on the macro-economic risks that still face us, most notably in the event of a slump, or even a slowdown, in China’s economic growth. Turning to the academic economics profession, it would be unfair to say that economists have ignored the evidence of the financial crisis. On the contrary, vast numbers of papers are now being written to incorporate financial shocks into econometric and macro-economic models. But there is no suggestion, as there was in both the 1930s and the 1970s, that the GFC necessitates any reassessment of the ideas that have dominated economic thinking since the 1970s or any significant change in the way in which economics is done. In terms of the way in which economics is done, the selection of articles published in economics journals today is almost indistinguishable from that of, say, 2007. The central focus is on incremental contributions on topics of fashionable interest. The aesthetic criteria on which articles are judged (focussed primarily on theoretical rigour) means that there is no place in the journals for the reconsideration of fundamental issues. Almost the only exception is the publication of presidential addresses and the like, where the most firmly established members of the profession are given some licence to speculate. 119 6. WHAT HAVE WE LEARNED FROM THE GLOBAL FINANCIAL CRISIS? As far as content is concerned, the majority of economic research deals with issues that are, while not necessarily irrelevant to policy concerns, far removed from the most pressing issues of the day. This has probably always been true to some extent,2 and the need for external funding for most research has only exacerbated the problem. An obvious difference between the GFC and the crises of the 1930s and 1970s is the absence, at least so far, of a well-developed alternative to the dominant model rendered problematic by the crisis. Keynes (1936) offered an alternative to the orthodoxy of classical and neoclassical economics, which maintained the impossibility of sustained high unemployment, except as the product of distortions in the labour market. Keynes also offered a solution—the use of fiscal policy to stabilise aggregate demand—and this policy was adopted, with great success, after 1945. When Keynesian economics itself ran into difficulties, beginning in the late 1960s, the monetarism of Milton Friedman (1968) presented itself as an alternative. No such alternative is yet available to us. Our position is most analogous to that faced by economists in the early years of the Great Depression before the emergence of the Keynesian alternative to thedominant Treasury view. It is, perhaps, too much to hope for the emergence of a new Keynes or Friedman who can present a comprehensive analysis of the failures of the current model and point the way forward toanew one. Rather, we must look for a synthesis, recovering the central insights of the Keynesian revolution while retaining what was valuable in Friedman’s counterrevolution, and incorporating the insights of more recent work on behavioural economics. That is a demanding research program, and it is far from clear where it will lead. All the more reason, then, for the profession to make a start along these lines—if necessary, at the expense of established research programs whose inadequacies have been shown up by the GFC. 2 Many years ago, I was struck by reading a survey of the articles published in economic journals during the Great Depression, which found that only a small proportion addressed the problems of unemployment, macro-economic policy and other issues related to the economic crisis that had engulfed the world. Unfortunately, I did not record the reference and have never again been able to locate this article. Nevertheless, it had a significant impact on my own research priorities. AFTER NEOLIBERALISM 120 Less hubris? The central theme of Quiggin (2010), reflected in the title Zombie Economics, was that, although the ideas and policies central to neoliberalism3 had been refuted by events, they nonetheless remain influential. Less than a year since the book appeared, the resurgence of these zombie ideas is now almost complete. Despite being spectacularly discredited by the GFC, the ideas of neoliberalism continue to guide the thinking of many, if not most, policymakers and commentators. In part, that is because these ideas are useful to rich and powerful interest groups. In part, it reflects the inherent tenacity of intellectual commitments. Most importantly, though, the survival of these zombie ideas reflects the absence of a well-developed alternative. Economics must take new directions in the 21st century if we are to avoid a repetition of the recent crisis. Most obviously, there needs to be a shift from rigour to relevance. The prevailing emphasis on mathematical and logical rigour has given economics an internal consistency that is missing in other social sciences. However, there is little value in being consistently wrong. Similarly, there needs to be a shift from efficiency to equity. Three decades of neoliberals pushing policies based on ideas of efficiency, and claims about the efficiency of financial markets, have not produced much in the way of improved economic performance, but they have led to drastic increases in inequality, particularly in the English-speaking world. Economists need to return their attention to policies that will generate a more equitable distribution of income. Finally, with the collapse of yet another economic ‘new era’, it is time for the economics profession to display more humility and less hubris. Morethan two centuries after Adam Smith, economists have to admit the force of Socrates’s observation that: ‘The wisest man is he who knows that he knowsnothing.’ 3 I used the term ‘market liberalism’. 121 6. WHAT HAVE WE LEARNED FROM THE GLOBAL FINANCIAL CRISIS? Bibliography Blanchard, Olivier. 2008. ‘The state of macro’. Working Paper no. 14259, National Bureau of Economic Research, Cambridge, MA. Coibion, Olivier, and Yuriy Gorodnichenko. 2010. ‘Does the Great Recession Really Mean the End of the Great Moderation?’. Centre for Economic and Policy Research. cepr.org/voxeu/columns/does-great-recession-really-mean-end- great-moderation. Cole, Harold, and Lee Ohanian. 2004. ‘New Deal Policies and the Persistence of the Great Depression: A General Equilibrium Analysis’. Journal of Political Economy 112: 779–816. doi.org/10.1086/421169. Friedman, Milton. 1968. ‘The Role of Monetary Policy’. American Economic Review 58: 1–17. Garber, Peter. 2001. Famous First Bubbles: The Fundamentals of Early Manias, Cambridge: MIT Press. Haskins, Ron, and Isabel Sawhill. 2009. Creating an Opportunity Society. Washington, DC: Brookings Institution Press. Keynes, John Maynard. 1936. The General Theory of Employment, Interest and Money. London: MacMillan. Krugman, Paul. 2009. ‘How Did Economists Get It So Wrong?’. New York Times, 2September 2009. www.nytimes.com/2009/09/06/magazine/06Economic-t.html. Lucas, Robert. 1980. ‘Methods and Problems in Business Cycle Theory’. Journal of Money, Credit and Banking 12, no. 4. Part 2: Rational Expectations: 696–715. McCrann, Terry. 2009. ‘The Loan Rangers’ Ride’, Herald Sun, 9 July 2009: 21. Quiggin, John. 2006. ‘Taking Iceland’s Hot Tip’. Australian Financial Review, 22June 2006. Quiggin, John. 2010. Zombie Economics: How Dead Ideas Still Walk Among Us. Princeton: Princeton University Press. Quiggin, John. 2011. ‘What Have We Learned from the Global Financial Crisis?’. Australian Economic Review 44: 355–65. doi.org/10.1111/j.1467-8462. 2011. 00661.x. Reinhart, Carmen, and Kenneth Rogoff. 2009. This Time Is Different: Eight Centuries of Financial Folly. Princeton: Princeton University Press. AFTER NEOLIBERALISM 122 Rogers, Will. 1932. ‘And Here’s How It All Happened’. The Tulsa Daily World, 5December 1932. Quoted in Wikiquotes. ‘Will Rogers’, last modified 1 August 2022. en.wikiquote.org/wiki/Will_Rogers. Saez, Emanuel. 2009. ‘Striking It Richer: The Evolution of Top Incomes in the United States (Update with 2007 Estimates).’ Unpublished paper, Department of Economics, University of California, Berkeley. Shiller, Robert. 2000. Irrational Exuberance. Princeton: Princeton University Press. Sowell, Thomas. 2010. Intellectuals and Society. New York: Basic Books. Taylor, John. 1993. ‘Discretion Versus Policy Rules in Practice’. Carnegie-Rochester Conference Series on Public Policy 39: 195–214. doi.org/10.1016/0167-2231 (93) 90009-l. Trichet, Jean-Claude. 2010. ‘Commentary on ‘‘Fifty Years of Monetary Policy: What Have We Learned?’’ by Adam Cagliarini, Christopher Kent and Glenn Stevens’. BIS Review 14.www.bis.org/review/r100211a.pdf. Woodford, Michael. 2009. ‘Convergence in macroeconomics: Elements of the New Synthesis’. American Economic Journal: Macroeconomics 1, no. 1: 267–79. doi.org/10.1257/mac.1.1.267. 129 7. THE LOST GOLDEN AGE OF PRODUCTIVITY GROWTH? of the business cycle (Quiggin 2000). A typical business cycle contained two productivity cycles, with productivity growth stronger in the cycle corresponding to the expansion phase and weaker in the cycle corresponding to the contraction phase (Dolman, Lu, and Rahman 2006). The productivity cycle plays a crucial role in the myth of the 1990s productivity surge, since it allows the years of strong productivity growth from 1993–94 to 1998–99 to be treated as a distinct period, while the weaker years at the beginning of the decade are discarded. The result is a widespread but false impression that the 1990s was a period of exceptionally strong measured MFP growth. In reality, the average rate of MFP growth for two ABS productivity cycles from 1988–89 to 1998–99 was 1.6per cent—above average but not exceptional compared to preceding decades. In summary, MFP growth over a productivity cycle is not a particularly useful measure of economic performance. Even when measured correctly, productivity estimates combine the effects of long-term technological growth with a subset of the factors that determine variations in short-term performance. In practice, accurate measurement is impossible. In the case of Australia’s supposed productivity surge, the crucial problem is the failure to take account of changes in work intensity. Work intensity and productivity Labour productivity is typically measured in terms of output per hour worked. However, this measure can be problematic. For example, enterprise agreements and individual contracts adopted in place of awards commonly eliminate breaks such as tea breaks, which were treated as working time under the award system. On the other hand, employees have always taken unauthorised and unrecorded breaks of various kinds. A notable example that has emerged in the last 10 to 15 years is the use of office computers to visit internet sites that are not work-related. Of much longer standing is the practice of making private phone calls during paid time at work. Conversely, employers may demand unpaid overtime or contact their employees with work requests outside of paid hours. Although these practices are regularly the subject of dispute, the normal situation is one of equilibrium, in which some deviation from official hours is part of the wage bargain tacitly accepted by both parties. The hours of work reported to statistical agencies will reflect some, but not all, of the AFTER NEOLIBERALISM 130 deviations from award-determined or contractually agreed hours. How should these features of the labour market be reflected in productivity measures? At least conceptually, it seems clear that the appropriate measure is actual hours worked rather than paid hours. Consider the case in which the number of hours worked remains unchanged, but the pace of work varies. In some industries, such changes can be observed directly and are the subject of explicit wage bargaining. The archetypal case is that of production-line work, in which employers typically seek to increase the rate at which the line moves, while workers and unions try to slow it down. The development of the word processor in the 1980s provides another example. Since the number of keystrokes could bemeasured directly, employers demanded higher rates, thus precipitating an epidemic of repetitive strain injury, a problem that had existed previously but was typically diagnosed as an individual pathology rather than a broader occupational hazard. There is, in principle, no difference between an increase in the number of hours worked and an increase in the pace of work. In both cases, standard economic logic implies that an equilibrium wage bargain will typically involve a commitment of hours and effort greater than the level that would be chosen by workers in the absence of a monetary incentive. In particular instances, depending on labour market institutions, the bargained outcome may involve more or fewer hours and more or less effort than would characterise a Pareto-optimal bargain. However, the general assumption is that at the margin, increased hours and increased effort are equally costly to workers when they are normalised by the payment required to elicit them. It follows that, to the extent that increases in output are derived either from unmeasured increases in hours of work or from increased intensity of work, there is no corresponding increase in productivity. Ifthehours or intensity of work were previously sub-optimal (or above the optimal level), there will be a net welfare gain (or loss), but this will be of second-order magnitude relative to the change in output. Australian economic policymakers have shown considerable confusion on this point. Some have explicitly asserted that working harder is a genuine source of productivity gains. For example, the Productivity Commission (1996, 24) asserted that productivity gains could be achieved not only through resource reallocation but through people ‘working harder and working smarter’. More than a decade later, the chairman of the Productivity 131 7. THE LOST GOLDEN AGE OF PRODUCTIVITY GROWTH? Commission repeated an almost identical formulation (Banks 2011 20): ‘whether productivity growth comes from working harder or working “smarter”, people in workplaces are central to it’. The appearance of scare quotes around ‘smarter’ is revealing. Whereas in the 1990s this phrase was used in all seriousness, ‘working smarter’ is now understood as a piece of management jargon, typically decoded as ‘We’re giving you more work to do with fewer resources, and it’s up to you to figure out how to do it.’ The association of reform with harder and less pleasant work is usually implicit. Standard discussions of micro-economic reform and workplace reform are full of references to ‘cutting out fat’, the ‘chill winds of competition’ and so forth. It is not hard for workers to discern where there is fat to be cut, or to observe that CEOs are usually equipped with well-padded windbreakers, even in cases where their mismanagement leads to an early (but generously compensated) departure. By contrast, in debates over the validity of MFP statistics, most mainstream economists—particularly those associated with the Productivity Commission—have denied that changes in work intensity are an important source of changes in measured productivity. The mid-1990s saw an upsurge in public concern about the pace of work, work–life balance, stress and related issues, which persisted into the early 2000s, leading to John Howard’s description of the topic at an electorate dinner in Melbourne in 2002 as a ‘barbecue stopper’ (Treguer 2023). Inthe context of a strengthening labour market from about 2000 onwards, community resistance to work intensification, and to employer demands for longer hours of work, became increasingly successful. While the intensity of work is difficult to measure, there is sufficient evidence to support the general perception of an increase in work intensity in the 1990s. First, as discussed above, increases in work hours and in work intensity are substitutes both as inputs to production and as sources of disutility for workers. It follows that, when the equilibrium wage bargain involves an increase (or decrease) in hours, it will also involve an increase (decrease) in work intensity. The data on working hours are unequivocal and exactly consistent with the idea that fluctuations in MFP growth may be explained largely in terms of work intensity. As the ABS (2010) notes, the proportion of full-time workers working more than 50 hours per week increased from 13per cent in 1978 to 19per cent in late 1999 and early 2000, before falling to around 15per cent in 2010. AFTER NEOLIBERALISM 132 There is some direct evidence on work intensity. The Australian Workplace Industrial Relations Survey undertaken in 1995 (Morehead et al. 1997) found that a majority of employees reported increases in stress, work effort and pace of work over the previous year, while less than 10per cent reported reductions in any of these variables. This is consistent with evidence from the UK and some, although not all, other European countries (Green and McIntosh 2001). Moreover, Green and Macintosh observe that the increases in work intensity are associated with higher productivity (as would be expected) and are positively correlated with exposure to competition and reductions in union density. Defences of the productivity surge As I have discussed elsewhere (Quiggin 2006), believers in the productivity surge produced a variety of stories to explain the observed outcomes. Asymmetric measurement error During the 1990s, the Productivity Commission was the most prominent proponent of the claim that the strong growth in MFP reported by the ABS reflected the emergence of a ‘new economy’ as a result of micro-economic reform (Parham 1999). Unsurprisingly, the Productivity Commission rejected claims that the apparent surge in MFP growth was due, in part or in whole, to measurement error or cyclical factors. By contrast, as low rates of MFP growth emerged in the 2000s, the commission became much more sympathetic to the idea that measurement error might be a problem. The poor productivity growth of the early 2000s was blamed on, among other factors, the Sydney Olympics, capital expenditure associated with the Y2K fiasco (also referred to as the Millennium Bug), the transitional effects of the introduction of the GST, and the drought that began in 2002 (Parham 2005). The drought persisted well into the decade, but the other factors should have been transitory. As measured MFP performance deteriorated even further, attention has shifted to the mining sector. It seems clear that measurement problems associated with mining are significant. Investments in new or expanded mines count immediately as part of the capital stock but contribute to 133 7. THE LOST GOLDEN AGE OF PRODUCTIVITY GROWTH? output only with a delay of some years. Moreover, high mineral prices have led to the exploitation of less productive resources that would otherwise be uneconomic. Since the quality of the resource is not measured as an input, this produces an illusory decline in productivity. Richardson and Denniss (2011) estimate that the measured growth rate of labour productivity over the first decade of the 2000s was reduced by one percentage point as a result of distortions in the mining sector. This is a significant effect, but it is not sufficient to explain the decline in measured MFP growth rates. The view that the disappointing performance of measured MFP is primarily due to measurement error has gone out of favour over time as disappointment has persisted. However, it frequently re-emerges in discussions of Australia’s strong macro-economic performance during and after the GFC. The idea that market-oriented micro-economic policies provide significant flexibility in response to macro-economic shocks has been influential in Australia since the beginnings of micro-economic reform in the 1980s. This idea contributed substantially to the policy misjudgements that produced the 1989–91 recession, when it was supposed that the economy was flexible enough to handle a ‘short, sharp shock to interest rates’ and then to bounce back rapidly from ‘the recession we had to have’. Counter-examples to this idea abound. The most striking is that of New Zealand, which has followed broadly similar micro-economic policies since the 1980s, although with more radical micro-economic reform until the mid-1990s and a sharper reaction against some aspects of those policies subsequently. At the same time, New Zealand has adopted far more restrictionist macro-economic policies. From its initial position of approximate income parity with Australia in the early 1980s, New Zealand fell sharply behind, experiencing an even deeper recession from 1987 to 1991 and two subsequent recessions interspersed with periods of mostly sluggish growth. By 2000, income per person in New Zealand had fallen to around two-thirds of the Australian level, and it has remained there since. While it is unwise to attribute such a huge gap to any single factor (Hazledine and Quiggin 2006), poor macro-economic performance is an important part of the story. AFTER NEOLIBERALISM 134 The lost golden age The dominant interpretation of the MFP statistics today is of a lost golden age. The surge in measured MFP growth is attributed to the micro-economic reform process that began in the 1980s and the slowing down to ‘reform fatigue’ in the 2000s. The major problem with this story is timing. It is difficult to see how aseries of reforms undertaken over 20 years or more can have produced substantial productivity benefits confined to a single period of five years. Itis even harder to see how the benefits of those reforms can have dissipated so rapidly, having been already on the wane when the reform process was still under way. The beginning of the process of micro-economic reform is usually dated to the float of the Australian dollar in 1983. There is less agreement on the end of the process. As far as I can determine, I was the first to offer an explicit end date suggesting that the era of micro-economic reform in Australia ‘began with a big bang—the floating of the dollar in 1983’ and ‘ended with another big bang—the package of tax reforms centred on the goods and services tax (GST), which came into force in July 2000’ (Quiggin 2004). There have been retrospective attempts to backdate the end of microeconomic reform, sometimes as far as the election of the Howard government in 1996, but these do not stand up to scrutiny. Although it is true that the Howard government took a less consistent approach to reform than its Labor predecessors, it nevertheless introduced several major reforms in itsfirst few years in office. Many of the reforms implemented under Howard were measures that had long been demanded by advocates of radical reform but resisted by the Labor government because of political sensitivities. These included the Workplace Relations Act 1996, the partial privatisation of Telstra in 1998 and 1999, waterfront reform in 1998 and, most notably, the GST, legislated in 1999 and implemented in 2000.5 Moreover, many reforms introduced by the Hawke–Keating government did not begin to take effect until after the MFP surge. The most notable of these is the National Competition Policy (NCP). Most states did not even 5 Following the surprising achievement of a Senate majority in 2004, the last term of the Howard government included the passage of a package of labour market reforms called Work Choices. These reforms were mostly repealed by the Rudd Labor government and cannot be regarded as a successful renewal of micro-economic reform. 135 7. THE LOST GOLDEN AGE OF PRODUCTIVITY GROWTH? complete their legislative reviews or set up their general regulatory bodies until the late 1990s, and the NCP process, with associated payments to the states, was not completed until 2005, when it was succeeded by the National Reform Agenda. Even after 2005, the push for micro-economic reform continued through a proliferation of free-trade agreements, which were less focussed on trade than on constraining government intervention in the domestic economy. The timing issue becomes more acute when we consider that the measured productivity surge did not begin until a decade after the float of the dollar. In fact, the years during which ‘even the resident galah in the pet shop’ was talking about micro-economic reform were characterised by the lowest productivity growth of the entire period for which data are available. Hence, the story of the lost golden age relies on the long-delayed benefits of the reforms of the early 1980s, combined with an instant (indeed, in some cases, retrospective) benefit from the reforms of the late 1990s. Even if we were to accept the story of the lost golden age, the whole rationale of micro-economic reform is called into question. Far from generating sustained growth, the lost-golden-age myth suggests that the decade or more of micro-economic reform that began with the floating of the dollar in 1983 produced only five years of above-average productivity growth before requiring a renewed burst of reform merely to sustain past gains. Conclusion In the economy of the 21st century, increases in productivity arise almost entirely from capital deepening and improvements in education. Economic theory, therefore, predicts that the rate of MFP growth, properly calculated to take account of labour quality, should be close to zero. This prediction is borne out by the data. Nevertheless, the mythical productivity surge of the mid-1990s continues to dominate the thinking of policymakers, leading to incessant demands for more micro-economic reform to generate higherproductivity. The correlation between demand for higher productivity and increases in work intensity is so evident to most Australians that we take it for granted. What is striking in this context is the failure of (most) Australian economists and economic commentators to accept the evidence on this point. Unlike virtually everyone else in Australia, economists have resolutely denied that AFTER NEOLIBERALISM 136 the higher measured labour productivity growth evident in the mid-1990s was largely due to increased work intensity, and that the reversal of those measured gains in the 2000 was due to the fact that this intensification could not be sustained. A belief that large increases in annual productivity growth rates can and should be achieved through micro-economic reform is not supported by the data and can lead to bad public policy decisions. Most notably, the belief lends support to the idea that ‘Australians must work harder’. 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