This is the third part of my blog on neoliberalism, which asks the following questions:
- Were the economic policies of the Hawke-Keating governments neoliberal, or simply pragmatic?
- Was ‘Fightback’ a triumph of neoliberalism or the beginning of its decline?
- Did it advance or retreat under Howard and Costello?
- What’s left of neoliberalism?
The star-studded cast of this blog includes Dani Rodrick, John Quiggin, Bob Hawke, Paul Keating, Paul Kelly, Alan Bond, John Hewson, John Howard, and Peter Costello.
What is neoliberalism?
Neoliberalism is understood here as the application of philosophical liberalism, which privileges individual freedom and self-determination, to economics. As discussed in the next part of this blog, this worldview underpinned the ‘neoclassical’ schools of economics that emerged in the late 19th century. Hence they viewed commerce and trade as market relations among individuals, side-stepping their social and political foundations.
This view had an ideological edge. The default position of neoclassical economics was that markets would only reach their utility-maximising equilibrium if governments and communities stepped out of the way. As evidence piled up against this view throughout the 20th century, exceptions to the implied superiority of ‘free’ markets were admitted, such as externalities (a cost or benefit, such as environmental harm, that is not priced into a market) and asymmetric information (where, for example, the seller has much more knowledge of a product than the buyer).
From time to time, ideology broke through this wall of exceptions, and evidence (or the lack of it) was ignored. The 1980s, when the ‘Chicago school’ revived neoclassical economics, was such a time in the main English-speaking countries, including Australia.
Neoliberalism or pragmatic policy?
As in past scientific revolutions, advocates for the neoliberal worldview in economics in the 1970s and 80s such as Milton Friedman packaged this new paradigm as a set of practical solutions to the main economic problems of the day. This makes it hard to distinguish economic theory and its pragmatic applications from its ideological underpinnings.
Dani Rodrik distinguishes pragmatic and ideological policy-making in this way: the former leaves open the possibility that there is more than one diagnosis of a problem, and set of policy solutions. Ideologically-driven policy making does not admit this possibility. In the words of Margaret Thatcher following the collapse of the Soviet Union, ‘there was no alternative’ to market liberalisation.
The result is over-reach: policies are dogmatically pursued as evidence is disregarded, and if they fail they are pursued more vigorously. A classic example was Thatcher’s poll tax: a highly regressive local tax that lacked solid economic justification, triggered riots across the country, and was her political undoing.
‘The real trouble is that mainstream economics shades too easily into ideology, constraining the choices that we appear to have and providing cookie-cutter solutions. A proper understanding of the economics that lies behind neoliberalism would allow us to identify—and to reject—ideology when it masquerades as economic science.’ Dani Rodrik, 2017
A short diversion here: ideology doesn’t only ‘masquerade’ as science, it underpins it. Science is not ‘value-free’: it is built on a world-view shaped by the dominant institutions of the day.
In the 17th century, Galileo was forced by the catholic church to recant his heretical view that the earth circled the sun. His view triumphed in the end, for two reasons. First, the scientific method required empirical proof, which he provided. Second, and of equal importance, the religious worldview that placed the earth in the middle of the heavens was challenged by a new one. People were able to apply a different lens to this age-old question because the church’s stranglehold on knowledge was loosened by urbanisation, the establishment of universities, and the split within the church itself (the reformation).
How can we observe the ideology underpinning apparently scientific or factual statements? One way is to apply a different worldview, or ‘paradigm’, to the same set of facts – as occurs in ‘scientific revolutions’. Another is to keep a weather eye out for over-reach and a refusal to consider alternative explanations. These are signs that ideology has by-passed the scientific method (in which empirical evidence is used to choose between competing hypotheses) and seeped to the surface.
The Hawke-Keating governments and neoliberalism
We now turn to the emergence of neoliberal economic policies in Australia.
The Hawke-Keating Labor governments of the 1980s and early 1990s are widely held to have implemented overdue economic reforms that reduced inflation and unemployment, and set the Australian economy up for the decades of growth that followed. Australia and New Zealand were unusual in that these reforms, which loosened public regulation of private markets, were introduced (rather than just accepted or reinforced) by labourist or social democratic governments.
One implication of this in Australia (regrettably less so in New Zealand) was that market-oriented reforms were buttressed by social policies (such as improved social security, labour market programs, and community services) that eased the impact of those reforms on those adversely affected. Compared with the UK and New Zealand, income inequality rose less in Australia in the 80s and 90s, though it did rise (on this more later). As in other Anglophone nations, the top 10% gained much more than the rest, but inequality did not increase much between the lower and middle parts of the distribution. Peter Whiteford argues that the largest increase in income inequality in Australia came later, during the 2000s.
Michael Keating, who held senior economic policy positions in the 80s and 90s, argues that the economic policies of the Hawke-Keating governments were pragmatic responses to real-world problems, not an ideologically-driven neoliberal agenda.
The narrative that the Hawke-Keating governments pursued necessary market liberalisation is contested. The opposing view is that Labor reshaped social democratic policies in the image of neoliberalism (called ‘economic rationalism’ at the time).
The reality is a bit more complicated. The Hawke-Keating governments did adopt key elements of the neoliberal world-view, but that’s not where they started. Labor’s economic reforms came in two distinct phases.
The corporatist phase
The first phase, from the signing of the Prices and Incomes Accord between the Labor Party and the Australian Council of Trade Unions in 1982 to Treasurer Keating’s ‘banana republic’ statement in 1986, focussed on the dire state of the macro-economy. When Labor entered government in 1983, Australia was recovering from a severe recession and both unemployment and annual inflation exceeded 10%.
Its policy response combined Keynesian ‘demand management’ and coordination of wage bargaining (actually, wage restraint agreed between government, unions and business) to reduce inflation and unemployment simultaneously.
While real wages were cut substantially, coordinated wage bargaining and the use of fiscal (budget) policy to lean against booms and recessions are not neoliberal policies.
The Accord brought Australia closer to the corporatist model of economic governance of continental Europe (including tripartism, where economic policy is developed in consultation with peak union and employer organisations), and away from the traditional Anglo-saxon model (where business and unions compete for resources in markets overseen at arms length by government).
It was this corporatist approach to macro-economic management, not neoliberalism, that stabilised the economy after the wild gyrations of the 1970s. From 1983 to 1989, economic growth was strong and jobs-rich, and wage and consumer price inflation was contained well below 1970s levels even as the economy boomed. The trade-off was very low growth in wages, offset in part by a sharp increase in dual-income families as more women entered part-time employment, by social security and tax policies to buttress sagging household incomes, and easier access to credit.
The key liberalising policies in this period were the removal of foreign exchange controls, the easing of controls on bank lending, and reductions in tariffs (industry protection).
While consistent with neoliberal thinking, the removal of foreign exchange controls was a pragmatic (and belated) response to the abandonment of the ‘Bretton Woods’ system of fixed currency exchange rates a decade earlier (on which more in the next instalment). Australia could not hold out on its own against the wealthy hedge funds that bet against attempts by national governments to manage their exchange rates. In retrospect, while it strengthened the influence of international financial markets on national economic policies, the floating of the dollar buffered the Australian economy from the commodity price cycle, allowing it to continue to grow when the value of the farm products and minerals we sold to the world declined (and slowing it down when commodity prices boomed).
The easing of other controls over domestic banking and financial markets in Australia and elsewhere during the 1980s had mixed results. As in other wealthy nations, this increased access to credit, and the accountability of companies to their shareholders and financiers. Business and household debt accelerated, along with speculation in asset prices, especially real estate. This undermined housing affordability and lifted inflation during economic booms.
All else equal, easing credit availability attributable to financial liberalisation directly raised the long-run level of real house prices [from 1972 to 2006] by around 51%. Williams D (2009), p1.
The financial sector grew beyond its economically-useful size, capital movements became more volatile, companies focussed less on long-term plans and more on quarterly results, and banks mixed the basic banking services on which consumers and businesses relied with more risky and exotic products under the umbrella of ‘investment banking’.
The problem here was not the removal of outdated regulation (such as controls on home loan interest rates), but – with the benefit of hindsight – a failure to replace them with alternative modes of regulation fit for purpose in the new environment of more internationally-mobile capital. Free movement of capital brought new risks, and was not the growth tonic many thought it would be.
The lowering of tariff protection for industry was more controversial, especially for the unions who feared that import competition would threaten jobs and wages. While many European countries sustained high wages without high tariff walls, after the ‘Harvester judgement‘ of the Industrial Commission in 1907 the idea that industry protection and high pay were inseparable became part of labour movement mythology.
Against the grain of neoliberalism, the Hawke government’s solution to these tensions in its early years was industry planning. From 1983 to 1986, tariffs were lowered in lock-step with industry plans that sought to modernise outdated sectors such as the car industry in cooperation with business and unions. The idea was that Australia could open its economy to trade and modernise, without destroying entire industries.
The banana republic phase
The second phase of the Hawke-Keating government economic reforms began with Treasurer Keating’s shock statement in 1986 that Australia risked becoming a ‘banana republic’ . That signalled a shift from macro to micro-economic policy and towards market liberalisation to improve ‘competitiveness’.
There was much truth in Keating’s diagnosis that Australian business at that time was conservative, slow to innovate, and over-reliant on domestic monopolies and protection against imports. A sharp fall in international prices for Australian commodities in the mid 1980s brought these weaknesses into sharp relief. As Australia’s current account deficit rose off the back of lower mineral prices, there was a sense of foreboding that Australia could no longer ‘pay its way’ in world markets (though this view was later challenged and the current account deficit did not prove to be the bogey it was feared to be). Recently, Australia recorded its first current account surplus since the 1970s.
The sense of foreboding associated with ‘banana republic’ status was used to garner public support for a major round of ‘microeconomic reform’ (code for rapid intensification of competition in product, labour and financial markets to ‘clear the arteries’ of the economy). This, it was claimed, would transform Australia from a sheltered, backward economy to one that could ‘compete’ on international markets (this idea of competing nations was an odd throwback to the pre-Adam Smith economics of ‘mercantilism’).
The positive effects of Australia’s version of micro-economic reform included strong productivity growth through the 1990s, the opening up of competition in some product markets to the benefit of consumers, and a growing reluctance by government to subsidise individual businesses or industries through tariffs or direct subsidies.
On the negative side, neoliberal thinking (tainted with mercantilism) distorted the policy vision for Australia’s economic and industrial development, and the role of government in shaping it. The default economic narrative was that governments should step out of the way and leave business to specialise in what (it was assumed) Australia did best: shipping minerals overseas at the lowest possible cost. We forgot that, everywhere and always, markets are shaped by public policies and public institutions.
There was no ‘iron law’ that required countries to adopt neoliberal policies as international markets for capital, goods and services were opened up. Two of the most successful exporting nations at this time, Germany and Japan, eschewed the Anglophone model of market-driven industrial development.
‘Although the breakdown of restrictions of international capital flows
imposes new constraints on government policy, globalisation does not imply that
governments must adopt free-market policies. The relevant criterion, now as in the
past, is that governments should pursue policies if and only if the benefits of those
policies outweigh the costs.’ John Quiggin (1993), p47
Hindsight is a wonderful thing. Advocates for removing ‘red tape’ to unleash competition did not forsee the continued dominance of monopolies (increasingly so in the weakly-regulated information technology sector), the short-termism and ‘groupthink’ that often dumbs-down business decisions in large companies, or that ‘innovation’ would all too often take the form of organisational restructures and complex and opaque financial arrangements and price structures, rather than new and better products.
When all of this was combined with easy access to credit, it gave rise to a new breed of ‘entrepreneur’ (technical term: ‘spivs’) whose core business was financial manipulation and asset speculation (e.g. via company take-overs) rather than growing new industries. Growth now depended on higher corporate and household debt, storing up problems for the future.
Alan Bond floats on an updraft of market speculation (1986)
Bond benefited from the easing of financial regulation in the 1980s, and built a business empire from almost nothing through debt-financed company takeovers. New investment banks, including government-controlled ones in Victoria and South Australia, lent him the money. When the asset price boom ended in 1990, so did his business empire. The courts eventually stepped in to do what financial regulators had failed to do, and convicted him of fraud. The State banks went under.
Over-reach: neoliberal thinking rises to the surface
It was in the late 1980s that neoliberal ideology rose to the surface in Australian economic policy-making. Here are three examples of the policy ‘over-reach’ it inspired. In each case, radical policies were pursued on a ‘leap of faith’, rather than hard evidence. Pragmatic responses to pressing problems morphed into something else: deliberate structural change in the direction of ‘freer markets’. The three cases relate to major preoccupations of neoliberals: small government, ‘sound money’ (prioritising the ‘war on inflation’), and deregulation of wages.
Item 1: The single-minded pursuit in the late 80s of a budget surplus (a keynesian goal during economic booms) and lower taxes (a neoliberal goal) meant public spending was more tightly constrained than it needed to be.
From its peak in 1984-85 to the last year of the 80’s boom in 1989-90, budget outlays fell by an extraordinary 6% of GDP while revenues fell by 2% of GDP. Although the fall in public spending was largely due to lower unemployment and public asset sales (another neoliberal preoccupation), tough curbs on current expenditures played a major role.
Federal Budget outlays and revenue fell in the late 1980s (as a % of GDP)
Source: Budget Papers 1989-90
While building surpluses in good times is simply good budget management, this became a test of economic policy virility (as it is still!). The government feared that the (liberalised) financial markets would punish Australia if the country’s current account deficit was not reduced. It was thought at the time that the best way to achieve this was to increase public saving (i.e. reduce budget deficits), though as it turned out lower public debt was offset by higher private debt in any event.
Under the influence of neoliberal ideas, what began as a pragmatic response to a (perceived) crisis morphed into a paradigmatic reform. No sooner was a budget surplus achieved, than the government turned its attention to cutting personal income tax. While this had obvious political benefits, it was consistent with the neoliberal idea that ‘smaller government’ is best, because the public sector is less inefficient than markets, individuals are best placed to decide how economic resources are allocated, and taxes weaken incentives.
It’s worth recalling that at this time, Australia was the sixth-lowest taxing government of 28 countries in the ‘wealthy nations club’ of the OECD. (OECD Revenue Statistics, 1989)
“Tough savings were made [in 1987]. Community employment programs were abolished, as was the widows’ pension for those without dependent children. There were cuts to Medicare payments, unemployment benefits, TAFE funding and road building. Family allowances were means-tested for the first time. The arts were not spared, with reduced film funding, while defence, which had been promised 3 per cent real growth in its allowance, found itself facing a 1 per cent cut. The government stripped $1bn out of its general revenue assistance to the states…
A year later, on the first day of sittings in the new Parliament House in 1988, [Keating] handed down his budget reporting a return to surplus. ‘This is the one that brings home the bacon,’ he said.” Uren D (2013)
To be sure budget ‘waste’ was cut, but there was an opportunity cost. After introducing Medicare and boosting social security and schools funding in its early years, the government was in no position to meet growing public demands for essential services such as health care as the country became wealthier.
Public investment was kicked down the road. One the best examples was the rejection by Cabinet of an early opportunity to build a second airport in Sydney (at a time when opposition to one in Badgery’s Creek was almost non-existent).
Item 2: The decision to keep interest rates high to ‘slay the inflation dragon’, at a time (in 1990) when it was clear the economy was falling into recession prolonged the downturn and contributed to unemployment more than doubling, to reach 11% a few years later.
Once inflation fell to 2-3%, it made sense to anchor future expectations at that level through a formal inflation target, but the transition was more painful than it needed to be, in part because the war on inflation was privileged over full employment (at 5-6%, unemployment was hardly low before the recession – it had hovered around 2% in the 1960s). The Reserve Bank kept interest rates high when it was clear the economy was heading into recession.
‘The key to establishing price stability was the 1990-91 recession provided the opportunity ..and the monetary framework was ready to use (it). The bank did not set policy with the view to producing the kind of inflation-busting downturn in the US in 1979-80. But when the recession came, the policy response was quite different from the recession of 1982-83 ..in 1990 the bank was prepared to use the opportunity to achieve a structural downward shift in inflation.’ Former RBA Deputy Governor Stephen Grenville, in Bell S (2004) Australia’s money mandarins.
The upshot of this decision, and the huge corporate ‘debt overhang’ from financial liberalisation (Westpac was in serious financial trouble and two State Banks were wound up), was a very slow recovery and a build-up of long-term unemployment. Once this became entrenched, it was very hard to reduce as those affected lost confidence and skills and employers were reluctant to offer them jobs.
In 1993 the Keating government announced a 6 month job guarantee (the ‘job compact’ in the ‘Working Nation’ package) to tackle long-term unemployment. This was welcome recognition that prolonged unemployment was a ‘structural’ as well as a ‘cyclical’ problem, and that more and better investment in labour market assistance was needed. Yet in the absence of stronger growth in ‘mainstream’ employment, the job compact could not succeed. Only about a third of those in guaranteed jobs progressed to regular employment afterwards.
Unemployment and long-term unemployment (% of labour force)
Item 3: The radical shift to enterprise bargaining in the early 1990s contributed to greater earnings inequality and a sharp decline in union membership during that decade.
In the wake of the 1991 recession, the ‘microeconomic reform’ push turned its attention to the labour market. The Industrial Commission’s powers to regulate wages were reduced to the maintenance of industrial ‘awards’ as safety nets for workers in the weakest position, on the assumption that enterprise bargaining would deliver productivity gains and higher pay for most. ‘Pattern bargaining’ beyond individual enterprises (otherwise called ‘comparative wage justice’) was banned.
Union membership plummeted through the 1990s. Other factors contributed to the weakening of unions at this time, including a shift of employment from manufacturing to services and growth in casual employment. Yet the inability of unions to ‘flow on’ wage gains from one business to others across an industry disadvantaged lower-paid workers and reduced union bargaining power.
The decline in union membership was stark during the 1990s
By removing centralised or industry-based wage fixation, the government was fighting yesterday’s war against wage-fuelled inflation. While there is little doubt wage growth had to be contained in the 1980s to control inflation and reduce unemployment at the same time, by the end of that decade the greater risk (one that was also acknowledged by the Reserve Bank at the time) was asset price speculation.
To be fair, the shift to enterprise bargaining was an international trend: even the Nordic countries pursued it at this time. Yet there is no convincing evidence that enterprise or individual wage bargaining (as distinct from competition in product markets) improved overall productivity, as neoliberal thinking assumed it would. Enterprise wage agreements were more likely to trade off conditions of employment (especially regulation of working hours, to the detriment of paid work-family balance) than ‘win-win’ productivity bargains that modernised work practices and management.
In sum, Hawke-Keating government economic policies were a hybrid of social democratic commitment to greater equality, corporatist policy-making, and ideas borrowed from neoclassical economics. By the late 1980s, the pendulum had swung firmly towards the latter, and its economic policies displayed clear signs of neoliberal over-reach.
A backlash from Labor’s blue-collar ‘base’ was brewing. There was a growing (and accurate) perception that the top 10% of income earners (including those notorious ‘entrepreneurs’) profited from the easing of economic regulation during the 1980s boom while most wage-earners were denied entry to the party.
Source: Saunders P (1992), Rising on the Tasman tide: income inequality in New Zealand and Australia in the 1980s, Social Policy Research Centre University of New South Wales.
When the hangover came in the form of a deep recession, it was ordinary wage earners and those who lost their jobs who suffered most.
Neoliberalism reached both its high point and nadir in the 1993 election with the release by Opposition leader John Hewson of the Liberal-National Opposition’s ‘Fightback’ policy. This took the neoliberal thinking at the time to its logical conclusion: the scrapping of universal health insurance (medicare), time limits on unemployment benefits, shifting the tax base to consumption, and individual pay bargaining. Having survived the decade of economic disruption which journalist Paul Kelly called ‘The End of Certainty’, the electorate wasn’t buying it. The ‘un-loseable election’ was lost by the Liberals.
The Howard government: ‘relaxed and comfortable’
The Keating government won the 1993 election and enjoyed a three-year reprieve. It tried to settle accounts with unemployed workers by committing to a job guarantee for those unemployed long-term, and otherwise eschewed radical economic reform in favour of a push to redefine national identity. The push for a republic, recognition of native title, and reinvigoration of the arts were welcomed by progressive-thinking people in the major cities – and by First Nations communities – but Labor’s blue-collar base and many people outside the cities were still seething over a decade of economic disruption that left many poorer or out of work.
The stage was set for the election of the Howard government in 1996. In contrast to Hewson, Howard signalled an easing of neoliberal reforms, harking back to an Australia that was ‘relaxed and comfortable’.
Howard also resisted social modernisation in many of its forms – the republic, recognition of native title, multiculturalism, and feminism. The subliminal message in the Coalition’s election slogan: ‘For all of Us’ was that decent mainstream white Australians were under seige from economic disruption led by vested interests and cultural disruption led by inner-city elites.
A flashpoint for Howard’s anti-modernist push was the election that same year of Pauline Hanson in a southern-Queensland seat despite her dis-endorsement by the Liberal Party for public attacks on Asian and Aboriginal people. Howard responded by acknowledging the anxieties of socially-conservative voters. His governments steadily unwound decades of bipartisanship on race and national identity. This process accelerated after the twin-towers attack in New York in 2001, and an influx of refugees coming by sea, fanned fears of migrants of Islamic faith. The symbolic marker was the Tampa episode, when troops boarded a Norwegian cargo vessel carrying asylum-seekers and many were incarcerated for years in camps on Nauru and Manus Islands.
The Tampa stirs troubled waters
It was said that on economic policy, Howard had four main goals and not much else: to reduce the role of unions in setting wages (and backing the Labor Party), to introduce a consumption tax, and to boost financial support for single-income families and older investors. His Treasurer Peter Costello was more socially progressive and also more committed to the neoliberal agenda.
Unlike Costello, Howard was sceptical of the benefits of more far-reaching neoliberal reforms. In an early speech as Prime Minister, he put the Commonwealth Treasury in its place, arguing that its advice should always be weighed against its social consequences. At the same time, social policy under the Howard governments was often directed against ‘outsiders’ such as Aboriginal and Torres Strait Islander people (who were subjected to the Northern Territory ‘intervention’) and recipients of working-age social security payments (who faced tougher work tests and cuts in their payments after the government gained control of the Senate in 2004). Policies affecting these groups (such as ‘Work for the Dole’) and the unions (such as ‘Workchoices’) were driven more by political and ‘culture-war’ considerations than economic ones.
A succession of Liberal-National Coalition governments that presented two faces to the community: Howard gifting the budget proceeds of a mining boom to favoured constituencies such as non-pensioner retirees and single-income couples, and Costello taking every opportunity to reduce the size of government by cutting income tax. Howard resisting an apology to the ‘Stolen Generation’ of Aboriginal and Torres Strait Islander peoples, Costello marching in support of one.
Aside from the introduction of a Goods and Services Tax, a long-overdue reform to clean up the disjointed mess of taxes on goods in Australia and extend taxation to services (which was previously championed by Keating), and the introduction of ‘market competition’ in employment and other services; the record of the Howard governments on market-oriented economic ‘reform’ was thin by comparison with Hawke and Keating. Some say much of that work was already done. In truth, neither the Australian people nor its leaders on either side of politics had much stomach to go further.
Meanwhile, income inequality (especially at the top end) continued to grow, under the influence of the forces unleashed by past reforms (wage regulation and financial liberalisation), and the tax cuts and social security policies of the Howard governments.
Cumulative growth in household incomes by income group (1994-2009)
Source: Whiteford P (2013), Australia, inequality and prosperity in a radical welfare state, Crawford School of Public Policy, ANU.
Note: P10 refers to the highest income of the lowest 10% of households, while P90 refers to that of the second-highest 10%. The period from 1995-2007 corresponds to the Howard government.
The Global Financial Crisis cut household incomes from 2007-2009, though the lowest 10% benefited from a pension increase introduced by the Rudd government in 2008.
Neoliberalism in Australia today
Regrets, they have a few..
There was little sign of political or public support for neoliberal economic ideas in the 2019 Australian government election.
The Coalition campaigned on economic management but offered few ideas to boost productivity, jobs and growth beyond restoring a budget surplus, then putting it at risk through $36 billion in annual tax cuts.
Its climate and energy policies threw out the neoliberal rulebook, by opposing a price on carbon and seeking powers to force energy companies to divest themselves of assets.
Labor ran on a traditional redistribution agenda: clamping down on high-end tax shelters and using the proceeds to fund services such as dental care for older people, free cancer care, and child care subsidies. The Opposition went into battle against the ‘top end of town’.
Former Labor Treasurer Keating argued during the campaign that neoliberalism was now at a dead end. and that public infrastructure investment rather than further de-regulation should lead the next growth cycle.
Keating, along with Costello, nevertheless regretted the major parties’ apparent abandonment of key neoliberal policies of the 80s and 90s.
After Labor’s election loss, Keating argued the party should revisit Labor’s late 1980s strategy of cutting taxes and constraining spending:
“Labor failed to understand the middle-class economy that Bob Hawke and I created for Australia. So much of Labor Party’s [2019 election] policies were devoted to the bottom end of the workforce and the community paid for by cuts in tax expenditures.”
[reality check: It’s not clear which of Labor’s major policies targeted the lowest income-earners – Labor’s spending commitments were aimed squarely at the middle class]
This view was echoed by former ACTU Secretary Kelty, who called for the top personal income tax rate to be cut below 40%.
The year before the election, former Liberal Treasurer Costello asked plaintively:
“If the International Monetary Fund was to turn to Australia and ask it to share a successful case of reform in the last decade, what story would we tell?”
[reality check: as discussed in the next instalment, the IMF’s economic orthodoxy has moved some distance from where it was when he was Treasurer].
Is neoliberalism dead?
The era of ‘economic rationalism’ in Australia is not over yet, but economic policy thinking is in a state of flux. The old orthodoxy is fading but the new one has not emerged.
Once a dominant paradigm such as neoliberalism has percolated through the institutions of power and informed the world-view of elite decision-makers, its grip is not easily shaken. As Peter Hall’s seminal analysis of the adoption of neoliberal policies in the UK in the Thatcher era found, that requires a ‘crisis’ in public policy, brought about by a radical change in circumstances for which the prevailing paradigm has no answer. A crisis or major turning point in public policy is often accompanied by political turbulence.
As discussed in the next instalment of this blog, the neoliberal economic paradigm gained traction when the previous ‘Keynesian’ paradigm floundered in its response to the combination of high inflation and high unemployment in the 1970s.
Economic conditions pose a completely new set of challenges today – in some ways the mirror image of the 1970s. Inflation is too low, raising the risk of economic stagnation. Despite relatively low unemployment, wages are growing too slowly and demand for goods and services remains weak in the face of historically-low interest rates.
The global financial crisis of 2008 shook the credibility of the neoliberal economic paradigm: the financial speculation that triggered it was blamed on the easing of controls over financial markets a decade beforehand (implemented more fulsomely in the United States than elsewhere).
Two key economic policy institutions that championed neoliberalism in Australia – Treasury and the Productivity Commission – have had to adjust to new ideas and economic conditions.
‘Treasury’s economic line has been based on a belief in the power of markets and in the inherent tendency of supply and demand forces to move markets towards equilibrium. In that paradigm, non-achievement of equilibrium must be caused by some market impediment or government interference. Treasury sees it as its job to tackle those.’ Tilley P (2019), Changing Fortunes, a history of the Australian Treasury. Melbourne University Press.
The Productivity Commission, a unique Australia institution, is the successor of the Tariff Board and the Industry Commission. They were charged with reducing barriers to trade, and subsequently with promoting competition across the economy. Their tools of trade were public inquiries informed by analysis of the economic pros and cons of barriers to open markets, including the impact on consumers. This was good for transparent policy making and to quell ‘rent seeking’, but every model they ran seemed to come to the same conclusion: more markets, less regulation.
Recently the Commission responded to the loss of public and government support for neoliberal ideas by changing focus from the ‘usual suspects’ of market-liberalising reforms (tax, workplace relations and trade), towards something over which governments have greater control: reform of government services.
‘These two factors — the recent failure of landmark statements of change and queries over net benefits of change — suggested to us the better focus of a five-year [productivity] strategy should be on areas where it would be more evident to people how they and their families might benefit and yet still allow the nation to become a more sustainable economic growth machine. The decision to focus on education, health and the shaping of urban investment and infrastructure fell quite simply out of that analysis.’ Harris P (2016)
During the 2000s, the Treasury began to question the intellectual root of neoliberal ideas: the shallow utilitarianism underpinning much of neoclassical economics (discussed in the next instalment of this blog).
‘When I studied neoclassical welfare economics the basic tool of analysis was the neoclassic utility function. but..a person’s utility function should [not] be confined to obvious material variables like [their] present and future consumption of products.’ former Treasury Secretary Ken Henry (2009), Address to Master of Economics 30 year reunion.
Influenced by the ideas of philosopher Amartya Sen, the Treasury adopted a ‘well being framework’ in 2004, in which material living standards were only one element, along with equitable distribution of resources (ignored for years by neoclassical economists), sustainable use of resources, and minimising risk and complexity. The overall goal was not higher GDP, but ‘freedom and opportunity to live lives that people value’.
A decade later, the well-being framework was downplayed by new leadership at Treasury. Nevertheless, Treasury’s influence waned as the Ministerial office gradually displaced the public service’s policy advisory role, and the daily media cycle and aggressive American-style politics blurred the vision of governments. From about the mid-2010s, Treasury was asked to prepare information briefs and policy options for Ministers in place of detailed analysis combined with its own policy recommendations:
‘I was up in [the Treasurer’s] office. I’d forgotten how big they had become, how many bright people there are. I’ve been saying: ‘stop this nonsense of just putting up options. We must put up a solid and considered Treasury view’. I was staggered by it. We have to have a view. We’d become too much an information office.’
former Treasury Secretary John Fraser in Tilley P (2019), ibid.
‘Marketisation’ of human services: a lasting legacy for neoliberalism?
Ironically, it’s possible that the most lasting impact of neoliberal thinking will be felt at the heart of government, in the application of market principles to one of the last bastions of public control: human services.
This began in the 1980s with the emergence of New Public Management (NPM), a doctrine that advocated separation of policy from service delivery, and government as purchaser from service providers, who could be community or for-profit agencies.
‘Government managers and employees should be as entrepreneurial as their private-sector counterparts. This meant embracing competition; measuring outcomes rather than inputs or processes; and insisting on accountability.’
Gaebler & Osborne (1992) ‘Reinventing Govt: How the Entrepreneurial Spirit Is Transforming the Public Sector.’
The logical extension of NPM principles was the creation of ‘quasi-markets’ in which providers compete for public funds that are attached to individual ‘consumers’. The Job Network is the classic example in Australia, and similar principles are now being applied on a much larger scale via the National Disability Insurance Scheme.
NPM has strengths, including a focus on individual service entitlements (as in the NDIS), outcomes as well as service inputs (as in employment services), cost-efficiency and accountability to governments and users.
Its strengths have all to often morphed into weaknesses, including scarcity of funding due to monopsony purchasing (by a government agency) combined with competition for contracts, the spill-over of harmful business practices to human services (often leading to the dominance of a handful of large for-profit providers despite faith in ‘competition’), and the excessive central control and standardisation of services that often results from an obsession with measureable KPIs.
Marketisation of human services may well linger longer than other elements of neoliberal thinking because it facilitates cost control while shifting blame from politicians, governments have greater control than in most areas of economic policy (especially over programs assisting politically weaker constituencies like employment services, social housing, and Indigenous community services), vested private interests become entrenched (in health, for example), and because once a paradigm is ’embedded’ in the machinery of government it often takes a long time to shake it, even though it may no longer be ‘dominant’ in broader public discourse.
Australian economic reforms of the 80s and 90s are widely held to have reduced inflation and boosted growth in jobs and incomes. Unusually, these changes, which loosened public regulation of private markets, were initiated by Labor governments.
These reforms were associated in the public mind with neoliberal economic ideas: the view that markets would only reach their utility-maximising equilibrium if governments and communities step out of the way.
We can now answer the questions posed at the start:
- Were the economic policies of the Hawke-Keating governments neoliberal or simply pragmatic?
The Hawke government did not start out with a neoliberal agenda. It started with the corporatism embodied in the Prices and Incomes Accord with the ACTU, including many policies that were the antitheses of neoliberalism (centralised wage fixation, boosting the social wage, and the coordination of economic policy-making with unions, business and community organisations).
Its early liberalising policies, including the removal of currency controls and reductions in tariffs, were mostly pragmatic decisions based on evidence (for example, the adaptation of other countries to a floating currency). However, financial liberalisation at this time (such as removal of many direct controls over bank lending and interest rates) suffered from major sins of omission (weaknesses in the macro-prudential controls that replaced the outdated ones that were abandoned).
After the ‘Banana Republic’ statement in 1986, the Hawke and Keating governments were increasingly swayed by neoliberal ideas on ‘microeconomic reform’. These included ‘smaller government’, privileging the fight against inflation over lower unemployment, and enterprise pay bargaining. Positive social reforms were constrained by tight budget management, which then gave way to large personal tax cuts (the large increase in family payments to reduce child poverty was a notable exception).
Market-friendly policies in the 1980s (especially those which supported competition in product markets) reduced barriers to competition and growth, but they did not fulfil their promise. During the 1980s the economy grew off the back of price stability and easier credit, but growth was brought to a sudden halt by a recession that was made all the more severe by financial liberalisation (i.e. more debt) and hard-line anti-inflationary policies. More recently, competition has been weakened by poor regulation of finance, information technology, and other sectors where monopolies have emerged or were already entrenched.
When growth was restored in the 1990s in an economy where financial and labour markets were given more free play, it carried the seeds of greater inequality. Wage disparities and investment returns for high-earners grew. After Labor lost power in 1996, this was exacerbated as ‘social wage’ commitments were wound back.
- Was ‘Fightback’ a triumph of neoliberalism or the beginning of its decline?
The uneven benefits of growth, and its full stop in the 1991 recession, undermined public acceptance of neoliberal ideas. Ironically that won an election for Paul Keating and Labor when the Opposition advanced the more radical ‘Fightback’ manifesto, which was a triumph for neoliberalism only on paper.
- Did neoliberalism advance or retreat under Howard and Costello?
The Howard government was conflicted on neoliberalism. Treasurer Costello took every opportunity to shrink government through tax cuts, while Prime Minister Howard avoided upsetting the ‘relaxed and comfortable’ mood of the middle class as the economy grew off the back of a mining boom. Beyond an overdue modernisation of consumption taxes and workplace relations changes targeting the (already diminishing) power of unions, neoliberal policies were mostly held in abeyance.
- What’s left of neoliberalism?
The global economic crisis was another blow for neoliberalism. Australia avoided a recession through old-fashioned Keynesian stimulus, but public unease over the loosening of controls over markets – especially financial markets – was by now firmly entrenched.
Key economic policy institutions either began to question the philosophical basis of neoliberalism (in the case of Treasury) or to change tack and focus on the ‘marketisation’ of services funded by governments (Productivity Commission).
Yet neoliberal policies persist through institutional momentum. Budget surpluses are still sacred (more than just a tool of pragmatic economic management). A neoliberal agenda (‘marketisation’) is still being pursued in human services, long regarded by neoliberals as one of the last bastions of public control.
Neoliberal ideas remain influential in Australia, more from the lack of a clear alternative than as a convincing economic narrative that commands the allegiance of politicians, public officials and the community. In any event, by the 2010s Australian governments with their revolving door of short-lived Prime Ministers focussed increasingly on short-term survival and quick policy fixes.
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