The Myth of the Robust Deregulated Economy

[Published at Pearls and Irritations 3 Dec 18]

The economic ‘reforms’ of the 1980s are supposed to have set Australia up for an unprecedented run of prosperity: 27 years, and counting, without a recession. The economy’s robustness is supposed to have saved us from the Global Financial Crisis. In fact our economy has been unstable, and its performance has been mediocre verging on anaemic. Any appearance of robust prosperity is due to a huge run-up of debt, some direct intervention, high immigration, overwork, selective blindness and over-active imaginations.

“Just think how the old Australia – the over-regulated, overprotected and inflation-prone Australia – would have coped with the global financial crisis a decade ago” gushed Tom Switzer of the Centre for Independent Studies in a recent column. Australia made the cover of a recent Economist, and George Megalogenis did a book and a TV series on it (I have critiqued Megalogenis’ claims before). The mantra has been relentless since 1983.

What a shame such a seductive story turns out to be a flimsy confection.

That dreadful “old” Australia, presided over, we should remember, by that pinko Bob Menzies, achieved average annual GDP growth exceeding 5% and unemployment averaging a minuscule 1.3%. Nowadays such numbers are considered impossible, guaranteed to bring on raging inflation, but inflation averaged a moderate 3.3%. The contrast was documented over 20 years ago by Stephen Bell (Ungoverning the Economy, 1997). The post-1983 neoliberal economy has never come close to this performance, with GDP growth around 3%, unemployment rarely below 5% and inflation in the 2-3% range.

Ah, but what about the 1970s, you may be thinking? There was Whitlam, stagflation, global chaos and the disastrous demise of the Keynesian era. Yes, what about them? First of all, the price of oil quadrupled, so of course economies struggled. That’s the stagnation part of stagflation. The US went off the gold standard and tried to pay for its Vietnam war by printing money. That’s a large part of the inflation component of stagflation. If there was a wage-price spiral also contributing to inflation, that was the doing of unions and bosses – it takes two to tango. But you have to count the US contribution to inflation before you lay any remaining blame elsewhere.

It was quite disingenuous of neoliberal campaigners to blame the difficulties of the 1970s on Keynesian management and, locally, Whitlam. As to Whitlam’s much-derided economic management, Australia was the only OECD country to avoid recession in the 1970s too, and the UK and US recessions were severe. So the Whitlam years were not quite the unmitigated disaster they are commonly portrayed as.

What about the alleged stability of the modern economy, its ability to ride-out financial crises? Neoliberal deregulation caused both Australia’s and the world’s worst recessions since the Great Depression.

Banks make most of their money by ‘loaning’ money. (They create the money they ‘loan’ with a few keystrokes, but that’s another story.) When the Hawke-Keating government deregulated Australia’s banks the banks competed to throw money at ‘entrepreneurs’ – people like Alan Bond and Christopher Skase. There was a huge run-up of private business debt. The economy boomed along with much cheering from the breathless commentariat. But then the debt bubble burst, precipitating the Keating recession of the early 1990s, the worst since the 1930s and a recession we did not have to have.

The deregulated global financial system was also having the odd hiccup. There was the 1987 stock market crash, assorted national crises in Mexico, Russia, Brazil and Argentina, the Asian currency meltdown in 1998 and the dot-com bust in 2001. Meanwhile toxic debt was being spread through the global system by unscrupulous, competing financiers. The bursting of that debt bubble brought on the Global Financial Crisis and the ensuing Great Recession (actually a depression in peripheral Europe and parts of the US).

Australia avoided a GFC recession because the Rudd-Swan Government, uniquely in the world, briefly suspended neoliberalism and spent directly into the economy. Yes the mining boom helped, but the short-term timing is clear. Christmas 2008 was gloomy everywhere but here.

Australian business and manufacturing have been hollowed out by a shift towards short-termism and financial speculation. The consequences of this were disguised for a long time by a steady rise in private debt, much of it household mortgage debt, as documented for example by Egan and Soos (Bubble Economics, 2014). We were living on our credit card. Since the capacity to increase debt saturated after the GFC our economy has been increasingly anaemic, and a collapse of the debt bubble remains a clear danger.

The weakness has also been disguised by two other factors. First, an increase in working hours. Second, the high immigration rate, which keeps the GDP expanding (just) though the GDP per capita and median incomes stagnate.

It is not a little gob-smacking that neoliberal apologists can (still) look at this history and extract a story of an economy saved by deregulation. Remember, these are the people who didn’t see the GFC coming, for the basic reason that they exclude debt from their models and minds. It is testimony to the power of faith over evidence.

Australia has suffered long-term damage from this grand, misguided experiment in social engineering. Pauline Hanson got her start in the bitter aftermath of the Keating recession (11% unemployment), just as Trump and various fascist movements have risen from the ashes of the GFC.

We are a divided, unhappy nation and society. People know they have been ripped off by the financial class. Young people can’t afford houses and higher education is increasingly out of reach. People are being priced out of their homes. All the ailments of poverty and disaffection are increasing, including scapegoating. The Abbotts and Duttons have found fertile ground for their fear-mongering.

We are relatively fortunate that mainstream Australians’ patience seems at last to be wearing thin and they are rebelling at the ballot box. Resistance is taking more toxic forms in many other nations.

It is insulting to Australians to call this resistance ‘populism’. The neoliberal experiment has been a disastrous failure and people have been slowly waking up to the nonsense they have been fed, for decades.

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