Monday, February 23, 2009

Howard in defence of "neo-liberalism"

I've only alluded briefly to the Kevin Rudd exercise in The Monthly. It is a reasonable attempt to analyse what the period of "extreme capitalism" or the "neo-liberal movement" that ran from the mid 1970s to, well, about now represented.

Last week John Howard responded in his eponyomous speech to the Menzies Research Foundation.* He claimed;

In 1980 our nation needed five great reforms. We needed to deregulate our financial system, fundamentally change our taxation system, make our labour markets freer, reduce excessively high tariffs and rid the government of ownership of commercial enterprises that would be better run privately. By 2007 these five great reforms had been achieved.

Warming to his topic Howard attacks Rudd for attacking the excessive pro-market reforms of the coalition, but then trying to claim that really the sub-prime crisis is entirely the fault of the Americans. Ultimately Howard misses the point that the sub-prime crisis occurred in the US through the more extreme version of the implementation of the same philosophies that had been pursued in the US.

What is really most interesting is how everyone has lost site of the reasons why the prescription from the mid 1970s was as it was, and why we should all be Keynesians now. Following on from the Keynes analysis of the depression and the global role of Government in nation (re)building following World War II Governments were suddenly confronted with the OPEC price rises of the mid 1970s. As any introductory economic text of today will explain a supply shock cannot be responded to by any Keyseian response, what you need to do is facilitate the restructuring of the economy. That was why the neo-liberal prescriptions were efective.

But it was wrong to think that Keynes was wrong. Most particularly wrong was Allan Greenspan in not raising US interest rates as the US economy recovered from the mild recession at the start of the century. This has been coupled by the remorselss process of wild deficit spending by the Republicans - something Thomas Frank in The Wrecking Crew has labelled as part of the strategy to "defund the Left".

Howard's address has received comment from both the Left and the Right. On the Right Michael Duffy accuses Howard of rewriting history in his claim that he had always acknowledged the preceding Labor Government for its efforts in financial deregulation and in tariff reform. However the bulk of his effort is to lambast the Rudd essay and borrows the Latham description of it as "zigzag economics".

In this he is possibly quite fair, reflecting as it does on the tendency of both Howad and Rudd as PMs to rubbis their predecessors once in office. It is interesting to note that Howard prior to his first election was at pains to suggest he wouldn't change things too much, there was no promise of IR reform and at that first election there would "never ever be a GST".

The criticism from the Left comes from Stephen Keen in Crikey (possibly behind the paywall). Keen's first criticism is that Australia wasn't far behind the US in its rush to encourage the masses into home ownership, including changes to capital gains tax, various home buyers subsudies and generous negative gearing allowances.

(He doesn't mention the famous Howard quote "I never had anyone come up to me a shake their fist in my face because they were angry that the value of their house had gone up". This was something I rectified in a letter exchange with the PM at the time, but it had no effect).

Keen goes on to be critical of the whole theory of financial market deregulation, pointing out correctly that there is no natural limit to finance institutions competing away their prudential controls in an endless rush to create credit. The only market control is the kind of crash we are now witnessing (and as we briefly witnessed in Australia in 1991). Australia has escaped the worst of this because we had slightly tighter controls and our own national savings (in the form of superannuation).

The question is not whether the finance sector needs to be regulated or not, but how to regulate it. Governments acting as price setters doesn't work any better, especially if their decisions on prices can be affected by the democratc process. What is needed is a system of regulation that includes "automatic stabilisers". Particularly this means (a) prudential controls on lenders not just deposit taking institution and (b) risk weightings that adjust if the asset class is experiencing excessive (e.g. average plus one standard deviation) price inflation. It isn't hard to design or implement.

Meanwhile the former PM should perhaps reflect a bit more on privatisation and labour market reform and wonder whether he didn't pursue both of these ideologically and not because of the real impact they would have on the economy.

* Am I alone in thinking that the idea of Howard giving the first Howard lecture is decidedly off? Am I also alone in thinking they have created the speech a little too quickly? One is left with the feeling that the Liberals are trying to overdo the lesson from the ALP and Keating. After 1996 the ALP tried to disown the Keating Government, whereas the Liberals are trying to run the argument that really the people didn't vote out the coalition they just bought the coalition light. (as Howard did in the speech saying;

One of the greatest compliments paid to the former government was the campaign approach in 2007 by the now Prime Minister. With the exception of his stance on climate change and industrial relations, he sought at every turn to diminish the differences between himself and the Coalition.

No comments: