GEOFF DAVIES. Brexit, Trump and a Rigged System. Part 1 of 2.

Behind the votes for Brexit and Trump lies a simple and widespread perception: the system is rigged in favour of the rich. That perception is accurate. People may lash out at scapegoats and follow false prophets, but their disgust and alienation are quite justified. Trump promised to break up the cozy club at the top, and many people said Yes.  

Neoliberalism has Failed 

Ian McAuley’s series Brexit, Trump and the Lucky Country is good as far as it goes. Yet he seems to imply that market liberalisation is broadly a good thing and overall has been successful.

In Part 1 I argue, on the contrary and from readily available evidence, that the neoliberal program never achieved more than mediocrity and that overall it has failed even on its own terms. Part 2, which will be posted tomorrow, argues this failure flows from two false premises at the heart of neoliberalism, and it has as well corrupted government, fractured society and visited destruction upon the Earth.

Behind the votes for Brexit and Trump lies a simple and widespread perception: the system is rigged in favour of the rich. That perception is accurate. People may lash out at scapegoats and follow false prophets, but their disgust and alienation are quite justified. Trump promised to break up the cozy club at the top, and many people said Yes.

The Australian economy is regularly proclaimed to be highly successful, and the current favourite argument is that it has gone for 25 years without a recession. While that is technically true, its performance in the neoliberal era since 1983 has never come close to its performance in the social democratic post-war decades. Stephen Bell in Ungoverning the Economy (OUP 1997) documented the contrast: the post-war average GDP growth was 5.3%, inflation 3.3%, and unemployment a minuscule 1.3%. Such numbers are held by many these days to be impossible. Furthermore, and not coincidentally, the wealth was more widely shared than ever before or since.

Since then growth has averaged around 3%, inflation 2 to 4%, and unemployment has rarely been below 5%. Bell documented a comparable contrast for the OECD. A later comparison of over 100 countries shows growth pre-1980 averaging 2.5%, but only 1.1% 1980-2005. The rise of China improves the average more recently, but China is far from neoliberal.

Mainstream commentary seems oblivious to this recent history. Indeed Australia’s pre-1980 economy is commonly dismissed derisively as protectionist and sclerotic, apparently on the basis of the difficulties of the 1970s. Two principal difficulties then were inflation due to the USA’s excessive spending on the Vietnam war and stagnation due to the quadrupling of oil prices. The economics profession at the time had trouble understanding that the effect of the oil embargo was not simple inflation (too much money) but rather a real rise in the cost of running the economy, as measured in the effort required. So the economy slowed, or “stagnated”. There may also have been a need to rebalance the level of wages, but fixing that did not require a revolution.

The confusion around “stagflation” opened the way for a well-organised campaign by neoliberals to proclaim the failure of social democracy and to thrust their panacea of free markets upon the world. The neoliberal era began with the elections of Margaret Thatcher in 1979 and Ronald Reagan in 1980, but its roots go back at least to 1947, when economist Friedrich Hayek formed the Mont Pelerin Society to promote free markets. He found ready backing from the wealthy.

Another common claim, made most explicitly by George Megalogenis in The Australian Moment is that the neoliberal “reforms” of the 1980s proofed the country against a recession in 2008. The claim is laughable, completely contradicted by the detailed evidence Megalogenis himself assembled. First of all, we avoided recession in 2008 because the Rudd government threw out the neoliberal rulebook and intervened heavily in the economy, putting money in the hands of people. The mining boom also helped, but its timing was different and should not take credit from the Rudd government. Neither, of course, can neoliberals claim any credit for the mining boom.

Second, Megalogenis documents the deregulation of Australia’s financial sector and the resulting debt binge in which competing banks threw money at so-called entrepreneurs. That debt binge collapsed spectacularly and triggered the recession of the early 1990s, still Australia’s biggest since the great depression.

Mainstream economists have a peculiar blindness to the critical dynamic roles of money and debt, as has been well demonstrated by Steve Keen. So they seem to be blind to the cause of the 1990 recession, as they were blind to the approach of the 2007 Global Financial Crisis and are still blind to its cause – another and bigger debt binge. (A notable and honourable exception is Dr. Ken Henry, who later was Treasury Secretary during the Rudd Government, and it was he who, on the basis of lessons learnt from 1990, urged and supported Rudd and Treasurer Wayne Swan spending into the economy.)

So the evidence does not support the claim that the Australian economy is a spectacular success. Its performance under neoliberal management has been mediocre and unstable. The mediocrity was disguised for a long time by a steady build-up of private debt, documented by Keen, and then by the mining boom. It was saved from recession in 2008 by departing from neoliberal rules. It wobbles along precariously and uninspiringly under a huge burden of private debt, heading for 200% of GDP.

Analogous considerations apply to most of the rest of the world. Given the immense destruction and suffering inflicted by the global Global Financial Crisis and its protracted aftermath, one can only conclude that the neoliberal project has been a miserable failure, just on its own terms.

But the failure was not just in bringing about the GFC. In the United States, median incomes have stagnated or gone backwards since the 1970s, even as the super wealthy became ever wealthier. Virtually all the extra wealth generated in that time has been creamed off by the already-wealthy. The situation has not been so extreme in other countries, but it has been of the same kind, and seen rapidly rising inequality of wealth around the world.

People may misdirect their anger, but they are not totally stupid. They know they have not been feeling the great benefits claimed by politicians, they know their lives have become less secure and more stressful, and they can see a rich minority laughing all the way to the bank.

Dr. Geoff Davies is an author, commentator and scientist. He is a retired geophysicist at the Australian National University and the author of Sack the Economists (Nov 2013). He blogs at BetterNature . This article is adapted from an essay posted there.

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7 Responses to GEOFF DAVIES. Brexit, Trump and a Rigged System. Part 1 of 2.

  1. Dog's Breakfast says:

    Very good Dr Geoff. Looking forward to the next instalment. The more I see, the more that the dismal non-science of economics has a front row seat when apportioning blame for the rise of poor thinking, abject policy, and the rise of inequality.

    People may misdirect their anger, but they are not totally stupid. Or to put it another way, you can fool some of the people all of the time, or all of the people some of the time, but not all the people all the time. We’ve finally arrived at that third space, and people are realising how much they’ve been conned.

  2. Jim KABLE says:

    With a PM able to gift his own party to ensure his re-election – and what else we may legitimately ask – upwards of $2 million – with the bulk of his fortune (said to be his, at least) salted away in a Grand Cayman letter box – while speaking down at ordinary citizens mouthing platitudes about understanding how “Australian families” are having it tough – prices going up – and up – honestly what would he know except for the hardship his own government is putting people through – CentreLink, ending of ABC broadcasts into rural parts of northern Australia – the disappearance of jobs under his Abbott/Turnbull governments – and the many other rorts of his LNP “cowboys”. How I respected and loved actor Sam NEIL last night on ABC TV – with Julie ZEMIRO – when he lambasted the politicians both sides of the Tasman who benefited from free tertiary education yet who have since and now inflicted huge debts on tertiary students – destroying our hopes for a proper provision so that all our citizens could opt for tertiary studies and find their pathways to enriching our societies and our world. Remember Tony Abbott’s daughter who was suddenly the recipient of a $60,000+ scholarship not only that she had applied for but which in fact had not existed until Abbott became the means of favourable legislation which would benefit that institution – or the greatest leaner of all on the public purse – Joe Hockey – now schmoozing his way into the Trump camp. Thanks, Geoff! Your analysis gives us hope that it is not all lost – yet!

  3. derrida derider says:

    As an economist, Dr Davies makes a good geologist. No fan of “free market” dogmatism I, but this article is simply full of straw men and quite misleading figures.

    “The economics profession at the time [1970s] had trouble understanding that the effect of the oil embargo was not simple inflation (too much money) but rather a real rise in the cost of running the economy”
    That is ESPECIALLY ironic. Its was the Real Business Cycle theorists – extreme neoliberals – who first asserted this. FWIW the response from the relatively moderate monetarists was “yes – the oil shortage reduced the quantity of real goods so there was now too much money chasing them” – IOW that its only a matter of perspective. The left of course universally said it was all the fault of greedy bosses intensifying repression of the workers.

    • Geoff Davies says:

      derrida, you quibble about who said what in the 1970s, but pass over the main point – the contrast between the postwar decades and the neoliberal decades.

  4. Niall McLaren says:

    “… the neoliberal project has been a miserable failure, just on its own terms.”
    Not so. In terms of its goals and original justification, the neoliberal project has been successful beyond the wildest dreams of those who spawned it. Their goal was to wreck the welfarist, social-democrat state and convert it into a money factory for themselves. This was all modeled and planned in great detail before the US left the gold standard. Of course, if at any stage, it had appeared that the workers would benefit, their wages would double or treble while the wealthy stagnated, the 1% would have changed the rules. So simple.

    • Geoff Davies says:

      Niall, true enough. I could have said “ostensible terms”. The money men knew what they wanted. I think many economists take it literally though, which of course makes them the mugs.

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