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

Feb 2, 2017

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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