MICHAEL KEATING. Why Blame Neo-Liberal Economics: A Response

My previous article on Why Blame Neo-Liberal Economics, which argued that neo-liberal economics was not a main cause of increasing inequality, drew an unusually large and mostly critical response. While it is not feasible to respond to all the detailed points that my many critics have raised, in this response I propose to focus on two big issues: (i) what is neo-liberal economics and how does it influence policy outcomes, and (ii) why has inequality increased since the 1980s. I will also briefly discuss the policy implications that flow from my analysis.

In addition, a large part of the motivation for my original article was the extent to which those alleging a strong link between neo-liberalism and inequality rely on conjecture and even ideology, rather than carefully examining the evidence. For that reason, my response will rely heavily on what the numerous studies of the evidence have concluded.

What is neo-liberal economics

I should first begin with an apology. Clearly I made a mistake in not defining neo-liberal economics. I offer the not very good excuse, that I have been in good company – most of the critics of neo-liberal economics do not define it either.

I took my definition of neo-liberalism from what I understood the critics of the micro-economic reforms of the 1980s and 1990s to be complaining about. These reforms involved:

  • floating the Australian dollar,
  • financial deregulation and (later) changing the type of regulation,
  • largely eliminating protection, and a shift in industry assistance in favour of more generic assistance and less specific industry assistance,
  • tax system reform,
  • decentralising wage determination in favour of more enterprise bargaining,
  • some measure of privatisation accompanied by the introduction of competition policy.

I think these reforms can be broadly characterised as making greater use of markets through a degree of market liberalisation, and it is the impact of these reforms, frequently characterised as representing ‘neo-liberalism’, that I am discussing. Furthermore, as someone who was heavily engaged in the development of many of these reforms, I don’t think they were inspired by economic rationalist views that markets are always right.  Neither did these so-called neo-liberal micro-economic reforms represent an attempt to introduce ‘smaller government’. Instead, on any objective measure the government is significantly larger today than it was at the time of the Whitlam Government – a time which I suspect so many of my critics now look back on nostalgically.  Today Australian Government Budget outlays represent 25.1 per cent of GDP, quite a lot more than the 21.7 per cent share in 1974-75 (the last full year of the Whitlam Government). Similarly, the number of pages of government regulation has increased over the same time period, although the nature of the economic regulation has changed to improve the working of markets by improved prudential regulation of financial institutions to increase investor protection and to improve consumer protection through labelling and health and safety regulation, and ensuring competition in the markets for goods and services.  Industrial awards continue to set minimum standards for pay and conditions in the labour market, and environmental protections have also increased.

The fundamental reason for many of these reforms was because the previous regulations were just not working. For example, the previous attempts to ‘manage’ the Australian currency were proving counter-productive, signalling the likely next movement to the speculators, and giving them a one-way bet. Similarly, protectionism wasn’t working.  These sorts of regulatory changes did not, however, involve any attempt to reduce government responsibilities, as implied by the critics of neo-liberalism. Rather they represented an attempt to improve the effectiveness of government intervention as governments found that often they would be more effective if they focussed more on managing markets and creating the right incentives and disincentives, and relied less on administrative controls that were increasingly being evaded or proving unworkable (Keating, 2004).  Today the equivalent approach would be to price carbon as the best way to reduce carbon emissions, rather than relying on direct action policies, and it is curious that this reliance on pricing carbon is now supported by many of the critics of neo-liberalism.

My sense is that it may be privatisation that most attracts the animus of the critics of the neo-liberal economic reforms. There are, however, a couple of points to be made. First, the majority of economists long ago concluded that competition was a much more important determinant of corporate performance than ownership. Furthermore, the government ownership of commercial entities such as airlines and banks did not seem to be achieving any social purpose, with the government owned airlines and banks behaving and having to behave in much the same way as their competitors to survive.  While, the funds from the sales of these government businesses helped fund other more important government activities, and I have no sense of any public pressure to use scarce government funds to re-purchase these companies.

Recently there have been many allegations that the privatisation of public utilities has led to higher prices. However, the evidence shows that prices initially fell following many privatisations and the introduction of competition policy at the same time. While clearly further large increases in the prices of electricity in particular have been foreshadowed, there are a number of reasons which have nothing to do with privatisation; such as the recent increases in gas prices, and the impact of policy uncertainty on investment.

Nicholas Gruen has argued that public utilities can be managed with reasonable efficiency, citing the case of Australia Post.  I agree that Australia Post is a success, but It is important to note that Australia Post is now subject to considerable competition; evidence of my point that competition is more important than ownership. Furthermore, as a former Board member, I know that the Board was very conscious of how that success was only made possible by the corporatisation of Australia Post, which freed up Post from excessive Ministerial direction and allowed it to compete.

More generally, whether the government should be directly responsible for the provision of a service or contract it out, seems to me to be a matter of judging horses for courses. For example, a long time ago – well before the advent of neo-liberalism – governments started contracting out construction activity, such as road building – and this seems to have received community-wide acceptance. Similarly, the community has long supported the system whereby medical services are mostly provided by private doctors who are then reimbursed totally or partially by the state. What may be more controversial is the contracting out of some decisions, which in the end affect the nature of government programs. For example, the Keating Government in its One Nation package of assistance to long-term unemployed people decided to contract out the provision of employment and training advice and assistance. The reason was that although the former Commonwealth Employment Service had a reasonable record of assisting the typical job seeker, its culture was built around the provision of the same uniform service to all its clients, whereas long-term unemployed people required more individual assistance which non-government providers were better at delivering. On the other hand, I personally question the increasing contracting out of the analytical and advisory functions of the public service. Too often the use of a commercial consultancy firm results in the government getting the sort of analysis and advice that it wants to receive, rather than frank and fearless advice.  This is probably because of the pressure on the consultancy firm “to please” when it wants to gain another future contract.

Finally, I would like to comment briefly on what my definition of neo-liberal economics doesn’t cover. I suspect that my critics would argue that neo-liberalism is not just about improving and making more use of managed markets to achieve long-held government objectives, but that neo-liberalism has had an impact on the nature of our society and relations between the state and communities (for example, see the comment by Eva Cox).  I acknowledge that this might be a possibility, but it is still a conjecture and unproven.  The reality is that there are numerous reasons why our society and culture may have become more individualistic, and I don’t see a more individualistic society as necessarily being a consequence of measures to improve the functioning of markets. Indeed, it seems equally likely that some of these measures were more in response to a more individualistic society and culture, rather than its cause (for example, the contracting out of personalised assistance to the most disadvantaged unemployed persons).  In this regard, it might be noted that individualism has always been central to the Liberal Party’s values since its foundation in the early 1940s – well before the advent of modern neo-liberalism. In addition, individualism has been assisted by changes in the way we live: marriage break-up is much more common, most of us no longer travel together on public transport, and our entertainment is more likely to be spent watching TV or a video than engaging in community activities or even in group activities in the home, such as singing around the piano.  These changes have all encouraged the development of a more individualistic society and culture, without any assistance from neo-liberal thought.  In short, I am inclined to think that neo-liberalism is providing a scape-goat for a number of changes in our society and culture that some people do not approve of, but which have other more complex causes than neo-liberalism.

Causes of the rise in inequality

As I said in my previous article, ‘one thing that we are all agreed upon is that the evidence published by the OECD (and others) clearly shows that inequality has risen in most advanced countries since the early 1980s’.  While no-one has disputed the finding that according to the OECD data, the increase in Australian inequality has been less than in other countries, although I should have added that the distribution of household disposable income in Australia was relatively unequal to start with back in 1980.   In addition, I further noted that ‘as both the IMF and OECD have been saying for some time, inequality is bad for economic growth and governments can make a difference’. But if governments are to make an effective difference to the inequality of incomes we need to understand better the causes of the increase in that inequality.

My contention has been that technological change was the most significant cause of the increase in inequality across the OECD group of member countries, but this has been heavily disputed in many of the responses. What disappoints me is that so many (although not all) of those who disagree, have failed to provide statistical evidence and analysis of cause and effect to support what is too often conjecture.  So in what follows I will spell out at greater length my reasons for continuing to think that technology is the main cause of the increase in income inequality since the early 1980s.

First, it is useful to list the principal possible causes of changes in the distribution of earnings, noting that earnings account for about three quarters of total household incomes among the working age populations. In sum these possible causes of increasing income inequality are:

  • the nature of technological change
  • globalisation
  • regulatory changes
  • financialisation which describes the expanding scale and scope of financial markets and activity and is often closely associated with rent seeking behaviour
  • changes in the tax/transfer systems

Technology, and particularly information and communication technology has had its greatest impact on relatively routine tasks, reducing the share of middle-level jobs such as clerical occupations and the operation of basic machinery (Blinder, 2oo6; Borland & Coelli, 2015; Frey & Osborne, 2013; IMF, 2017).  This hollowing out of the number of middle-level jobs has most affected manufacturing, which has always been at the forefront of introducing new technology. As a result manufacturing output has continued to increase in most OECD economies, while total manufacturing employment has declined. Across all industries, the increased share of jobs at the top and bottom of the job distribution has increased the dispersion of jobs, which in turn has resulted in an apparent increase in inequality as measured. In addition, technological change has often been skill-biased, resulting in an increase in relative wage rates for highly paid skilled professionals. However, one and possibly the main reason why inequality did not rise as much in Australia as in the United States is that the number of people with skilled qualifications expanded rapidly in Australia, while it stagnated in the United States, largely because of the very high up-front costs of getting a degree in the United States. As a result, relative wage rates have not changed much in Australia, while the wage premium for skills has increased dramatically in the United States.

Globalisation can affect employment and the distribution of earnings in a number of ways, including through trade integration, financial integration, and technology transfers.  In principle, trade integration can affect the structure of industry, but the reduction of trade barriers and the increase in trade can benefit both sides, as each country concentrates on what it does best (its comparative advantage), and exports and jobs increase in these sectors. In addition, the increase in incomes associated with the lower costs of imported products enables demand to increase, thus further offsetting the loss of jobs in sectors where a country is less competitive.  Indeed, for a long time, the output of goods in the trading sector in most of the advanced OECD economies has continued to increase even while employment in this sector was falling, suggesting that increasing productivity through technological changes was the principal influence on earnings and their distribution during that time.  Nevertheless, there are examples where job losses from increasing trade were significant; such as footwear, clothing and textiles, and more recently motor cars, although in the latter case it may have more to do with the failure of the Australian car industry to adapt to changing demands.

Product market regulation, labour market regulation and union density can all impact on employment and the distribution of earnings; indeed that may be their intended purpose.  An OECD study (2011) found that between 1980 and 2008 most countries relaxed regulation of product and labour markets, and these changes increased total employment, while also increasing wage disparities. with the two effects tending to cancel each other out. The net effect of these regulatory changes ‘on trends in “overall earnings inequality” remains indeterminate in most cases’ (OECD 2011: 31).

The enormous increase in the size, scope and influence of financial markets has been most helpful in explaining the increased share of the top one percent of the income distribution, with executive remuneration being increasingly linked to share price and stock options.  In effect, there is a de-facto alliance of executives with financiers.  In addition, Piketty argues convincingly that executive pay is heavily influenced by ‘pay norms’ and that these have shifted under the influence of financialisation. Indeed, the capacity of top managers to develop and appropriate the rents that Paul Frijters points to in his response has probably been aided and abetted by this change in social norms.  But as I am sure that Paul knows, the opportunities to appropriate rents typically flows from a monopoly situation, and often such situations are created by regulations.  Accordingly, economists have favoured regulatory reform to improve competition where possible, or otherwise regulate to eliminate the monopoly rents as the best policy option. While most importantly, in most countries the increase in the share of the top one per cent does not explain most of the increase in inequality, although the United States has been an exception (Piketty, 2014: 296).  Even in the United States, however, it has been the increase in earnings, and not income from capital, that accounts for most of the increase in the share of the top one per cent.

Although non-earnings income (capital and self-employed income) is less equally distributed than earnings, these other two sources of income are relatively too small to materially alter the conclusions reached about the causes of the increase in earnings inequality.  For example, the OECD (2011: 34) found that ‘Even though its [capital income] share increased in most countries, it remained at the moderate average level of around 7% of total income’. While ‘the effect of self-employment on overall inequality remained modest … because self-employment income fell in most countries and accounted for only a relatively small share of gross labour income – between 3% and 13%, depending on the country’ (OECD, 2011: 36).

Finally, the international evidence is that the tax-transfer system was on average able to offset about half of the of the increase in pre-tax market incomes in OECD countries, and more than half in Australia, Canada, Finland and Sweden (OECD, 2011). And because they are more tightly targeted, transfers have a much greater impact on redistribution than taxes, including income taxes. However, most of that reduction in market income inequality occurred between the mid-1980s and the mid-1990s, and since then the adoption of ‘austerity policies’ (mostly introduced for reasons unrelated to neo-liberalism) have made the tax-transfer system less redistributive in many countries.

Australia too has followed this fiscal pattern.  Between 1981-82 and 1996-97 the amount of redistribution achieved solely through the tax-transfer system stayed constant, reducing inequality by 34 per cent at the beginning of the period and by just over 35 per cent at the end (Johnson & Wilkins: 2006).  In the 2000s, however, the amount of redistribution achieved through government intervention in Australia declined, although two thirds of this decline was accounted for by fewer people on benefits as unemployment fell, while the progressivity of benefits hardly changed over the period from 1999 to 20009 (Herault & Azipitarte, 2015). Thus most of the decline in government assistance did not flow from government policies. I also think it is drawing a long bow to assert that the fiscal tightening and tax cuts in the 2000s flows directly from the adoption of neo-liberal policies. Instead, I would contend that a policy approach that favours greater use of market instruments and incentives was not necessarily inspired by a neo-liberal attack on government redistribution.  A more likely explanation in my view is that Australia elected the conservative Howard Government, and like previous conservative governments, the Howard Government was committed to lower taxes for the rich as part of its traditional conservative policies. As Paul Fritjers says in his comment, politics has everything to do with shifts in the income distribution caused by changes in the tax-transfer system.

To sum up, the actual examination of the evidence strongly supports the findings by the key international organisations – the OECD and the IMF – about the causes of increasing inequality, which were:

  • ‘neither rising trade integration nor financial openness had a significant impact on either wage inequality or employment trends within OECD countries’ (OECD, 2011: 29). However, the OECD study did find that increased financial flows and technological change did have an impact on inequality, with technological change having the more comprehensive effect.
  • ‘Technological progress, reflected in the steep decline in the relative price of investment goods, has been the key driver of the decline in labour’s share of production income in advanced economies, along with a high exposure to routine occupations that could be automated, with global integration playing a smaller role’ (IMF, 2017: 40). The IMF further concludes that ‘The evidence suggests that the impact of technological advancement and participation in the global value chains on the aggregate labour share in advanced economies comes through a reduced share for middle-skilled labour’ (IMF, 2017:40).

In short, the serious examinations of the evidence conclude that technological change has been the main driver of increased inequality over the last three or more decades since the early 1980s. Furthermore, it is difficult to imagine any connection between the nature of this technological change and neo-liberalism. Indeed, if further proof were needed, no-one in commenting on my original article sought to rebut my point that there is no obvious correlation between neo-liberalism and the types of government in Finland, Germany, and Luxembourg, which are three of the five countries where inequality has most increased, whereas Australia is a country where inequality has least changed.

Where do we go from here?

Before concluding I would like to add a few words on what does this discussion of the causes of increased inequality imply for future policy responses.

First, we cannot nor should we try to stop the structural changes in our economy generated by technology, or even by globalisation. Nor would rolling back market liberalisation achieve much in the way of improved equality.  As some of my critics have acknowledged, these reforms have helped underpin the strong performance of the Australian economy over the last quarter century.  However, I agree with those who are sceptical that economic growth on its own will ensure an egalitarian society as I don’t expect the fruits from that growth will trickle down equally to all member of our society.

Instead, there are a few policy responses that stand out and which should be pursued. First, Australian micro-economic reform has generally recognised that there can be some losers, and adjustment assistance has typically been provided. For example, when the Howard Government introduced the GST the compensation package actually cost more than was raised by the new tax. Failure to provide such assistance risks losing the consensus which successful reforms typically require. Second, increasing skills to assist in the adoption and adaptation to new technology is absolutely essential. This will improve the sharing of the gains from that technology as well as improving its rate of take-up and therefore future economic growth. Indeed, Piketty – contrary to the view of some of my critics who accused me of not reading Piketty – did conclude that:

‘the poor catch up with the rich to the extent that they achieve the same level of technological know-how, skill and education, not by becoming the property of the wealthy. The diffusion of knowledge is not like manna from heaven: it is often hastened by international openness and trade.’ (2014: 71).

‘To sum up: the best way to increase wages and reduce inequalities in the long run is to invest in education and skills’ (2014: 313).

I rest my case.

Michael Keating, AC was the Secretary of the Departments of Employment and Industrial Relations, Finance, and Prime Minister and Cabinet from 1983 to 1996. The ideas and evidence discussed above are drawn from a forthcoming book, co-authored with Professor Stephen Bell, Fair Share: Competing Claims and Australia’s Economic Future.

References

Blinder, A (2006). ‘Offshoring: The Next Industrial Revolution’, Foreign Affairs, vol. 85, pp. 113–28.

Borland, J & Coelli, M (2015). ‘Information Technology and the Australian Labour Market’, in CEDA (Committee for Economic Development of Australia), Australia’s Future Workforce? June 2015, CEDA, Melbourne, pp. 131–41.

Frey, C & Osborne, M (2013). The Future of Employment: How susceptible are jobs to computerisation, Oxford Martin School, University of Oxford.

Herault, N., & Aziptarte, F., 2015, ‘Recent Trends in Income Redistribution in Australia: Can Changes in the Tax-Benefit System Account for the Decline in Redistribution?’, Economic Record, 91, pp. 38-53.

IMF, (2017). World Economic Outlook, April 2017; Chapter 3: Understanding the Downward Trend in Labor Income Shares, pp.121-141.

Johnson, D, & Wilkins, R (2006). ‘The Causes of Changes in the Redistribution of Family Income in Australia, 1982 to 1997–98’, Social Policy Research Paper, no. 27, Department of Families, Housing, Community Services and Indigenous Affairs, Commonwealth of Australia, Canberra.

Keating, M (2004). Who Rules? How government retains control of a privatised economy, Federation Press, Sydney.

OECD, (2011). Divided We Stand: Why Inequality Keeps Rising, OECD Publishing, Paris.

Piketty, T (2014). Capital in the Twenty-First Century, Harvard University Press, Cambridge, MA.

 

 

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17 Responses to MICHAEL KEATING. Why Blame Neo-Liberal Economics: A Response

  1. michael lacey says:

    # Neoliberalism by its very nature is anti worker and anti society. This ideology first gained a foothold in Chile after the assassination of the democratically elected president, Salvador Allende. The basic characteristics of this toxic ideology are smashing unions, weakening government protection for its citizens, selling off all state assets to corporate interests, cutting taxation for the very wealthy, and eroding social services such as healthcare and education. Basically it entrenches systemic poverty and erodes the middle class, while making the top 1-2% extremely rich.

    # Another disturbing characteristic is the undermining of governments to pursue full employment through economic growth Today we have fake job centres churning people through a system that has at least 1 million unemployed and close to a million underemployed. The system is designed to be dysfunctional. It is the perfect opportunity for privately owned job agencies to suck government funding for a nonexistent service. Added to this, it suits the Neoliberal power-brokers to keep millions unsettled and poor. This serves their ultimate purpose, which is to make people so desperate for employment, that they will take any job, no matter how poor the conditions. Mass unemployment also keeps the hourly rate of pay low. The greater the demand for work, the more power the capitalist class have in exploiting workers.

    # Privatization has consistently shown to increase prices for consumers, providing a substandard product, cut health and safety, and creates obscene wealth for the board members and the CEOs who work for these private companies. The privatisation of Victorian electricity was just one example. This theft of a state asset resulted in mass redundancies, huge price gouging and the ultimate destruction of a whole community. All the utilities and public services which generations of citizens paid for, via their tax, in good faith, for the benefit of all is sold at often bargain basement prices to corporate raiders and wealthy political backers and their associates. Privatization is a political activity … bringing benefit to some groups and disadvantaging others.

    # Another terrible result of Globalisation is the huge loss of local jobs, particularly in once public owned sectors. Look at the amount of off shoring of service jobs to India and China. One cannot even speak to a technical officer in Australia for assistance, as all these jobs now reside in India, where these poor people are exploited for multinational profits.

    # The disastrous Free Trade Agreements are also highly damaging to the Nation State. The Trans Pacific Partnership has a section called ISDS (Investment State Dispute Settlements). These clauses can give corporations the power to sue a national government if its profits are threatened … even if the government decides that legislation is vital to protect the health and well-being of its population!

    I know exactly what Neoliberalism is!!

  2. Dog's Breakfast says:

    I read your first article Michael, and commented briefly as more credentialed contributors covered most of what I wanted to say.

    “First, the majority of economists long ago concluded that competition was a much more important determinant of corporate performance than ownership.”

    That hardly stands on its own, given that the economics profession itself is under attack for following the bling dogmas of their profession. Better still than introducing competition would have been recognising that a substantial number of industries are better left either as government owned services, or stand alone natural monopolies heavily and precisely regulated. The faux competitive markets of the energy industries, banking, the finance sector generally, telecommunications, are all sufficient examples to show that ‘competition’ ends up being a competition in who can extract the most economic rents.

    Better than serving up dogmas and shibboleths is to examine each policy and examine likely effects and then de-construct when shown to be a disaster.

    In other articles, Nick Gruen has written of a scheme to use the Reserve Bank to provide basic banking services, which would enable genuine competition as they would be a price-setter in a market gone wild. While selling the Commonwealth was a good idea at the time (and Qantas, an even better idea) the banking sector affects everyone and the four pillars extract significant economic rent because there is no public provider (an unintended and unforeseen consequence).

    The theory of comparative advantage is another classic text book application that should be approached with a hazmat suit on, and should not be relied on in any real world discussions. Strategic considerations must stand above economic orthodoxy.

    As for Tech. Change, sure it was always going to disrupt, but the initial disruption now flows overwhelmingly to the tax avoiding multi-national, who have become a real sovereign threat.

    So whether it is called neoliberal economics, or tech change, or anything else, poor policy has lead us to where we are and I would argue that began after the Hawke-Keating government’s time, of which you contributed greatly.

    Privatisation must be a large part of neo-liberal policy and has been show to be a disaster in so many areas. You could respond that this has gone too far, and I would agree. Like everything, a little is fine, a lot can be terrible. Others will no doubt take up more areas of concern, but overall I don’t think that trying to define every policy as being part of neoliberal economics or tech change or some other phenomenon actually helps. Better to look at policies overall, and as a nation and a globe we have done very poorly for the last few decades.

  3. hosscara says:

    As a regular punter; I’m no longer interested in high-minded justifications for why we’re worse off now than before, or whether “it wasn’t us, it was the technology”. I want change. Come the next election there will be vengeance. The missing ingredient is there isn’t a political offering that is different enough and complete enough to warrant attention. A local Bernie Sanders/Jeremy Corbyn would wipe the floor clean.
    We do want a lot more competition, less crony capitalism.
    We do want a mixed economy where the natural monopolies (roads, rail, pipelines, electricity grid, water system, NBN/Telecoms network, ports…) remain in public hands.
    We do want a political system where we have more input and not ignored between election cycles. I would love to be able to “unvote” (recall?) an idiot politician. I want to choose the person who stands in my area not have them imposed by some “preselection” horsetrading.
    We do want that shonky behaviour by the banks/other financial institutions are severely penalised where it hurts them most.
    We do want that the news we’re fed isn’t carefully managed to create a desired perception. The one-sided news, the strategic ommissions, the emphasis on the trivial elements whilst deliberately ignoring the elephant in the room ways for news are becoming increasing transparent. The days of managing the message is past, we now have other sources of data/information/news that we’re beginning to trust more than the daily fodder presented us. We no longer will trust those we suspect of manipulating us.
    The trickle down economic growth logic has lost the argument, it’s just plain bunkum, seemingly promoted to give the wealthy an nice tax cut. Either policymakers come up with something better or we’ll impose something different upon you.
    The economic policy of “dig-it-up-and-ship-it-out” is no longer an option, only the difficult path of raising our human capital remains. We can’t even agree that we have a problem, witness brother Malcolm’s “There’s never been a better time to be an Australian”, completely out of touch.
    I cannot wait for the next election to come.

  4. Andrew Farran says:

    As a (non-professional), ’empirical’ economist (!) I find myself much in agreement with this article. I would merely nit-pick around some of the edges.

    The market mechanism is what should keep us honest – and does for the greater part.

    What I do have some difficulty with are privatisations granted to monopolies. This is most in evidence with the railways or land transportation generally (here and in the U.K.). The problem with the other way is the tendency for the unions to get a stranglehold over state run systems. Is there another way?

    Am not sure that privatisation of Australia Post been all that good for the small user, including outside the cities. Services have been severely curtailed.

    As for disparity of incomes, technology is the key in terms of the skills that get rewarded and the easy multiplier in which high-value product can be distributed without physical effort (compared with industrial products).

    In the financial sector the returns based purely on multiples (of the same transactions) is excessive and creates obscene disparities which by and large are not effectively taxed. Slippage occurs everywhere.

    Ad for distortions resulting from public expenditure road and rail infrastructure has to be paid for or we will be in gridlock 24/7. But there must be more efficient ways of managing these projects (yet to be identified). Another distortion is the over-pricing of and over-commitment to defence capital items and too ready assumptions as to need. This area is wide open for critical investigation. Wastage here is astronomical and failure is rewarded.

    A digression. I hear that 70% of the lower end of the consumer drug trade is financed from social welfare payments. At first that is a shock. But what if that wasn’t the case? How many more households would have to be robbed to make up the difference?

    Thanks for the discussion.

  5. Colin Cook says:

    My parable – about the Munnies and the Wallies – explained the increasing inequality without mentioning ‘neo-liberal’ or even ‘productivity’; this latter, though, is at the heart of the matter in that this particular aspect of ‘technological change’ has exacerbated the difference between the value of the Wallies’ production and their combined income. http://cooksourdough.blogspot.com.au/2016/10/the-great-economic-divide-explained.html
    Another driver of inequality not featured earlier is that the Munnies as a class fix their own salaries – through various associations – whilst the Wallies have their rewards determined for them – by the Munnies!

  6. It was disturbing to read the 28 responses to Michael Keating’s 30 June post plus the 17 July update and find not a single mention of Friedrich Hayek, the father of neo-liberalism.

    On the other hand, it is good to see people discussing neo-liberalism. It would be even better if they knew what they were talking about.

    It is all about Hayek. He was the Marx and the Lenin of the neo-liberal revolution. He was the philosopher and the political strategist. It would not have happened without him.

    In Hayek’s own words: “Experience indicates that once a great body of intellectuals has accepted a philosophy it is only a question of time until these views become the governing force of politics.

    Among the informative writers on neo-liberalism are Philip Mirowski and Rob Van Horn. The Australian economist Craig Freedman’s book, “Chicago Fundamentalism,” is comprehensive and even-handed.

    Australian philosopher Jean Curthoys sums up the ideology with her wry observation of neo-liberalism as “the flip-side of communism.”

    Michael Pusey in “Economic Rationalism in Canberra” blew the whistle on the destruction of our professional civil service while Simon Marginson chronicled the leaching of neo-liberal toxins into the education system.

    Professor Hayek’s revolution is over now but what lies head is unclear. In this age of Trump, David Ruccio of Notre Dame says we are looking for “a new common sense” and quotes Antonio Gramsci’s “Prison Notebooks.”

    “The crisis consists precisely in the fact that the old is dying and the new cannot be born. In this interregnum morbid phenomena of the most varied kind come to pass.”

    Jeremy Corbyn, Bernie Sanders, Thomas Picketty and Anthony Atkinson hark back to the successful social democracy and mixed economy of the golden years when baby-boomers like me were growing up.

    Others, including Michael Keating, argue that we can’t turn back the pages to that postwar consensus resting on its foundations of Keynesian theory and Roosevelt New Deal pragmatism.

    I’m not convinced. Must we remain constrained under “a Hayekian dictatorship of the markets,” to borrow a phrase from Wolfgang Streeck.

    Surely not. The feisty reaction to Michael Keating indicates that people realise they have a problem with the political and economic theories of the last 30 years.

    The problem having been recognised, as Nugget Coombs used to say, it should not be beyond the wit of man to devise a solution.

  7. Bruce says:

    After the initial cost of setting up infrastructure, the major cost thereafter is maintenance. I recall a conversation with a plumber was had been employed by our local council and was then reemployed by the company that won the contract for plumbing for that council. His explanation of how “competitive tendering” worked was simple. Prior to privatisation most work done was preventative maintenance. The private owners suspended all preventative maintenance and only repaired what was actually broken.
    This formula was repeated over and over with almost all privatisations; railways, roads, power supplies and so on. As things inevitably broke down the private owners requested and were paid more, the excuse the unexpectedly high rate of breakdowns compared to the original tender specifications. A local kindergarten backed onto a park which was mown on a regular basis by the council gardeners. The successful tenderer reduced the regularity of mows to such an extent that parental working bees had to do it themselves in the interests of the safety of their children.
    Competitive tendering was a furphy. Those in charge of decisions were naïve, hamstrung by unrealistic rules and once the contracts had been let, the government workforces dismantled they were powerless to do anything about it. Eventually every tender became more expensive relatively than the government services they replaced.
    Not only that but many who lost their jobs became a social responsibility. Training of apprentices was mainly a social responsibility of government enterprises; it now only occurs with heavy government subsidy.

  8. Wayne J McMillan says:

    Hi Michael,
    I believe you are a decent, honest man who really believed that the basis upon which many policy decisions were made during the Hawke/Keating were economically sound and the right ones. I respect your achievements and your professional integrity and I would never criticise you for the selfless public service you gave to Australia.

    However what you did was to undo a Pandora’s Box in creating a false rationale where orthodox theory, ala neoclassical theory and its modern, dangerous off shoots, developed, mutated and spread like a rampant virus ad nauseum, across the Federal and State Treasuries in Australia.

    It’s the economic theory which upon which you continue to blindly believe in that is flawed and the GFC has proven this.

    Please believe me when I tell you that even Nobel Laureates like Paul Krugman still believe in unsound theory and think economists can just continue on where they left off before the GFC, albeit with minor theoretical corrections. This is a misplaced false ideological belief by Krugman and his trusting followers, which leads to a theoretical cul de sac.

    Empirical evidence from a broad cross section of the economics profession has been presented clearly and poignantly and it leads to only one conclusion that a major theoretical overhaul is needed.

    When mainstream economists of reputable standing like Joe Stiglitz, Danni Roderik and Paul Romer are saying that the orthodox theory is fundamentally flawed, you better believe them. If you don’t believe the mounting hard empirical evidence that is criticising orthodox theory, then you must have ideological blinkers on.
    Regards
    Wayne

  9. Peter Small says:

    Who am I to argue with Michael Keating’s eloquently argued and researched article. Indeed like Andrew Farran I am much in agreement. However there are two factors in respect to inequality that I would like Michael to comment on, if he would be so kind?
    1.With Governments around the World bailing out the Banking system post 2008, haven’t tax payers finished up “holding the can”? Has this resulted with an adverse impact on the capacity of Governments to provide services,- unfairly effecting lower income households?
    2. With central banks keeping interest rates abnormally low for too long, has that not resulted in an asset bubble? Has the asset bubble resulted in a disproportionate percentage of society’s income going into repaying loans to banks resulting in less money being spent in the rest of the economy, thereby impacting adversely on jobs, real incomes and growth?

    • Malcolm Crout says:

      Although your question is posed to Michael, I would just add a couple of notations.
      1. You are correct in that Governments carried the can and by extension the 99.99% while the executives on Wall Street were rewarded for their recklessness. It is incorrect to state that currency issuing sovereign Governments are unable to provide the services you mention – they issue their currency and have complete fiscal capacity limited only by the spare productive capacity in the economy such as dealing with unemployment.
      2. The low interest rate regime has fuelled private indebtedness to the point where increases in interest are capable of tipping the balance into recession or worse. This was promoted by Greenspan and others and quite stupid as Governments could have utilised their fiscal capacity to regain economic momentum. Instead, the bankers were bailed out and the false message of public debt and deficits being a bad economic outcome were and are promoted.

      In reality, neither of the challenges posed in your questions are insurmountable for any country that issues debt in their own currency. To state otherwise ignores the macroeconomic realities, although sadly, many economists are spreading disinformation.

  10. Allan Patience says:

    Dr Michael Keating has taken issue with critics of neoliberalism, focusing particularly on what he judges to be their mistaken view that neoliberalism is a major factor in the growing inequality that is beliming contemporary Australian (and global) society. As one of the architects of neoliberal policies in Australia Dr Keating is understandably defensive of that mode of policy making.

    He notes that in his first blog (30 June) neither he nor his critics provided a clear definition of neoliberalism. He seeks to remedy this in his second blog, providing a definition drawing on the micro-economic reforms of the 1980s and 1990s in Australia: the floating of the dollar; financial deregulation; eliminating protection; tax reform; decentralizing wage determination (favouring EBAs); and “some measure of privatization.” He sees these reforms freeing up markets to improve growth and strengthen the economy. He contrasts this era of reform to the Whitlam Government – a time he accuses his critics of remembering nostalgically rather than realistically.

    It is true that the reforms he highlights have generated some positive outcomes in the Australian economy. The old “settlement” (to borrow Paul Kelly’s term) that had prevailed pretty much up until the Hawke and Keating governments had become tired and run down; it badly needed a kick in the pants. However, the reforms he loftily identifies need a far more detailed interrogation than he provides.

    For example, financial deregulation has arguably spawned a dodgy clique of advisers who have ruined many investors, giving free reign to the big banks to handsomely reward their CEOs and shareholders, while permitting them to ride rough shod over their customers. Financial returns have become all-important, as evidenced in predatory housing investment strategies that are driving young people out of the housing market. Moreover, the “some measure of privatization” that he mentions needs a much more thorough investigation – consider, for example, the mess that privatizing the electricity industry has created in this country, with parasitic providers actually driving up costs because of the maze of ridiculous “market options” they spruik up and down the country.

    However, the major problem with Dr Keating’s definition of neoliberalism is his attempt to confine what has been a virulently global political ideology to a narrow version of microeconomic policy making in Australia in the 1980s and 1990s. This constitutes a serious category error.

    Neoliberalism has to be understood in all its political, cultural and social dimensions and its often highly corrosive global consequences as a social and political movement championed by transnational corporations, their bosses and their political cronies. Mark Davis’ excellent chapter on this in Chris Miller and Lionel Orchard’s important book, Australian Public Policy: Progressive Ideas in the Neoliberal Ascendancy, deserves a close reading.

    To ignore the fact that that there has been a major shift to the rich in the global distribution of capital over the past three decades or so seems whimsical, at best. Oxfams’s recent data, for example, revealing that a small number of multi-billionaires and trillionaires (less than 10% of the world’s population) now own more than 80% of the world’s wealth is surely a problem. The fact is that the sources of this dangerously growing inequality can largely be found among the neoliberal public policies that the wealthy (late capitalist) states have been applying over that time frame. That is what economic historians like Thomas Picketty, Wolfgang Streeck, Richard Wilkinson and Kate Pickett, and Jacob Hacker and Paul Pierson – to name just a few experts – have been demonstrating. It’s not enough to read Picketty; he needs to be understood. Moreover, Dr Keating glides past the Global Financial Crisis and its neoliberal causes as if it never happened.

    It is unfortunate that Dr Keating has chosen to define neoliberalism in such a provincial manner. But he is certainly not alone in contemporary Australia where provincialism is the name of the game in public policy making.

  11. Dog's Breakfast says:

    Another thought that came to mind is the blithe way in which ‘technological change’ is somehow another part of reality, unconnected with the economy, rather than embroidered through it.

    Isolating tech change as the cause of inequality assumes it to be inevitable (accepted) and ‘outside the system’, which it is not.

    Fundamental economic theory just externalises anything it doesn’t understand or can’t measure. These inequalities Michael claims to have occurred due to tech change occurred within the framework of the economic settings of the day, which in hindsight not only put the average worker behind the 8-ball, but also provided an opportunity for the business class, enabled by neoliberal economics, to ignore them, or just stand aside and call them ‘leaners’. If tech change was the cause, the economic settings are the ones that lead to the inequality not the other way around.

    Michael will well remember a nong Qld politician of the time going off about Canberra pollies putting the cart before the horse. I can’t think of a more apt expression to describe this thinking. “The world changed and we didn’t reset our economic policies, therefore the world changing caused the problems.”

    It’s a false dichotomy, and in that sense a false analysis.

  12. Malcolm Crout says:

    Michael, your descriptor of neoliberalism is absolutely incorrect. You have conflated globalisation and macroeconomic reforms as being neoliberalism, whereas the real definition of neoliberalism is simply free market theory which has undermined the nation state status where Governments were pledged to apply full employment policies which is the foundation of modern monetary and fiscal economics.

    The so called elites have captured the false narrative of the free market, by negatively targeting unionism, education, media and politics similar to their activities in the late nineteenth and early twentieth century and so captured the economic gains of productivity to profits rather than sharing it with wages. Thus inequality is back to the 1910 era where national instabilities were promoted by successive economic depressions and finally world wars.

    Currently the 99.99% are waking up to the false messages of the elite, enabling right wing politicians to seize political opportunity with the false message of quick fixes to this inequality. Governments have yielded to the free market nonsense since the 1970’s where monetarism replaced Keynesian economics and we are now experiencing consumption through rapidly rising private indebtedness rather consumption by wage sharing in productivity gains. The only way forward is for Governments to use fiscal capacity to generate overall private sector wealth, stop demonising unions, stop privatising public services, strongly regulate cross media ownership and cease the macroeconomic narrative that sovereign currency issuing Governments are revenue constrained.
    The economic mainstream message is completely perverted by business, media and political mouth pieces who spread disinformation regarding public debt, public spending, public ownership and unionism. The past forty years of economic consumption has been fuelled by unsustainable private debt. Financial services are a bloated and inefficient vehicle which has ceased to distribute productive capital and now concentrates on shuffling money around the globe to the point where the financial economy has destabilised the real economy. This is a key sector requiring urgent and large reforms and tight regulation to function properly so that capital is lees liable to find it’s way into speculation.

    Capitalism is only able to survive by growth in consumption of goods and services for which the 99.99% are consumers, but this is being stunted as productivity growth increases profits while wages are flat and/or declining. The situation is precarious and could fall either way in the next decade as which will promote militarism and false national security rhetoric by politicians. Now is the time for truth and not disinformation otherwise a cataclysmic near future is guaranteed.

  13. Mary Tehan says:

    Mmm. An interesting conversation! It was in 2002 that I first read an article titled “The Market as God”, when I was studying public policy. One has to wonder when relational words like “trust”, “shared responsibility”, “stewardship” etc. will be able to engage with the lexicon of economics – if ever? Having experienced firsthand Kennett’s Victorian privatisation agenda, that saw more of privatisation here than in the whole of the UK under Margaret Thatcher (remember her words: “there is no such thing as society”), I would argue that the loss of social capital has crippled the capacity for Australian society to function healthily and robustly. Add the new phenomenon of an ageing population who are vulnerable to not being able to ensure their own financial independence through paid employment … and who rely on insecure work, “shares” and/or “government welfare”to survive … and you have an increasingly broody, angry, and frustrated population of all ages being birthed. No surprise that the Federal Government is developing a mega-security department to strengthen “risk-management” … the only problem is that it is its own population that is becoming “terrored” in the name of terrorism from “the other”. Sane leadership is needed now more than ever.

  14. PeterL says:

    In my comment on Dr Keating’s first article, I suggested that there were differing opinions on the contribution that new technologies have made to rising inequality. While this is true, I do accept that technological advances in recent decades have been a significant contributor to current levels of disadvantage in the community and this will become an even greater issue in the future.

    A recent article by Viktor Shvets from Macquarie argues that although, in the long run, technological advances lead to increased productivity, which is the true generator of growth, in the short to medium term these advances reduce productivity due to the disruption they cause. New jobs are created but more are lost and helping people retrain takes time. The readjustment of the work force can take decades. As Dr Keating says, there are losers who have to be compensated through the transfer system. Unfortunately, governments in recent times seem more intent on punishing the victims of progress than with helping them.

    Shvets argues that the expectation of continued economic growth, despite productivity having stalled, is the cause of our ballooning national debt and of our capital city housing bubble. The truth is that most of the benefits of increased technology in recent decades have flowed to the owners of capital, not to wages. It is a big cause of our growing inequality. Some economists are suggesting that our current stagnation resembles the economy of the 1930s before the “New Deal”. Others think the malaise of western economies may be permanent. Far from providing solutions, neo-liberal ideology does not even recognise the problem. To the best of my knowledge, no current government minister has ever, unprompted, mentioned inequality at all. Dr Keating calls for more and better education. Dr Lowe calls vainly for workers to demand higher wages. All well and good. But more is needed. The simplest, fairest and best way to deal with inequality is through the tax and transfer system. In particular, we need higher marginal tax rates at the top end of incomes, a wealth tax and an inheritance tax.

    The idea that a small percentage of the population is so inherently more worthy than the rest of us and therefore deserves a huge slice of the economic cake belongs to a time long past. Every person is worthy of respect. This means more than that everyone deserves equal opportunities in life. It means everyone, regardless of their intelligence level, their skills, talents or even their luck in life, deserves a sufficient share of the national income to live a dignified life. Neo-liberalism, as it is practiced, ignores or rejects this principle. The fact that the Newstart Allowance is less than the poverty line is evidence of this.

  15. Dennis Allan says:

    To put a brief rebuttal to the view that neo-liberalism ha snot been the cause of inequality: the proof is in the pudding.

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