In February the Monthly published a 7700-word polemic written by the Prime Minister on “The Global Financial Crisis”, in which he sought to explain the worldwide economic downturn. But it was not just an outline of how this or that mistake was made or why various policy judgments had gone wrong, it was a full-scale attack on the political and economic philosophies of those who had managed our economies for the past twenty years.
A deep thinker the Prime Minister is obviously not, and it was interesting to read the many criticisms of what he had written. If you happen to think the same way as he does, then you more or less accepted what he said as reasonable, although not particularly well done. It was not an article that attracted widespread acclaim. If on the other hand you were not of a mind to be persuaded by his rhetorical sophistries and excess, then you not only were unchanged in your views, but in fact were amazed at how wrongheaded the PM actually is.
Robert Manne, editorial board chairman of the Monthly, in his own assessment more or less described these criticisms of the PM as mere flesh wounds. He had been “puzzled and disappointed by the media response” and went on to say:
There have been very many references to the essay in major Australian newspapers. The overwhelming majority have been carping and superficial. Virtually no one has offered a penetrating critique or proposed an alternative account of the most significant economic calamity since the Great Depression.
If by a “penetrating critique” is meant a criticism that has convinced Robert Manne, then there has certainly been no such thing. But to suggest that no one has proposed a superior alternative account of the global meltdown than that offered by the PM is not quite in accord with the facts. There have been no end of such accounts, and I hardly think the PM’s has been definitive.
Because of the dissatisfaction felt by Manne and others at the Monthly about the public debate over the PM’s article, in the May issue they brought together a number of commentators of their own to have a go—none of them, let me note, an Australian. And in their own way, these have been interesting and illuminating. They reveal a good deal about how our current economic downturn is being perceived, but more importantly, they set out very clearly the economic and political hay that is to be made in this recessionary sunshine.
The five they have chosen do not have a lot in common other than their ability to refrain from pointing out what an empty and ill-informed article Rudd’s piece was. So to the PM’s own deficiencies we can now add the deficiencies of four others. There is a fifth article, but this particular article essentially contradicts the other four and demonstrates beyond a shadow of a doubt the emptiness of the PM’s article.
The article I liked the best, which is different from being the one I agreed with the most, was by Eric Hobsbawm. An old-time communist of the most unrepentant kind, he is also the most revealing of the overall agenda Rudd and his comrades have in mind. Here from the article is a statement to which anyone with an interest in preserving our political freedoms and economic prosperity should pay the closest attention:
There remains the crucial problem of the environment, which must imply a major shift, at least for a substantial period, from an economy moved by the market to one directed by the priorities and imperatives of the public interest.
Such a “major shift”, so far as Hobsbawm is concerned, is probably also implied by just about any negative economic or political event that might crop up. He believes, exactly as he wrote, that the market should be directed by the priorities and imperatives of the public interest—that is, by Kevin Rudd. This is also what Kevin Rudd appears to believe. It is the neo-socialism of the twenty-first century. We citizens get to own what we own, but those in government tell us what we can and cannot do with our property. Private property is public property; it is there to be disposed of as governments see fit as part of their nation-building schemes.
How far Rudd would follow is uncertain, but Hobsbawm is clear about just how much of our economic outcomes ought to be directed by governments. Note the words “for instance” in the following sentence. These are only examples of an obviously much more comprehensive general case: “Controlling growth already implies a steep rise in the regulation of ordinary profit-making and consumer preferences: for instance, in the construction of houses and motor vehicles.” Houses and cars are just part of the full picture of a far more centrally directed economy. And it is more than just consumer sovereignty at stake. Savour this and its full implications:
[It is] important to stop dreaming of a return to anything like the pathological “market supremacy” of recent decades. It was, as was always evident in Friedrich Hayek, based not on economic considerations, but on an a priori belief in a concept of individual liberty which by definition excluded the public pursuit of social welfare.
The enemy is individual liberty! Not a surprising conclusion from an old-time Stalinist, but it should worry anyone that these are the kinds of arguments put forward in support of the PM’s attack on the “neo-liberal” philosophy, although the only thing particularly remarkable about this statement is that it has been said so clearly and in public. And it is extraordinary that Hobsbawm quotes as evidence of Hayek’s disregard for a concern with social welfare a statement which is unambiguously true. This is the quote from Hayek that Hobsbawm used to illustrate his point: “The economic freedom which is the prerequisite of any other freedom cannot be the freedom from economic care which the socialists promise us.”
That is: without economic freedom you cannot have freedom of any other kind, but in spite of what socialists promise, you will never be free from worrying about economic problems no matter what anyone does because such concerns are in the nature of things.
If Hobsbawm doesn’t agree with this, then for all his reading and writing, his study of history and historical knowledge, he is a lost soul. If he thinks that there is a socialism of any kind that has been or ever will be that can relieve us of our economic cares, then of economics he knows nothing. He is a complete innocent from whom on economic issues there is nothing to learn other than that a life of scholarship might yet leave you knowing nothing at all worth knowing.
We then turn to Dean Baker, “co-director of the democratic-progressive Center for Economic and Policy Research, in Washington, DC, and a regular columnist for the Guardian online”. And with Baker we enter a different world altogether. He liked Rudd’s article, even though he finds himself forced to argue that his “diagnosis of the problem is not entirely on target and therefore the response is not fully adequate to the enormity of the problem”. The Prime Minister, it turns out, is a wimp when thinking about the global downturn and what to do. This is Baker’s assessment:
More generally, we must understand the current crisis is a shortfall in aggregate demand. This is the Keynesian problem of the Great Depression, not the comparatively modest recessions of the postwar era. For this reason, the size of the required stimulus, both in the US and around the world, is far larger than that which has been put on the table thus far.
The debt that has suddenly accumulated here in Australia almost overnight, the stunning rise in the need to repay massive volumes of interest and principal that have virtually appeared out of nowhere, these are nothing to Baker. We have barely touched the sides on the expenditure requirements that are now demanded by our current position. This is obviously the kind of advice now being pumped into Barack Obama’s ears as well.
This is Keynesian economics gone rampant. It is the model beloved of all those who want to replace market outcomes with their own preferences. That Keynesian theory is the theory of choice for anyone from a socialist persuasion ought to be crystal clear from what Baker writes:
The most important point that the public must recognise is that this is a crisis of inadequate demand. For the moment, at least, the world of scarcity is nowhere on the horizon. In this world, we can and should throw money at our problems.
You should, he cautions, throw money only where it promotes long-term benefits, but that you should throw money now, and hand over fist, he does not doubt. His answer, should the expenditures we have already made not end up creating recovery, will obviously be that we did not throw enough. It was the right policy, just not applied with enough zeal.
Charles Morris is an American lawyer, banker and author of what Manne describes as the first history of our current economic crisis, The Two Trillion Dollar Meltdown. His is the commentary on the Prime Minister’s essay with the least to say. He finds himself “in virtually complete agreement with [Kevin Rudd’s] analysis of the origins of the current crisis, its historic importance and the nature of the response that governments will be required to make”. But he does not tell us why and in what way.
Morris’s conclusion more or less sums up the absence of any serious content in his article: “Good leadership will require both boldness and alertness to missteps, as well as firmness and flexibility, courage and humility. It is nothing less than the policy challenge of a lifetime.”
But he does agree the financial system must be reined in. What was it that used to be said about closing the barn door after the horse had gone?
John Gray is a British political philosopher who wrote a quite interesting book on Hayek in the 1980s. Robert Manne, in his introduction, says that Hayek gave it the “highest praise” but my suspicion would be that if he did, it was because he never read it right through to the end. Be that as it may, John Gray has commented on the Prime Minister’s essay in what is by and large a quite sensible article with a lot in it to think about.
He does provide a perfunctory statement of agreement with the Prime Minister. He states that “the crisis was the predictable outcome of applying a narrow and unrealistic ideology” and states that “an economic philosophy that contains no provision for dealing with large-scale market failure is a recipe for a disaster”. But having stated this, he goes on to his main point, which is to trace out the implications of “a historic shift in geopolitics, in which power is leaking away from the US and its allies”. This I found both interesting and disturbing for a number of reasons and not just for the reasons discussed by Professor Gray.
We in Australia live as far from the countries that have traditionally protected us as it is possible to be. Our alliance with the United States is our most important defence arrangement. Looking out even a paltry twenty years, Gray’s analysis should make anyone pondering Australia’s future think hard and deep:
The impact of the financial crisis extends beyond money and markets. With the unprecedented level of American indebtedness, it is hard to see how the US can continue to project its military power as it did after the Cold War … Indeed, can the US any longer afford its enormous defence industry?
The picture he paints is of a world in which the economy of the United States becomes proportionately smaller. In the meantime, other nations, either because of a desire to project their own power on the rest of the globe, or because world demand for their stocks of resources gives them greater income and political clout, increase in significance. Whatever pax Americana we might have been depending on until now will for all practical purposes have evaporated. It is easy to see Fortress America re-emerging, with the rest of us left to fend for ourselves. Gray finishes his article with a sobering thought:
The meltdown leaves the world without any effective global governance. No new power is emerging that could exercise hegemony in the aftermath of neo-liberalism in the way the US did after the fall of communism. Instead, we have a polycentric world, shaped by several great powers and ruled by none … It is hard to see how the planetary environment can be protected when the break-down of American-led globalisation has left a kind of anarchy, with no new order on the horizon.
Gray speaks of “the planetary environment” in the sense of a green planet, but I simply extend this to the foreign policy and international relations environment in which Australia will find itself. The kind of anarchy he envisages would have profound implications, with the narrow economic questions being the least of it. He doesn’t make the “aftermath of neo-liberalism” appear all that appealing.
Yet it is the mismanagement of our economies by governments that will be the driving force behind these massive political shifts. The advantage the West has had for the past 500 years has been based on its ability to harness science to innovation and economic growth. Our scientific curiosity and open societies are not going to go away. But the economic mismanagement, which will be amplified by the use of public waste to regenerate growth, may yet be our downfall in the kind of world Gray has described. It may well be the long-predicted suicide of the West ironically brought on by our prosperity and seeming ability until now to out-produce anyone else.
The last of the contributors is David Hale, a Chicago-based economic consultant. There is almost nothing he wrote that I would disagree with. His article might just as easily have been included in Quadrant. He spends a single sentence in a sidewards glance at Rudd’s piece, and then goes on to describe the current economic disaster in ways I would do myself.
The central point made by the Prime Minister was that the recession was caused by neo-liberal ideology and free market fundamentalism that left many of the major and most strategic economic actors without proper regulation. It was capitalist greed that led to the downturn. Only the sound economic management skills of Rudd in Australia or Barack Obama in the USA will be able to save capitalism from itself.
David Hale does not see it that way. He states unequivocally that “the downturn resulted from the collapse of the residential real-estate market in the US”. He describes three factors that led to the downturn, the first one being the excess in global liquidity and the exchange rate manipulation of developing countries, both of which are unambiguously government-generated problems. But then he goes on to say this:
The second factor nurturing the crisis was the American [government’s] obsession with home ownership. Since the days of Herbert Hoover, the goal of all American administrations has been to promote a rising level of home ownership. During the 1930s, Congress created new major intermediaries, such as Fannie Mae, to promote mortgage lending. In 1977, it enacted a law compelling banks to provide more credit for low- and moderate-income residents. During the past decade, the government-sponsored enterprises (GSEs) Fannie Mae and Freddie Mac expanded their lending for sub-prime and Alt-A mortgages to US$1.6 trillion. This helped to promote a boom which was already starting due to record low interest rates and steadily rising home prices. Congress supported the action because it was anxious to promote home ownership. The result was a surge of lending to households without any verification of income or ability to service the loan. The home ownership rate rose from 65% in 1995 to 69% in 2005, but millions of people obtained mortgages without any capacity to repay them.[emphasis added]
Sure, to this deadly mix was added the securitisation of mortgages that met with an inadequate set of ratings agencies. But the problem originated with governments. This is not a free market meltdown but a catastrophe that was created by politicians with no idea of what they were doing or of the consequences of the individual acts they sponsored. The tipping point may have come at the end of 2007 but the catastrophe was always coming.
For our Prime Minister or the American President to act as if they are saving us from a market-driven downturn, when it has been the attempts by the political class across the world to manipulate markets that caused the downturn in the first place, is insufferable but par for the course. The economic ignorance of a large swathe of politicians on the Left is a major source of economic instability, and it is a problem that probably cannot be contained since something like half the time it will be they who form government. That this same infection seems to have spread to politicians on the Right only makes the problem worse.
Just reading these essays has been a dispiriting experience. The contributors are listened to and help to form opinion on the Left side of politics. The fact that much of this illiteracy has slipped across the aisle only means that as a society we may have nowhere to turn to protect ourselves from the kinds of market manipulation that will only make us less well off.
I keep coming back to the idiocies of Keynesian economics. It tells governments to spend money and that doing so will only do good. It encourages useless wasteful expenditures which create no value and which only cause the economy’s wheels to spin. It diminishes our ability to grow and prosper. The postwar period could have produced an even more extraordinary improvement in real earnings and personal incomes than it did. Instead, in each succeeding year, our growth has been creamed off by governments who have taken larger and larger shares for their own use while regulating private industry into a defensive shell.
But this is no longer just a matter of a few percentage points difference in growth rates. As John Gray has argued, we in the West are looking at a debilitating loss of income that will leave our societies vulnerable to those who can exploit our technologies but who could not care less about the welfare of their citizens or the natural environments in which they live.
We in the West once understood how to develop strong economies. Kevin Rudd’s article reminded me that such knowledge is not possessed by all. The coin of the political realm is now the creation of jobs irrespective of what those jobs actually do. The Soviet Union had no unemployment for almost all of its seventy-odd-year history, but those who had “jobs” produced next to nothing because they did not have the market to guide them, either in what to produce or over which inputs to use.
Why these questions are important was one of the major ideas developed by Friedrich Hayek, the arch “market fundamentalist” to whose good advice and sound counsel our Prime Minister has closed his mind. On the surface Rudd appears to be guided by some defunct academic scribbler, but in reality looks to be making it up as he goes along.
Steven Kates teaches economics at RMIT University in Melbourne. He reviewed the Prime Minister’s initial essay in the March 2009 issue of Quadrant.