Tuesday, 27 January 2015

After the Crash

After reading Thomas Piketty's Capital in the 21st Century late last year, I found myself wanting to read more economics.

I'm not an economist, but as a social policy professional I need to know enough about economics to recognise when economists are having me on.  If the economics gets too technical or includes too many equations it's right over my head, but if it's written in plain English I can usually understand it.

In the last couple of months I've read two books written in the aftermath of the 2007 Global Financial Crisis - one about Australia and one about the USA.

The first, published in 2011, is The Sweet Spot: How Australia made its own luck - and could now throw it all away by Peter Hartcher.  Hartcher is not really an economist, he is a political journalist working for the Sydney Morning Herald.  If you've read his columns you'll know that he is on the "dry" end of the Fairfax spectrum, but at least he doesn't work for Murdoch.

Hartcher's question is, why did Australia come out of the GFC better than the rest of the world's advanced economies?  Was it just luck, or was it good judgement and good policy?

The proponents of luck suggest that the main reason we didn't suffer too badly is because we have coal and can sell it to China.  As long as this continued we could sail through the stormiest waters.  Hartcher disagrees.  Chinese exports, he says, are a tiny fraction of our economy.  The answer lies in good policy.

To explain he takes his readers on a rollicking journey through Australian history.  The true heroes of his story, however, are Bob Hawke and Paul Keating.  The Hawke government, with Keating as Treasurer, was elected in 1983, a time of entrenched inflation and unemployment.  The Fraser Coalition government which they replaced had failed to solve these problems and been punished as a result.

Hawke and Keating had two potential models to respond to this situation.  One was the ideological free market reforms of Thatcher and Reagan, involving more business-friendly labour laws (along with a bit of union-busting), deregulated financial markets, cuts to welfare programs and privatisation of State-owned enterprises.  Thatcher and Reagan, says Hartcher, achieved economic recovery at the expense of equity.

Alternatively, they could have followed the democratic socialist model of various European countries, exemplified by Sweden.  These countries had highly interventionist governments, high taxes, generous social benefits and high levels of government regulation.  They managed to sustain equitable societies but at the cost of inefficient economies and high levels of public debt.

The genius of Hawke and Keating, according to Hartcher, was their ability to chart a middle course between these two extremes.  On the one hand, they implemented a Thatcherite program of deregulation.  They wound back industry protections, opened up the banking system, introduced a more flexible approach to industrial relations and kept the lid on government spending.  At the same time, rather than busting unions they worked closely with them, striking a formal Accord with the union movement to promote reform.  Under the terms of this agreement, unions agreed to link wage increases to gains in productivity.  In return, the government agreed to sustain what they called the "social wage" - employer superannuation contributions, a welfare safety net, Medicare, public health and education.

The result was what Hartcher sees as a more or less ideal balance between efficiency and equity.  Productivity grew on the back of their economic reforms, as it did in the US and the UK, but unlike those nations a share of it flowed back to ordinary workers through wage increases and better public services.  This was all achieved without the stifling tax rates and government debt of Northern Europe, and without the social conflict and increasing poverty of the US and UK.  As a result, Australia was in a stable situation when 2007 rolled around.

The danger, he says, it that we seem to have gone away from this approach.  The Howard government lived off the back of the Hawke and Keating reforms, using the benefits to cut taxes and retire government debt but making relatively few meaningful reforms of their own.  The Rudd government began to tip the equation towards equity, failing in the task of economic reform and placing the Hawke-Keating legacy at risk.

The good thing about books by journalists is that they know how to write.  Hartcher tells a good story, mixing analysis with anecdote, avoiding jargon and over-analysis, keeping the tale moving towards its conclusion.  He makes a persuasive case.  However, when it comes down to it his analysis is dubious.  In focusing on Australia he largely ignores the fact that we are at the mercy of larger economies and the winds of global change.  He also thinks within a very narrow band.  What, after all, is the difference in policy terms between Keating and Rudd that one could be reforming hero and the other too focused on equity for his own good?  In pursuit of the big story Hartcher ends up in generalities.  The world has moved on since the days of his heroes, but he has failed to move with it.

Which brings me to my second book, Jeffrey Sachs' The Price of Civilisation: Reawakening virtue and prosperity after the economic fall, also first published in 2011.  Sachs also has a history of economic journalism and has written a number of popular books on economic subjects.  However, he is also a serious economist - a Professor at Columbia University and special advisor to the UN Secretary-General.  He describes himself as a "clinical economist" - his career is built on diagnosing national economic problems in various parts of the world and prescribing remedies.  To do this, he says, he needs to have a holistic understanding, seeing economics as integrally connected to politics, culture and ecology.

This book applies that skill to the US after the GFC.  Unlike Australia, the US did not come out of the crisis well.  To this day unemployment remains high, growth has slowed, poverty and inequality continue to rise, and government debt continues to grow.  What is wrong in the US, and how can it be fixed?  He outlines what he sees as six elements that contribute to America's entrenched economic problems.

The first is the ideological attachment to free markets as the source of all things good.  This belief means that regulation and intervention in markets is a "no-go" area in US politics.  This belief, he says, is a fallacy.  Well functioning economies should achieve efficiency, fairness and sustainability and all these aims require good government policy to guide the actions of private sector players.

The second problem is what Sachs refers to as the "retreat from public purpose".  From the Great Depression onwards, the USA has a history of public welfare programs - the "New Deal", the "War on Poverty".  However, in the 1980s the US began to retreat from this, seeing government programs and government generally as a problem not a solution and drawing back from a commitment to social equity and from a belief that government action can contribute to this.  The result is increasing poverty and inequality.

This is one contributing factor to a wider problem - America is a divided nation.  As well as a divide between rich and poor, there are divisions on geographic, ethnic and political lines.  These often break out into actual violence, at other times they simmer below the surface.  Either way, they undermine the sense of shared social purpose which, says Sachs, can still be detected beneath the divisions.

The fourth problem is the impact of globalisation on the US economy.  This has led to the loss of key industries as manufacturing shifts offshore.  Wealthy companies don't mind - they just shift their money elsewhere - but ordinary Americans find their jobs disappearing and nothing replacing them.

The fifth problem is that American politics has been captured by corporate interests.  American politicians rely on the corporate world to finance their campaigns.  Corporate lobbyists infest the halls of power, and Presidents of both parties draw their senior advisors from the corporate world - the Republicans from the oil industry, the Democrats from Wall Street.  Government has effectively been captured.

Finally, ordinary Americans are distracted and disengaged.  Civil society and local community organisation are in decline and Americans are stuck in their loungerooms, focused on reality TV and the trivialities of cable news, addicted to fads and the latest consumer goods.

Can it be fixed?  Well, obviously Sachs thinks it can, otherwise why write this book?  Not that he thinks there will be another "American Century" - he doesn't expect the US to ever be the dominant world economic power it once was.  However, he does believe it can regain a measure of prosperity.  For this to happen, three things need to change.

First, he sees a need for a general move towards mindfulness.  Ordinary Americans need to learn to move beyond their distractions and obsessions and become mindful of what is important to them in the longer run.  He encourages his fellow citizens to seek the "middle path" advocated by great sages such a Buddha and Aristotle, to focus on having enough rather than excess, to seek meaningful work, to build community and work towards ecological sustainability.

At the government level, he proposes an eight point reform program to put American government back on track.  This includes the goals of raising employment and quality of work life, improving quality of and access to education, reducing poverty, avoiding environmental catastrophe, balancing the budget, improving governance by breaking the link between government and corporations, an appropriate focus on national security and a goal of raising happiness and life satisfaction (rather than focusing exclusively on economic growth).

To pay for this, taxes need to increase.  He points out that through the 2000s successive governments cut taxes to the rich to the point where government finances are in serious trouble.  The Tea Party's solution - more spending cuts - he regards as simply not feasible.  The vast majority of the budget is spent on entitlement programs such as social security and Medicaid (the US's backstop health program for the poorest members of society).  These can only be cut from their present level if politicians are willing to have people starve or die from untreated medical conditions.  There is just not much fat in the federal budget, and the favourite targets of the Tea Party activists - foreign aid and allocations for "pet projects" - are a miniscule proportion of the budget.

Meanwhile, tax cuts for the rich have deprived the government of the revenue it needs to meet the basic needs of the poor.  These cuts need to be reversed, but this will only happen when politicians are no longer in the pockets of big corporations.  To do that he advocates public campaign funding, a complete ban on corporate donations and banishing corporate lobbysists from the White House and Congress.

Political reform, in turn, can only be brought about by an engaged, active populace.  Will the next generation - the Millennials, as some call them - be able to bring about this change?  Only time will tell.

Sachs does what Hartcher fails to do.  He looks beyond the superficialities of political rhetoric and "big picture" economics to what is actually going on in his society, from top to bottom.  He grasps the complexity of economic systems and their connections with society, ecology and the political process.  It's not simple to fix the problems he finds.  A lot of people are quite happy for them to remain unfixed, just as they are here in Australia.

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