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Opinion: Gareth Kiernan says neoliberal economic policies didn't die, they just got embraced and adjusted by mainstream parties

Opinion: Gareth Kiernan says neoliberal economic policies didn't die, they just got embraced and adjusted by mainstream parties

By Gareth Kiernan*

If you try and think about the ACT Party since the 2011 election, the chances are that your mind ends up dwelling on a large German guy with a penchant for challenging copyright laws rather than on any facet of the ACT Party itself.

Has there been a less relevant organisation in New Zealand politics over the last 18 months?

On TVNZ’s Sunday programme immediately following the 2011 election result, former Labour Party President Mike Williams said that “the sun is setting on ACT.” 

Dr Claire Robinson, Pro-Vice Chancellor and political marketing expert at Massey University, chimed in saying ACT’s “neoliberal economic agenda, which was quite sexy in the 1990s … doesn’t have a place now.  It’s been replaced by the green economic agenda, and that’s the one that is really driving a lot of businesses, government now, and really there is no place for neoliberal economics.”

I’d argue that the demise of ACT is more to do with the party’s own ineptitude than the extinction of neoliberal economics.

The loss of the party’s focus on its core economic policies under Rodney Hide’s leadership started the slide.

Subsequent internal wrangling, Don Brash’s coup, the infamous cup-of-tea saga, and questions about John Banks’ fit with the party’s liberal moral policies all turned more voters away.

ACT has also struggled with the perception that its support simply came from rich people with a self-interested motive.

Dr Robinson’s eulogy on the death of neoliberal economics came after a nine-year stretch for Labour in government where the trend towards smaller government was reversed.

Government spending as a percentage of GDP lifted from a 28-year low of 29.4% in 2002 to 31.4% by 2007.  The Global Financial Crisis and Canterbury earthquake further expanded the size of government spending to 35.6% of GDP by 2011, the highest level in about 20 years.

Furthermore, the Global Financial Crisis has also been popularly seen as an indictment on the virtues of the free-market philosophy, with a lack of regulation in financial markets seemingly bringing out the worst in human behaviour, rather than leading to “optimal” outcomes.

Key policies remain in place

One of the difficulties with using a term like “neoliberal economics” is that it can mean different things to different people.  But if we assume that Dr Robinson is referring to the economic policies that were implemented between 1984 and the mid-1990s, it seems odd to say that there is no place for neoliberal economics.

The policies that laid the foundation for the economic reforms in the 1980s and 1990s generally remain in place today.

These policies include:

· fiscal responsibility and the requirement for the government to balance the budget over the medium-term

· the focus of government spending on core areas of responsibility such as health and education rather than on specific industry subsidies

· a broad and relatively flat tax base

· market-determined interest rates

· a floating exchange rate

· trade liberalisation

· free flow of international investment funds

· the privatisation of state-owned enterprises

· the reduction of regulations that increase business costs and inhibit market competition.

Even under the last Labour government, most of these platforms were maintained.

Yes, there was a little more direct industry assistance, an increase in the top marginal income tax rate, and some increase in the government’s commercial presence (Air New Zealand, Kiwibank, KiwiRail), but these were all reasonably minor policy adjustments compared with the scale of the 1980s reforms.

The reality is that the economic policy directions being espoused by both major parties in New Zealand are simply different designs on a neoliberal foundation.

Over the last 15 years, there has been a moderate pull-back from the heavily free-market ideology that typified the periods when Roger Douglas and Ruth Richardson were finance ministers.

Under Michael Cullen, there was a definite push towards using the tax and welfare system to increase the amount of redistribution and targeted financial assistance to households. There was a deliberate increase in the size of government spending – a shift that probably would have occurred in specific areas even if the fiscal accounts hadn’t been overflowing during last decade’s boom years.

The Global Financial Crisis has also rammed home the fact that the perfectly competitive market underpinning neoliberal economics very rarely exists.

Perfect or complete information for market participants is a key element of a perfectly competitive market. But it is clear that, in the case of both global investment markets (eg mortgage-backed securities) and domestic investment markets (eg finance companies), people handing over their money didn’t have a complete understanding of what they were investing in.

“Buyer beware” remains an important concept, but if the government can cost-effectively improve market information and transparency, then intervention is a valid option. Worldwide, we are seeing increased levels of prudential oversight and regulation to rectify the overly hands-off approach of the previous decades.

The burden of proof

The key to remember is that, although there are potential grounds for government intervention almost everywhere, the burden of proof needs to be on the government improving society’s overall wellbeing by stepping in.  Using a sledgehammer to crack a nut is a poor use of a country’s limited resources and will ultimately be detrimental to wellbeing over the medium-term.

If I had to sum up New Zealand’s current economic policy direction, it is now one of social capitalism.

The “social” element of social capitalism is captured by the greater emphasis on redistribution introduced by Labour last decade. The fact that the National Party has kept Labour’s Working for Families policy in place hints at the electorate’s desire for a greater degree of equality than would have been the case otherwise.

The laissez-faire capitalist element from the 1980s onwards remains, even if things are a little more hands-on than they were 20 years ago. The recognition that a truly free market rarely exists does not change the neoliberal policy foundations, but simply reduces the hurdle rate for government intervention and increases the potential scope of government involvement in markets.

Rather than writing the death notice for neoliberal economics, I’d suggest that it’s grown up a bit, gaining a more realistic view of how markets actually work, as well as developing more of a social conscience.

It’s also moved from being a relatively radical prescription to becoming the economic orthodoxy – an outcome that has left ACT without a unique or distinctive policy platform. Indeed, having your policies adopted by the mainstream is a major risk for a single-issue party – the Greens should beware!

As such, the demise of ACT should not be seen as equivalent to the demise of neoliberal economics – it is partly a reflection of ACT’s own internal problems and, ironically, partly a reflection of neoliberal policies being followed by other parties.

Even the social capitalist adaptations to the policy direction, both under the last Labour government and in the wake of the Global Financial Crisis, are subtle policy shifts rather than complete U-turns.

In other words, writing off neoliberalism is like trying to throw out the economic baby with the bath water, when the bulk of the policies from the last 25-30 years are still generally being followed.

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Gareth Kiernan is the managing director at Infometrics, an economic consultancy and forecasting service, and he manages the forecasting team. You can contact him here »

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16 Comments

Why does economic policy have to have a name? And why are we arguing over what that name may be?

What an odd comment; how can one have a meaningful and worthwhile discussion about different economic policies if we don't have labels by which to refer to them and understand what is meant by such terms? 
 
Sports fans would struggle to talk to each other if there were not generally understood terms for concepts such as  "a game in which teams of eleven attempt to kick a ball into a goal" or "the man who bowls the ball at the batsman with a view to getting him out".

What I find interesting about neoliberalism is the way it has twisted language (spinned things to serve the interests of power) to mask underlying intentions.
 
We have a 'learned' to reflect this spin in our own language.
 
Take, for example, the Working for Families policy - it is referred to by Gareth (a trained economist I assume) as a 'redistributive' policy - implying the taking of tax (revenue) collected from the more wealthy and redistributing it to the less well off.
 
However, my understanding is that it is a tax credit - meaning if one qualifies as a PAYE earner, then the amount of tax that you as an earner might have paid is lessened by way of this credit (meaning return of your own earnings back to you).
 
So, it's not really redistributive in terms of proper academic language associated with tax policy - folks receiving WFF tax credits don't get a transfer payment (from tax paid by someone else) rather they get a credit on their own income earned.
 
At least that's how I understand it - in other words folks qualifying for WFF aren't on "negative tax" (meaning they don't get paid a redistribution from others).  And neither do they pay "no tax" as they are still subject to GST and indirect taxes.
 
It seems to me that WFF, if redistributive in nature was a case of the Government foregoing its tax revenue in favour of employers being able to continue to offer below a living wage.  So, it is a policy that favours the low income employers.
                   

You can indeed receive payments in WFF. Am personally supportive of the negative tax, for a number of reasons, including that:
The pay pyramid has steepened significantly over the last 20 years, and this helps balance that effect.
Essential workers (and we'll all have views about who they are) need to be able to live in comfort and dignity, and some convenience to their work place.
While to some extent it is an employer subsidy (in that employers can now employ people for wages they probably would not otherwise accept); it is probably helping marginal businesses and industries survive. I susepct the fairly heroic survival of some export industries is partly because of WFF.
To National's moderate credit, they presumably have recognised these things, and don't seem to have even murmured any change in policy.

If your family income is below $22,724 a year after tax (or $26,356.36 before tax), you may also be eligible for the minimum family tax credit (MFTC).
 
So does that mean it is redistributive ("negative tax" in nature) for a family with a gross income of $26,356.36 - which is less than the minimum wage for a 40 hour week?  Such a family/individual would qualify for the unemployment benefit and be rebated for the part time work .. so effectively WFF in this MFTC case is really a proxy for the unemployment benefit, isn't it?
 
In which case, yes, it is redistributive.
 
But for (I hope!) the greater majority who are eligible, WFF is a tax credit - not a redistributive tax mechanism.
 
I appreciate the point you re making but it's all a matter of the way it is framed (i.e. 'seen' or 'interpreted') by society at large - and most people see WFF as a welfare benefit (a transfer) when technically it is not.

Kate,
I believe that is indeed how it works. To my mind, it is most definitely not the unemployment benefit; it very much encourages people to work. Without this, the marginal benefit of working  at the minimum wage over being on the dole is minimal; so for many, especially after paying transport, clothing and other work related costs, being on the dole would otherwise be better. Some of that is counter intuitive, but I believe stacks up in logic. Society gets the essential work done; these people have a job and are better off for it, and some businesses survive.
My preference would be for generally flatter pay structures in society generally- say as per the 1980s. Then you wouldn't need WFF, but I don't think that's returning in a hurry.

But you are missing my point, I think, about "framing" - although I agree with you about the problem we have with respect to the silly way the dole rebates - which causes disincentive to take on part time employment.  So, yes, having such a mechanism within WFF (still a proxy for the dole where this mechanism is concerned) is useful.  But, WFF is not a redistributive tax mechanism - aside from in this example case above (I assume).
 
Gareth Morgan's Big Kahuna is the only proposal I've seen which addresses this ridiculous situation we have got ourselves into with tax and welfare.  And the costs associated with administrating both regulatory regimes (tax and welfare) are even more ridiculous than the convoluted nature of these programmes.

He's right that politicians adopted them - that's because the requirement is for less thought.
 
But they have died, in terms of societal outcome. All the mechanism does, socially, is suck the remaining wealth upwards, whilst failing to account for the things that support life.
 
Air quality, water quality, resource depletion, overpopulation, none register - in fact, as Groser exemplifies, we run away from those 'costs' even if they're socially identified. They are the reality. Using money as the ultimamte arbiter, can't possibly work when you issue it in exponentially-increasing quantities, on a finite planet.
 
PS - justify 'in the wake'. Who decided the global financial crisis is in the rearview mirror? A handful of narrow folk in a food-producing, first-world, unpopulated country? There are a lot of folk, in a lot of courtries, who'd disagree, and a lot of us who will tell it can't reboot.

Yeah, I saw that too. All a part of the 'language' - again designed to mask the reality. And Gareth wouldn't even be aware that he is doing someone else's bidding.
 
And that's another of neoliberalisms 'goals' - an educated peasantry who willingly took on debt to get there.
 

Gareth, a good article, and in my view a fair summary of the political consensus where social capitalism is now largely accepted by most; and it is only really minor degrees of separation between the main parties. (for what it's worth I largely share that consensus view)
The one very significant area NZ has not adapted our following of the policy, is in monetary policy, and especially how that affects our dealings with the rest of the world.
We seem to have a naïve view that the rest of the world plays fair all the time, when they blatantly (and I would say reasonably) look after their own national affairs as first, second and third priorities. 
We have sold off the farm, literally and figuratively, with very little to show for it in terms of national wealth. I suspect Mr Wheeler now understands that, and would like to respond accordingly, but the government don't want to push any short term pain on their constituents that would likely entail.
 

Well if this is an emerging new consensus - then that is a disappointment.
 
http://en.wikipedia.org/wiki/Social_capitalism
 
Social capitalism posits that a strong social support network for the poor enhances capital output. By decreasing poverty, capital market participation is enlarged. Social capitalism also posits that government regulation, and even sponsorship of markets, can lead to superior economic outcomes, as evidenced in government sponsorship of the internet or basic securities regulation.. .and situates social capitalism as a "middle way" between socialist collectivism and neo-liberal individualism.
 
To my mind it is a political philosophy which supports the concept of a working poor - and as Bernard's article on today's Top 10 indicates - the new temp/casual working model in the US demonstrates these working poor are working for corporations (e.g. Walmart) which return huge profits to their owners; 
 
New Federal Reserve data analyzed by both Allegretto and Josn Bivens at the Economic Policy Institute shows that the Waltons now hold as much wealth as the bottom 40 percent of Americans combined.
http://thinkprogress.org/economy/2012/07/17/534591/walmart-heirs-wealth-combined/?mobile=nc
 
It makes no sense to me why a company like that can't pay its workers a wage which is reflective of the value of the labour they use to generate such profits.
 
So, no, there is nothing socially or morally conscientious about an economic or political system which accepts poverty as a given and as an objective seeks to enslave its population, not only to their employers but to the State as well!
 
There is enough work being done globally and enough profit being made globally to eradicate poverty the world over.
 
You and Gareth both need to read a bit more in political economy. Indeed interest.co.nz would be best advised to get an academic skilled in this discipline to become a regular contributor.  You are failing your readership with all these orthodox schoolled folks. Time for some critical thinkers to be added to the mix.

Kate,
I actually share your sentiments; my support is more of the social direction that neo liberalism has taken, than of anything like neo liberalism in its "greed is good" purest form. Nevertheless for the most part businesses as a whole are probably better at picking the winners and losers in terms of future consumer priorities, than governments are. As noted above in a separate reply to you, there are some serious hangovers, like the ridiculous packages that CEOs and Directors now receive, in a sycophantic employ your mates kind of way, that help suck a share from the lower skilled, or at least now, low paid. WFF at least helps mitigate that. Other solutions to the low paid are not obvious. Significant rises in the minimum wage will knock a fair number of SMEs in particular out of business, and have jobs go with them.
I should note that selling prized state assets in industries like power companies that will survive no matter what with a fair degree of monopoly advantage, having entrenched some of those ridiculous packages for the top table, also get my blood pressure up. It is an area where there is most definitely not political consensus, and one where I would probably choose my party vote. The fact they are being done with a foreign exchange monetary system that means there will be an inevitable free leakage to foreigners of those assets; is the separate distinguishing issue politically at present, it seems to me. NZ First and the Greens appear to be in line with my thoughts on these things. Labour has been too weak kneed so far to really declare what they stand for, so my leaning towards them is changing. Hopefully they will sort that soon.
Each of the above two issues is worth probably $5-10 billion per annum to NZ's wealth, and pales most other political decisions into insignficance.

neoliberal economics + politicians turns it into the infamous Reagan voodoo economics...
ie even if it ever was a valid school of economics, it was twisted into the undead....and yes I mean that....IMHO.
No matter how many times you show it up for the falacy it is, it just keeps coming back...
regards

"The above also shows the absurdity of another of neo-liberalism’s premises that markets are rational and the optimal result for the economy and society is the sum of each individual’s rational self -interest. This stems from a fallacious use of both John Stuart Mill’s utilitarianism theory and the selective use of Adam Smith’s “invisible hand” metaphor in Wealth of Nations (1776). Neither man wrote in the context of unfettered global finance and indeed Smith writing in 1776 was describing his ideal circular economic flow within a national economy, not a global trans-national one. Mill too spent much of his later life trying to soften his initial theories from Principles of Political Economy (1848) by adding extra chapters and recognising that sometimes the state was required to protect the weak from the strong, even in commercial affairs.
It should seem obvious that often the net aggregate of all the self-interested actions of individuals can be detrimental to society as a whole as often as it can be unintentionally beneficial. A primary reason individuals group together in a society and form political institutions is to provide protection against one another under a rule of law, so individuals can’t take actions which may be personally rewarding but are detrimental to too many of their fellow citizens. Brian Easton points out in New Zealand

“The pursuit of self interest became the central ethical principle in public policy of the rogernomes….It is an enormously attractive principle for what it says is ‘do what feels good for you and that’s good for society’. At a stroke most of the great ethical dilemmas are resolved.”

 
http://unframednz.wordpress.com/2012/06/19/an-essay-revisiting-rogernomics-in-an-age-of-globalisation/

"The recognition that a truly free market rarely exists does not change the neoliberal policy foundations, but simply reduces the hurdle rate for government intervention and increases the potential scope of government involvement in markets."
 
Government sticks finger into market, which distorts it, then points to distortion as a reason to intervene. Beautiful </shenanigans>