Neoliberalism grows up

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 that 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  It’s been replaced by the green economic agenda, and that’s the one that is really driving a lot of businesses, government now, and really there is no place for neoliberal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.

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 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 bathwater, when the bulk of the policies from the last 25-30 years are still generally being followed.

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