[The] culture wars are just a device to keep the right-wing base agitated enough to turn out [and] keep pro-rich politicians in office. …
The great majority of [climate change] “sceptics” are, in fact, credulous believers in what they are told by trusted authority figures, notably including conservative political leaders.
— Climate claims a victory in the culture wars, Inside Story, 17 December 2015.
The Global Financial Crisis has shown that, for most of the past decade, market estimates of the relative riskiness and return of alternative investments have been entirely unrelated to reality. …
In Australia … it has become routine for retired politicians, of all political persuasions, to be offered cushy jobs in the financial sector, provided, of course, that they have followed the right kinds of policies when in office. …
Public office is no longer a goal in itself but a stepping stone to bigger and more profitable goals.
The incentives to promote the interests of the financial sector while in office are obvious. …
An analysis by the New Economics Foundation concluded that for each pound paid to British bankers, society incurred a net loss of ten pounds. …
A study by the Center for Responsive Politics showed that about two-thirds of US senators were millionaires in 2008.
— Zombie Economics, Princeton University Press, 2012, pp 190, 186, 174-5.
Traditional models of on-the-job training (apprenticeships and traineeships) are in decline.
Funding for vocational education through the Technical and Further Education (TAFE) system has been slashed leading to the closure of manyTAFEs and large-scale loss of teaching staff.
Meanwhile, billions of dollars have been wasted on ideologically driven experiments with market competition and forprofit provision.
— Submission to the South Australian Senate inquiry into Vocational Education and Training.
Contents
Stranded Coal
Australia and the Global Financial Crisis
Life after the GFC
Zombie Economics
John Quiggin (1956)
Vice Chancellor’s Senior Fellow in Economics, Queensland University.
- Economics 101: What you need to know, ABC Big Ideas, 25 June / 4 December (broadcast) 2019.
- High Court rejects move to reverse penalty rate cuts, ABC RN Breakfast, 12 October 2017.
- Infrastructure investment, ABC Saturday Extra, 18 March 2017.
- Innovation: the test is yet to come, Inside Story, 10 December 2015.
- How New Zealand fell further behind, Inside Story, 11 November 2015.
Stranded Coal
[Thermal] coal prices [have declined] over the past four years, from US$140 per tonne to US$70.
At this price, most new coal projects are uneconomic, and many existing mines are not covering their extraction, transport and shipping costs. …
If low prices are sustained, investments in these projects will be lost.
Mines with lower production costs, say US$40 a tonne, will stay in business.
[However, the rate of return at US$40] per tonne of coal, which would have been US$100 four years ago, has now fallen to US$30.
So while the price of coal has fallen by half, the value of the coal reserves has fallen (in this example) by 70%. …
The G8 (the predecessor of the G20) committed to an ambitious [Carbon Capture and Storage (CCS)] program in 2008, proposing at least 19 projects by 2020. …
[So far,] only a single large-scale CCS plant is in operation, and many projects have been cancelled or suspended. …
{[There] is no large-scale sequestration technology available for the foreseeable future.}
[And even if there was, CSIRO has estimated that CCS] involves the loss of as much as 30% of the energy generated. …
A 30% reduction on current coal prices would render even the most easily extracted resources almost worthless.
(The strengthening economic case for fossil fuel divestment, The Conversation, 30 November 2014)
Australia and the Global Financial Crisis
The free-market dogmas that prevented real action to preserve the effectiveness of financial regulation in the late twentieth century have lost much of their force. …
The starting point for a stable regulatory regime must be a reversal of the burden of proof in relation to financial innovation.
The prevailing rule has been to allow, and indeed encourage, financial innovations unless they can be shown to represent a threat to financial stability.
Given an unlimited public guarantee for the liabilities of these institutions, such a rule is a guaranteed, and proven, recipe for disaster, offering huge rewards to any innovation that increases both risks (ultimately borne by the public) and returns (captured by the innovators). …
(p 113, emphasis added)
[Henceforth, financial] innovations must be treated with caution and allowed only on the basis of a clear understanding of their effects on systemic risk. …
[Governments have] a clear responsibility for the stability of the financial infrastructure.
(p 114)
[The] crucial issue that has not been faced so far is that publicly guaranteed institutions require much closer regulation than is consistent with policies of financial deregulation.
(p 115)
It is now clear that unrestricted financial innovation played a major role in the advent of the financial crisis by facilitating the growth of unsound lending and by undermining systems of regulation. …
There is an inherent inconsistency between unrestricted financial innovation and a regulatory system [that insures] market participants against [the failure of those same innovations.]
(p 115)
Even the exposure of spectacular fraud at the Enron Corporation, which had been nominated by Fortune magazine as 'America's most innovative' for six years in succession, did little to dent faith in the desirability of innovation.
(p 116)
Moral hazard can only be offset by the design of regulatory mechanisms that discourage excessive risk-taking. …
[The] only sustainable approach to financial innovation is one in which proposed innovations are introduced only after the implementation of necessary changes to regulatory requirements and risk measures.
If reliable risk measures cannot be computed, the associated innovations should not be permitted. …
[Despite the scale of the financial-market failure,] resistance even to the most obviously necessary measures of financial regulation remains strong, and progress towards a more coherent system of regulation has been glacial.
(p 117, emphasis added)
[Notwithstanding the fact that arguments] against government intervention … now appear as absurd special pleading on behalf of an overpaid and underperforming corporate and financial elite.
(p 118)
{With the spectacular failure of financial markets as risk managers, the need for a return to active, social risk management is obvious …}
[A] view of society as a set of institutions through which we jointly manage those risks … can be supported by reasoned ethical judgments that are consistent with diversity and individualism.
(p 119)
The Howard government kept the budget in surplus, but it was also careful to run the surplus down in every election cycle, with the aim of precluding expensive electoral commitments by Labor.
The result was a budget with a structural deficit, concealed by the revenue generated by the commodity boom.
[Howard and Costello's greatest act] of fiscal irresponsibility was [their] massive three-year program of tax cuts, aimed largely at upper-income earners …
[And,] despite the disappearance of the projected surpluses that were expected to pay for the tax cuts, and of any possible economic rationale for aiding high-income earners, the Rudd government [went] ahead with the cuts promised in the utterly different world of 2007.
(p 102)
(Robert Manne & David McKnight, Editors, Goodbye to All That? On the Failure of Neo-Liberalism and the Urgency of Change, Black Inc, 2010)
Zombie Economics (2012)
Princeton University Press
[In the 1970s, those economists] who wanted to restore the pre-Keynesian purity of classical macroeconomics … became known as the New Classical school.
Their key idea was what they called "rational expectations," which, in its strongest form, required all participants in an economy to have, in their minds, a complete and accurate model of that economy.
John Muth (1930 – 2005):(p 94)
[Rational expectations are] those that agree with the predictions of the relevant economic model.
[New Classical economics] reproduces the classical conclusion:
- that government intervention cannot improve macroeconomic performance and
- that, in the absence of such intervention, the economy will rapidly adjust to economic shocks, returning quickly to its natural equilibrium position.
The top four hundred income earners [in the US] paid average tax rates below 20% in 2007, a fact symbolized by Warren Buffett's observation that he paid a lower rate of tax than his secretary.
(p 142)
Inequality of Outcome → Inequality of Opportunity
Among the developed countries,
- the United States has the lowest social mobility on nearly all measures, and
- the European social democracies [have] the highest.
If inequality of outcomes is entrenched for a long period, it inexorably erodes equality of opportunity.
Parents want the best for their children.
In a highly unequal society, wealthy parents will always find a way to guarantee their children a substantial head start {[—] most obviously through private schooling, expansion of which has been a central demand of market liberals. …}
(pp 164-5)
[Between] 1985 and 2000, the proportion of high-income (top 25 percent) students among freshmen at elite [US] institutions rose steadily, from 46 to 55 percent.
[By contrast, the] proportion of middle-income students (between the 25th and 75th percentiles) fell from 41 to 33 percent.
(p 159)
Those with old money, but less than stellar intellectual resources, have their highly effective affirmative action program — the (formal or informal) legacy admission system by which the children of alumni gain preferential admission. …
William Bowen & Derek Bok:(p 164)
[The] overall admission rate for legacies was almost twice that for all other candidates.
(The Shape of the River: Long-Term Consequences of Considering Race in College and University Admissions, Princeton University Press, 1998)
A British study [has also] found that “low ability children with high economic status” … experienced the largest increases in educational attainment.
(p 164, emphasis added)
The Gini coefficient is a standard statistical measure of inequality.
It is equal to half of the average income gap between households, divided by the mean income.
So if average income is $10,000, then a Gini of 0.25 means that the expected income gap between two randomly selected individuals is:
2 × 0.25 × $10,000 = $5000. …
The pattern set by the United States in the 1980s, was followed, to a greater or lesser degree, by other English-speaking countries as they embarked on the path of market liberalism.
{Canada and Australia all followed a similar path, as did Ireland in the 1990s.
Most countries in the European Union resisted the trend to increased inequality through the 1980s and 1990s, but recent evidence suggests that inequality may be rising there also.}
The most striking increases in inequality were in Britain under the Thatcher government, where the Gini coefficient rose from 0.25, a value comparable to that of Scandinavian social democracies to 0.33, which is among the highest values for developed countries.
New Zealand [cut] the top marginal rate of income tax from
- 66% in 1986 to
- 33% by 1990.
(p 142)
[As a result] income per person in New Zealand [fell] from broad parity with Australia (a position sustained from European settlement to the late 1970s) to two-thirds of the Australian level.
The gap stabilized around 2000, [and] has not been reduced [since.]
(p 221)
While the problem is worse in the United States than elsewhere because of highly unequal access to health care, high levels of inequality produce unequal health outcomes even in countries with universal public systems.
Children growing up with the poor health that is systematically associated with poverty can never be said to have a truly equal opportunity.
(p 165)
An Epidemic of Laziness
[Real Business Cycle Theory interprets] fluctuations in aggregate demand and employment [as the] socially optimal equilibrium response to exogenous shocks such as:
- changes in productivity,
- the terms of trade, or
- workers' preference for leisure.
[This analysis implies that,] at the outset was the Great Depression, [either:]
- the state of scientific knowledge had suddenly gone backward by 30%, or …
- workers throughout the world had suddenly succumbed to an epidemic of laziness …
The Productivity Treadmill: Doing More With Less
Productivity growth is seen by economic rationalists as a matter of using market forces to squeeze more production out of a given (or, if possible, reduced) number of workers. …
Despite the success of Keynesian economic stimulus in protecting Australia from the impacts of the Global Financial Crisis, economic rationalists remain fixated on the microeconomic reform agenda of the 1980s, centered on a combination of financial deregulation and competitive pressure aimed at forcing people to work [ever] harder.
(p 210)
[The National Competition Policy] was highly successful in bypassing democratic processes [and popular discontent] to introduce market liberal reforms, but it eventually produced a backlash.
The upsurge of Pauline Hanson's One Nation party in the 1990s reflected an inchoate mass of grievances among Australians who felt excluded and looked down on by urban elites.
(p 219)
[The Institute of Public Affairs] was established in the 1940s as part of the reorganization of conservative politics that produced the Liberal Party, and was, for many years, primarily a Liberal fundraising conduit for business.
It was intellectually revitalized in the 1980s under the leadership of the former Liberal parliamentarian John Hyde, but maintained its historical role as a paid lobbyist for business interests, notably including the tobacco and, later, fossil fuel industries.
In this role, the IPA routinely attacked mainstream science and propounded pro-cartel views on economics.
[The Centre for Independent Studies (CIS),] founded in 1976, was more libertarian in orientation and, at least in its early years, more intellectually rigorous and challenging than the IPA.
It is the Australian representative of the Mont Pelerin Society, established by Hayek and others in 1947.
(p 212)
A striking feature of [Paul Keating's new deregulated, market-oriented economy of the 1990s] was the rise to prominence of a group of corporate raiders and speculators, notably including:
- Alan Bond [— Bond Corporation,]
- John Elliott [— Elders],
- Robert Holmes a Court [— Bell Group,]
- Christopher Skase and
- John Spalvins [— Adelaide Steamship. …]
"lead to more profitable uses of company assets, and as such they play a vital role in the capital allocation process."In reality, the entrepreneurs were simply the latest illustration of the adage that "genius is leverage in a rising market."
They relied heavily on borrowed money.
When interest rates rose, their paper empires collapsed, revealing a tangled web of fraud and malfeasance.
Most of the entrepreneurs went bankrupt, and many ended up behind bars or on the run.
Some, like Alan Bond, eventually bounced back, finding mysterious sources of funding that had escaped the attention of their creditors, who were paid fractions of a cent in the dollar.
(p 217)
[In the mid-1990s, economic rationalists seized on] methods of estimating productivity growth that appeared, [at least for a few years,] to reveal a "productivity miracle" unparalleled at any time in our history.
In reality, the apparent increase in productivity arose from the increase in the pace and intensity of work produced by the combination of microeconomic reform and the adverse labor market conditions that followed the "recession we had to have."
[However, these] increases in effort weren't sustainable [and so] productivity growth slowed to a crawl in the 2000s.
(p 220)
Moral Hazard
[The hedge fund Long Term Capital Management (LTCM)] looked for divergences between the margins generated by the markets and the values predicted by its computer models, then bet that the market would "correct itself" over time.
These bets paid off for a number of years, making big profits for LTCM owners and investors.
But, in 1997 with the Asian and Russian financial crises, all its bets failed at once. …
[Since] the leveraged investments made by LTCM had been financed by huge loans from major Wall Street and international banks [the] failure by LTCM ran the risk of generating a systemic collapse.
[Consequently, the] US Federal Reserve, under Chairman Alan Greenspan, orchestrated a rescue package. …
[In spite of needing a bailout, the] LTCM principals and investors escaped with much of the wealth gained from their earlier successful bets intact.
(p 56)
Crisis? What Crisis?
The Efficient Markets Hypothesis implies that there can be no such thing as a bubble in the prices of assets such as stocks or houses.
(p 45)
The Efficient Markets Hypothesis, which enshrines the market price of assets as the summary of all relevant information, is inconsistent with any idea that managers should pursue the long-term interests of corporations, disregarding short-term fluctuations in share prices.
According to the Efficient Markets Hypothesis, the current share price is the best possible estimate of the long-term share price and therefore of the long-term value of the corporation to shareholders.
If the Efficient Markets Hypothesis is accepted, public investment decisions may be improved through the use of formal evaluation procedures like benefit-cost analysis, but the only really satisfactory solution is to turn [delivery of public services] over to the private sector. …
The Efficient Markets Hypothesis implies that governments can never outperform well-informed financial markets.
(p 49)
Privatization is bad for unions, which tend to be stronger and more effective in the public sector.
It is usually good for the incumbent senior managers of privatized firms, who move from being rather modestly paid public sector employees, constrained by bureaucratic rules and accountability, to doing much the same job but with greatly increased pay and privileges, and far fewer constraints.
(pp 185-6)
[In 2007 all] of the checks and balances in the system failed comprehensively.
The ratings agencies offered AAA ratings to assets that turned out to be worthless, on the basis of models that assumed that house prices could never fall. …
The entire ratings agency model, in which issuers pay for ratings, proved to be fundamentally unsound.
But, these very ratings were embedded in official systems of regulation.
Thanks to the Efficient Markets Hypothesis, crucial public policy decisions were, in effect, outsourced to for-profit firms that had a strong incentive to get the answers wrong.
(p 64)
The failure of the Efficient Markets Hypothesis does not imply the converse claim that governments will always do better.
Rather, the evidence suggests that markets will do
- better than governments in planning investments in some cases (those where a good judgment of consumer demand is important, for example) and
- worse in others (those requiring long-term planning, for example).
The experience of the twentieth century suggests that a mixed economy will outperform both
- central planning and
- laissez-faire.
The financial markets that were supposed to replace governments showed themselves incapable of managing their own businesses, let alone the world economy. …
[During the crisis everyone] in the financial sector was happy to be bailed out.
But of course, as soon as the crisis was over, they insisted that everything had been under control and that no rescue was necessary.
(p 225)
Throughout the [global financial] crisis, the economics profession carried on, for the most part, as if nothing had changed.
And now that the immediate crisis has passed, market liberals are trying to pretend … it never happened.
(p 231)
