The Reserve Bank’s decision to lower interest rates last Tuesday – which surprised many – shows that the Australian economy is by no means fully recovered from the Global Financial Crisis (GFC). Indeed new pressures are beginning to take their toll, not least the downturn in commodity prices and decline in Chinese growth rates.
The Treasurer Joe Hockey suggests that if his government continues on its path of ‘fixing Labor’s mess’, this will give the Reserve Bank space to continue adjusting interest rates, to the benefit of borrowers and the economy.
There are four points need to be made in response.
First, the Reserve Bank is cutting rates because the economy is slowing, not because the government has been adequately dealing with the ‘debt and deficit crisis’.
Second, it seems that cutting interest rates all the economic policy elites believe they have available in their armoury to assist them to manage the macro-economy.
Third, as a result of this focus on the financial system and the supply of credit, the Reserve Bank is helping to fuel an asset price bubble, particularly in real estate. Ever since the GFC, government and Reserve Bank policy has been the equivalent of trying to help a drunk alcoholic by picking him up off the floor, propping him against the bar and giving him another drink.
The fourth point is that the Treasurer’s ‘debt and deficit’ mantra is simply not true.
According to Mr Hockey, we need to deal with the debt and deficit crisis by undergoing a process of austerity through cuts to public spending, and further erosion of the welfare state through measures such as Medicare co-payments.
This is false. Australia has largely avoided the worst symptoms of the economic crisis that almost brought the global economic system to its knees in 2008. This is actually a source of disappointment to the free market fundamentalists in the government. Their colleagues in other parts of the world used the crisis to regain the upper hand in a debate that, by all reason, they should have lost, and to reassert their control over economic policy making.
Most Australians of a certain age will remember Paul Keating’s ‘recession we had to have’. Hockey is now creating the crisis the Liberals want to have so that the Coalition Government can implement a radical free market agenda that has no broad support in the Australian community, as the Queensland election result and the parlous state of the Abbott Government’s fortunes demonstrate.
In 2008, massive spending by the Rudd and Chinese governments managed to protect Australia from the worst of the economic crisis that beset the rest of the world. In Britain, Europe and the US the crisis initially represented an existential threat to the present system of financial capitalism, a threat that was overcome by shifting the mountain of toxic debt from private to public balance sheets.
What was in reality a profound crisis at the heart of the debt-fuelled, inflated asset price system that is contemporary capitalism, manifesting itself particularly in over-inflated housing markets, could then be re-sold as a crisis of government debt caused by excess spending, especially on social programs.
Australia, with relatively low levels of toxic debt and highly profitable banks, did not have the kind of banking problem that beset many other nations. But because of the interconnected nature of the global economy, it was exposed nonetheless to the global credit crunch and economic downturn. In the face of collapsing private demand the government’s only real option if it wanted to avoid recession or worse was to increase demand through government expenditure financed by increased borrowings.
This is what occurred. In either case, whether through taking toxic debt off private balance sheets or propping up demand through public spending, the result was to increase the level of public debt. When markets fail, only governments can rescue the system. But the important thing to be clear about is that government debt increased as a result of the crisis: it did not cause the crisis.
In the wake of the collapse of several major institutions, such as Lehman Brothers, when even Alan Greenspan was experiencing a crisis of belief in the inherent stability of the new capitalism and its ability to deliver never-ending growth, it seemed that neoliberalism had finally been exposed for what it is: an economic doctrine of little theoretical or empirical integrity. Yet that was to under-estimate its strength as an ideological and political movement based in the real class power of the global political and economic elites. If there were any doubts about neoliberalism’s political and cultural power, they quickly disappeared. The primary means by which this dominance was maintained was the rapid propagation of the myth that the crisis was the result of excessive government debt and spending.
Hockey is following the neoliberal playbook with precision: manufacture a crisis of government debt and expenditure; get an ‘independent’ commission to come up with recommendations to deal with it; ensure that many of the recommendations are extreme in order to reinforce the severity of the ‘crisis’ and to give cover for subsequent, slightly less extreme policies; finally, introduce a milder form of the commission’s recommendations, which are still more extreme than would have been possible without the manufactured crisis, arguing that they are all necessary because, as the ‘independent’ commission says, there is a crisis to deal with.
By this devious means, Hockey’s goal is to further strip the public sector and extend the reach of market processes into all aspects of existence. The attack on universal health care is one example.
This is not to say there are no structural problems in the Australian economy. There are. Some of them are specific to our country, while others are shared across the global economy. One of them goes back to the way Australia managed to avoid the worst of the global financial crisis, and has its echoes in the Reserve Bank’s latest rate cut. This has nothing to do with the massive pumping of money into the economy by the Rudd government, which saw a large, but by no means catastrophic, rise in government debt – which is what Joe Hockey would have us focus on.
The long-term problem is that Rudd’s response did nothing to reduce the asset price and debt spiral that is the underlying cause of the global economic crisis that continues to haunt the world. Indeed, aspects of Rudd’s response, specifically increasing the First Home Owner’s Grant, and the Reserve Bank’s unavoidable, and continuing, lowering of interest rates, were specifically intended to prevent the asset price bubble from bursting. The continuing mad inflation of Australian housing prices is the result.
The other, global, structural problem is the fundamental lack of viability of an economic system founded on ever-growing credit and relying on never-ending, environmentally unsustainable growth to meet the interest payments. Now that is the basis of a real crisis.
Colin Long is Victorian Secretary of the National Tertiary Education Union and President of the Victorian Trades Hall Council.