Rudd, Keynes and the economic crisis

February 14, 2009

In a 7000-word essay published in the February Monthly magazine , Prime Minister Kevin Rudd blames neoliberalism for the global economic crisis.

He promises to deliver a new "social democratic state" that will "save capitalism from itself", while protecting working people's interests.

However, while Rudd's prescription may provide relief for bankers, industrialists and developers, it is working people who will pay in the end.

In his essay titled "The Global Financial Crisis", Rudd blames the "global regulatory frameworks that have so spectacularly failed to prevent the economic mayhem which has now been visited upon us".

He argues that this discredited neoliberal framework must be replaced with "a global financial system that properly balances private incentive with public responsibility".

However, he warns, social democrats must not "retreat to some model of an all-providing state and to abandon altogether the cause of open and competitive markets…"

Beyond the rhetoric, what is Rudd calling for?

"The first step towards preserving confidence and restoring liquidity … was the provision of an explicit guarantee of deposits placed in mainstream financial institutions", Rudd writes, justifying his government's actions in helping out the banks with a state guarantee of deposits.

On face value, Rudd's economic package appears at odds with neoliberal economic ideas.

Under neoliberal policy prescriptions, governments should leave the market unregulated and let the strong eat the weak. But the exponents of neoliberalism always expected that capital — most importantly big capital — would be the biggest winner under such a setting.

With the collapse of the global financial system, the evaporation of credit and a severe economic slowdown, this is no longer necessarily the case.

So, while Rudd bravely distances himself from neoliberal doyens such as Fredrick Hayek and Ludwig von Mises, and criticises the (former) governor of the US Federal Reserve, Alan Greenspan, he is simply scrapping over details.

When it comes to the big picture of saving the capitalist system from its in-built tendency to self-destruction, there is no fundamental disagreement among the elites.

The sheer scale of the global financial crisis means that neoliberal policies will not increase the wealth of the corporate rich any longer.

Capitalist governments simply cannot sit by with their hands in their pockets while US$4.1 trillion is wiped off the US stock market in the year ending last September. They don't expect that the market will simply look after things. It won't.

In spending billions of dollars of public money, Rudd is simply adopting the "new Keynesian" orthodoxy of direct government intervention to save capitalism.

The aim of guaranteeing the best conditions for capital to maximise profits remains unchanged.

Furthermore, the Rudd government's own policies undermine any claims he makes to being an agent of "social justice".

Hawke and Keating legacy

Rudd gives a clue to his policy agenda when he refers to the Bob Hawke and Paul Keating Labor governments as having "improve[d] the productivity of the Australian private economy, while simultaneously expanding the role of the state in the provision of equity-enhancing public services in health and education".

Under the Prices and Incomes Accord introduced by Hawke, workers' real wages fell between 17 and 28%. The role of the state <19& at least in policing unions — was massively increased.

Two unions, the Builders Labourers Federation and the Australian Federation of Air Pilots, were deregistered and destroyed by the ALP goverment.

A provision for universal health insurance (Medicare) was introduced — although this has been allowed to wither, with rates of bulk billing declining.

The Hawke government also began the process of privatisating tertiary education, with the introduction of student fees in 1987 and the Higher Education Contribution Scheme in 1989.

When Keating had his turn as PM, he embraced neoliberalism even tighter than Hawke.

The Keating government privatised the Commonwealth Bank and Qantas, and also retirement incomes with the introduction of compulsory superannuation in 1992.

It deregulated wage fixing with the introduction of enterprise bargaining and allowed the use of individual (common law) contracts in the mining industry to undermine awards.

The Howard Coalition government extended the deregulation of the economy. Rudd disingenuously says that "the political home of neoliberalism in Australia is of course the Liberal Party itself."

However, Howard's 11 years of neoliberalism simply built on the platform left by Hawke and Keating.

Social justice

In its first year in office, Rudd's Labor did little (apart from symbolic actions like the apology to the Stolen Generations) to differentiate itself from the Coalition — until the onset of the economic crisis in September.

In its "pursuit of social justice" based "on a belief in the self-evident value of equality", Labor only increased education funding by 0.8% in its first budget in May.

In real terms it cut funding to universities, by failing to compensate them fully for the loss of full-fee-paying courses.

Labor is also continuing to use the discredited Socio-Economic Status model for determining federal funding for schools, which by 2012, will mean that more federal funding will go to private schools than the public system, according to the May 14, 2008 Sydney Morning Herald.

While Rudd crows about the role of a "social democratic state" being that it "funds and provides public goods and pursues social equity", the Labor government of NSW is launching a new round of privatisations, including the virtual sale of electricity generation and supply.

In Victoria meanwhile, the state Labor government is struggling to explain why it does not intervene to renationalise the privatised train and tram systems, which simply collapse in hot weather.

Rudd argues in his essay that "the Liberals in government also set about the comprehensive deregulation of the labour market — based on the argument that human labour was no different to any other commodity".

However, the Rudd government's replacement for Work Choices — the Fair Work Bill — while changing some of the worst aspects of Howard's legislation such as Australian Workplace Agreements, leaves most of it intact.

Enterprise bargaining is enshrined in the Rudd legislation — industry-wide (or pattern) bargaining is made illegal.

Mandatory "flexibility" clauses allowing individual agreements between bosses and workers must now be included in all awards and agreements.

Restrictions on union officials' right of entry are also kept, along with the draconian Australian Building and Construction Commission.

Is this what Rudd means when he describes his ideas as "social capitalism"?

Short-term intervention

Rudd is explicit that government largesse — in the form of the A$10.6 billion "Harvey Norman" stimulus package paid in December and the $42 billion package put to parliament on February 4, must be short-term measures only.

"Increases in public investment and direct transfers to households will stimulate the economy, but they will have to be paid for in the future, when strong economic growth has resumed", he writes.

Lower spending, increased privatisation, cuts to services and reduced government investment are on the government's long-term agenda.

Those most reliant on government services — public schools, hospitals and transport — will be the ones to pay the cost of Rudd's "social capitalism" to ensure business profitability returns.

In the meantime, we are left to hope that the companies, who will ultimately receive most of this public money, decide to keep their staff employed and not use the cover of the downturn to shed jobs.

For the time being, the Rudd government will continue to "stimulate" the profit margins of the banks, developers, large retailers and car companies. They will feel the generosity of Rudd's "new Keynesian" policies the most.

As for workers — they will be counted lucky if they keep their jobs. Unemployment rose to 4.8% for January in figures released on February 12, meaning an extra 37,000 people were out of work.

And those who remain in work will have to contend with pressure for "wage moderation".

Rudd's attack on neoliberalism has a hollow ring.

While seeking justification in Keynesian economics for increased spending to boost business profits, the reality is that his actions are purely pragmatic.

Capitalism might be able to just drag itself out of this crisis — but only if working people are made to pay for it through sharply reduced wages, living standards and public services.

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