Brain Peter J. - Credit code red: how financial deregulation and world instability are exposing Australia to economic catastrophe

CREDIT CODE RED

Peter Brains doctoral degree, completed at the University of New South Wales, was a pioneering analysis of the National Accounts statistics then becoming available in time series. In 1973, he was appointed to head the Econometric Forecasting Project at the Melbourne University Institute of Applied Economic and Social Research .

After graduation from the University of Melbourne, Ian Manning taught at one of the affiliated colleges of the University of Madras, India, specialising in the economics of banking. He returned to the Australian National University to complete a doctorate on the economics of town planning, and then worked on social-security policy for the National Inquiry into Poverty. In 1980, he joined the staff at the Melbourne Institute.

In 1984, Peter left Melbourne University to found the National Institute of Economic and Industry Research (now known as National Economics). Ian joined him a year later. For the past thirty years and more, they have both collaborated and worked independently on projects covering all aspects of the Australian economy, its industries, its regions, and its people.

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Published by Scribe 2017

Copyright 2017 Peter Brain and Ian Manning 2017

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To Angela and Alice

Contents

: The role of financial deregulation in the accumulation of overseas debt

Abbreviations

Australian Bureau of Statistics ABS

European Commisssion EC

European Union EU

Gross Domestic Product GDP

Global Financial Crisis GFC

International Monetary Fund IMF

Reserve Bank of Australia RBA

Volatility Index VIX

Introduction

For more than thirty years, Australian governments have pursued and promoted free-market economic reforms. They have trumpeted the virtues of profitability and competition; they have asserted that productivity is bound to increase when business is deregulated. Their reforms have been guided by neo-liberal economics, the faith that the free market, unimpeded by government intervention, will answer all human needs. This faith claims a universal validity, and the Australian reforms were part of a surge of reform that originated in the United States and washed outwards from the English-speaking countries.

The reforms have now been in place for long enough, and in enough countries, to be associated with several adverse trends notably, increases in the inequality of wealth and income, and increases in the incidence of severe economic crises. Are the reforms responsible for these adverse trends? Our answer is a definite Yes.

To prove the case that reform has increased inequality and vulnerability to crises, it is necessary to move beyond the neo-liberal economic theories on which the reforms were based. These theories have nothing to say about inequality and crises; they simply assume them away.

When the neo-liberal theories came into fashion in Australia we were concerned that they would generate complacency. We were not, perhaps, as concerned as we should have been about the promotion of inequality Australia has a robust social-security system that has so far resisted the most outrageous reforms, though neo-liberal tolerance of high unemployment and failure to index benefit rates have raised the incidence of poverty. Our particular concern was that governments would neglect the need for active policies to maintain stability and underpin future prosperity, and so would sleepwalk Australia into crisis.

Over more than three decades, we have maintained an unfashionablly broad approach to economics, unconstrained by neo-liberal assumptions. This approach warns us that Australia is over-indebted; its households have borrowed too much from its banks, and its banks have borrowed too much from overseas. The neo-liberal reforms freed the banks to sell credit, and the resulting debt is becoming unmanageable. Though it avoided the Global Financial Crisis of 2008, Australia is now drifting towards economic breakdown and Depression. In this book, we hoist the Code Red signal; drastic action is required to extricate Australia from the pitfalls that neo-liberal policy has created.

When one encounters it in a first-year economics textbook, neo-liberal theory seems too esoteric to provide the foundation for a reform movement. Expressed in mathematics and expounded in academic article after academic article, it buys its internal consistency at the cost of an almost endless list of assumptions. These assumptions create an artificial world a placid metaphysical world in which individual property-owners buy and sell their way to the common good. Neo-liberal theory has been marketed as a sophisticated account of the complex interrelationships that comprise a capitalist economy, yet it simplifies these relationships by disregarding some of the most crucial interconnections and uncertainties within such an economy. Herein lies its danger, when potential sources of economic breakdown are assumed away by those in charge of public policy.

The governments of Australia did not turn to neo-liberal theory through infatuation with its intellectual beauty. Rather, they adopted it because it was heavily promoted by vested interests. Though its basic theories were developed in nineteenth-century Europe to defend capitalism against Marx and other critics, their present incarnation owes much to a coterie of American billionaires, and their counterparts in Australia and the United Kingdom, who turned to neo-liberal economics in their search for arguments to defend their wealth against pesky taxes and environmental regulations. Their fundamental contentions were that taxes, particularly those on high-income people, weaken incentives to produce and to innovate, and that regulations raise costs, with similar debilitating effects. And, further, that production foregone due to taxes and regulations is a loss to the nation as a whole, not just to its rich minority.

Neo-liberal economic theory can easily be tweaked to support these arguments, but for it to be of any political use in defending the billionaires interests it had to be established that the theory describes an attainable reality. It proved hard to establish the theory as realistic its assumptions were just too restrictive but its protagonists had considerable success with their assertion that free markets are associated with freedom from authoritarian government. It helped, too, that the seeming sophistication of the theory attracted intellectuals to the think tanks and academic posts that were founded to promote the reform program, and that journalists could readily be found to carry the message into the media.

Once academics, politicians, and the elite in general were drawn into a mental world in which neo-liberal perfection was considered attainable, economic policy became a simple matter of reforming economic institutions to make them look more like those assumed in the theory in general, by promoting competitive markets. It was argued that such reforms would guarantee increases not only in in productivity but also in incomes.