Neoliberalism: an obituary.
The ideology which ruled the world’s economies for half a century has, after a long illness, finally died. Liz Truss tripped over its decaying corpse on the doorstep of 10 Downing Street.
Neoliberalism is shorthand for the small-government, tax-cutting nostrums of Reagan, Thatcher, Greenspan and Friedman that were supposed to bring prosperity to all. It bought great prosperity only to a few. But those few ran the world.
In London, there’s even a museum dedicated to documenting the history of neoliberalism and the damage it has left behind.
Privatisation is dead. Cutting health and education services is political poison. Outsourcing is out of fashion. Globalisation – chasing the cheapest sources of production from one poor nation to the next – is in retreat. Tax cuts have lost their gloss. Does anyone, anywhere still fall for the scam known as trickle-down economics? And conservative governments which still pursue these dead policies are at last being voted from office.
A privatised Telstra was incapable of setting up a national broadband network, so the government had to do it.
Private prisons and detention centres have been tried and have failed, costing more and providing poorer service than publicly-owned facilities. It is unlikely that there will be more of them.
The privatised owners of power stations and distribution networks are incapable of handling the switch to renewables, so the Victorian government is reviving the State Electricity Commission.
A private-focused, user-pays approach to health services has led us to where we are now. It’s given us overcrowded public hospitals, chaotic emergency departments, unaffordable copayments at the doctor and the pharmacy, feather-bedded and publicly subsidised and inefficient private health insurers reaping big profits (the industry-wide gross margin in 2020-21 was 14.6%).
The new government has the task of giving back to us what we’ve lost.
INEQUALITY AND ITS DISCONTENTS
Half a century of cuts has left the public sector bereft of talent and purpose and it has rendered whole societies, including ours, more unequal than at any time in the past hundred years. The very richest – the top 1% – have massively increased their share of personal income and wealth while the bottom half has barely moved or gone backwards. On this measure, Australia is level-pegging with the United States, with the share of income going to the richest 1% increasing by 72% (not to 72%: this is a relative, not an absolute, figure.)
Researchers at Our World in Data traced the patterns of income inequality since the beginning of the 20th century, showing how inequality decreased during the era before Thatcher and Reagan and, in some countries only, rose again since. The researchers compiled this chart showing that in English-speaking countries, the most enthusiastic disciples of neoliberal economics, money flowed back to the top 1%. By 2015, these countries were back where they were a century before.
But it was not universal. Other developed nations followed a very different pattern. Inequality remained relatively low.
“A lesson that we can take away from this empirical research,” the report concludes, “is that political forces at work on the national level are likely important for how incomes are distributed.
“The reality of different inequality trends within countries suggests that the institutional and political frameworks in different countries play a role in shaping inequality of incomes. This means that rising inequality is most likely not inevitable.”
It didn’t have to be like this. It was a choice.
IT'S THE TAX SYSTEM, STUPID!
A central mantra of neoliberalism is that taxes must be cut to the minimum, to avoid “crowding out” the dynamic and incentive-driven private sector from the limited resources available. Though the crowding-out theory has been repeatedly and conclusively debunked, it still rules in conservative circles.
The tactic even has a name: “Starve the Beast”. The idea, enthusiastically embraced by the Right in the United States (and notably by the former chairman of the Federal Reserve, Alan Greenspan) is that if money isn’t raised through taxes, governments can’t spend it. But it’s always easier to cut taxes than to cut services, which is why government debt levels commonly rise more strongly when conservative administrations are in power.
Few major economies raise less tax than Australia. Here, when taxes are cut, they cut not into fat but into flesh.
We are not newcomers to the low-tax world. When we look at the past half-century, Australia has always raised less tax (as a proportion of GDP) than most other developed nations. In that time, Australia has raised an average of 4.3% a year less tax than the rest of the OECD. It has persisted through Liberal and Labor administrations, though the effect of the Howard-Costello structural tax cuts can be seen in the figures for the early 2000s, when tax receipts plummeted and the gap widened to its highest level ever.
In 2019, the most recent year for which full data is available, the gap had blown out to 5.7% – once again as the result of unaffordable tax cuts.
That gap has translated into an ever-increasing drain on the public sector. In 1972, the shortfall was $26 billion in 2021 dollars. But it had reached $113 billion a year by the end of the period, mostly because of tax cuts introduced by the Howard government. These included the 50% capital gains discount, fuel excise cuts, superannuation concessions and extending franking credits on investments to people who weren’t paying any tax at all.
The most important measure, with the greatest impact on the budget, was the decision in 2005 to give away a temporary revenue windfall from the mining boom in the form of permanent tax cuts.
On top of all this were cuts enacted by state governments, and the failure of the GST to raise the revenue that was expected when it was introduced.
All these measures have had a cascading effect on the revenue of Australian governments. In the following graph, we can see how hard that cascade effect of unfunded tax cuts hit revenue in the six years from 2005.
PRIVATISATION: THATCHER AND THE SEWERS
Margaret Thatcher and her government sold off a vast range of public assets into corporate hands. By the mid-1980s they had flogged off Jaguar, British Telecom, the remainder of Cable & Wireless, British Aerospace, Britoil and British Gas.
Then came British Steel, British Petroleum, Rolls Royce, and British Airways. Then their attention turned to core public assets, most of them utilities and therefore natural monopolies – the electricity, transport and water systems.
|Are you sure that water's clean, Maggie?|
The government wrote off all the debts of the existing utilities and provided subsidies to the new owners. A study from the University of Greenwich found that in seven years, the pre-tax profits of the ten sewerage and water companies rose by 147%. Consumers did less well. Sewerage prices rose by 42% and water prices by 36% over the same period.
And they went on rising. By the end of the 1990s, customers were paying twice as much for their power and water as they had a decade earlier.
|Sewage for fun and profit|
By 1997, company directors were being paid up to 250% more than in 1990. Over the same period 8,600 jobs were lost: that’s 22% of the original workforce. Customers were disconnected at three times the previous rate, with a serious risk to public health.
There were no incentives to improve genuine operational efficiency or to remedy water and sewage leaks. The system was less able to deal with droughts, so severe water restrictions ensued. When it rained, sewers flooded. Water quality declined.
Between 1989 and 1997 there were 260 successful prosecutions of privatised water and sewerage companies for serious pollution incidents.
By the early 1990s, the privatisation wave had caught up with the Australian electricity industry and swallowed most of it. State-owned power stations and distribution networks were sold off in the belief that private owners would simultaneously deliver a better service for customers, cheaper retail prices and attractive profits for themselves.
Only one of these promises – profits – has been kept.
The big international companies that now own most of Australia’s electricity assets have made a great deal of money and continue to do so. A recent analysis by the US-based Institute for Energy Economics and Financial Analysis found the profits of energy network providers over the eight years 2014 to 2021 was 67% higher than could be justified by normal profit levels. That amounted to $10 billion in economic rent – “super profits” – transferred from Australian customers to (mainly) international corporations.
“This has imposed an unnecessary additional average cost of 6.8% onto people’s electricity bills in 2020,” the researchers found, “or between $800 to $1200 per energy customer over the eight-year period, depending on the state they live in.
“The complex regulatory system designed to prevent sustained excessive network monopoly profits has failed due to weak laws and rules regulating networks and a lack of transparency over the extent of monopoly profits.
“The enormous supernormal profits have also hindered Australia’s necessary transition to a low carbon electricity system by diverting funds that could have been used to fund the energy transformation.”
High power prices long preceded the war in Ukraine and the Covid-19 pandemic. They are structural – hard-wired into a system designed to reap short-term budget boosts for state governments and permanent pain for individuals and the whole economy.
Recent hikes in gas prices have merely added to a situation that has long existed and that was deliberately designed to work this way.
The results can be clearly seen in the retail price of electricity. From 1980 to about 2000, price rises were below the rate of inflation. Power bills were taking up less and less of household income.
All that changed when the power assets were sold off. The days of low prices were over: electricity bills rose and then soared, well above the rate of inflation. The cost squeeze for households and industry had begun.
No Australian political leader has pursued privatisation with as much vim and gusto as Jeff Kennett in Victoria. In just seven years as Premier from 1992 to 1999, he sold off roads, trams and trains, hospitals, schools, prisons, the Portland smelter, BASS ticket sales, the Gas and Fuel Corporation, the State Insurance Office, Tabcorp, the Grain Elevators Board and the ports of Melbourne, Geelong and Portland.
Kennett claimed to have devised a system that would moderate power prices. Even when bills were rising sharply, he said Victoria was better off than the rest of Australia.
“While prices for energy have risen in Victoria, as has everything else, they have risen less there than other states,” he wrote in 2013.
Like so many claims about privatisation, it wasn’t true. A simple analysis of retail power prices shows hardly any difference at all between prices paid in Melbourne and in the rest of the country.
The other underlying lie of privatisation is the claim that government budgets benefited.
“Privatisation,” wrote Kennett, “at the right time, properly handled, can often generate money that can be used to reduce debt, as we did in Victoria. That can lead to the better provision of the basic services we expect from governments, as occurred in Victoria.”
John Quiggin, economics professor at Queensland University, has conducted extensive reviews of whether this claim is true of the electricity industry. He concludes that in every Australian case it is not.
Before beginning the privatisation process, Kennett imposed a 10% increase in electricity prices to make the assets more valuable and ensure profits. So, even before the sales were made, consumers were being slugged.
Nor, in the longer term, did the state budget benefit.
Quiggin puts it this way: “Private owners have been able to realise cost savings in operating capital assets purchased from the public sector (often by reducing wages and working conditions). But they have consistently failed to deliver new capital investment at a cost comparable to that of the public enterprises they displaced.
“The regulated charges for distribution monopolies, which were held down in the early years following privatisation, have been increased drastically, with the aim of encouraging new investment. As a result, retail prices have risen sharply, as have the profits of electricity distributors.”
The Electricity Trust of South Australia was sold by the Liberal government of John Olsen in 1999 for $3.55 billion. Analysis by John Quiggin and Professor John Spoehr has shown that a sale price of between $6 billion and $7 billion would have been needed to offset the loss of income to the state.
New South Wales
Successive Labor and Liberal governments in NSW sold publicly-owned generators but kept the transmission and distribution components, which are much more profitable. The decision not to sell, says Quiggin, had by 2014 saved the NSW public $10 billion.
Queensland had several attempts at privatisation but all failed. Keeping the assets in public hands, rather than selling them in 1996, saved the government around $15 billion over the 18 years to 2014.
Tasmania kept its electricity assets in public hands. In 2021, they made a combined pre-tax profit of $442 million.
THE END OF THE EXPERIMENT
When the Global Financial Crisis – the crowning product of corporate control, the profit motive and light-touch regulation – struck in 2008, it gave neoliberals a big shock. It wasn’t supposed to happen. Alan Greenspan, former chairman of the US Federal Reserve and high priest of neoliberalism, found his world had collapsed.
“I made a mistake in presuming that the self-interests of organisations, specifically banks and others, were such that they were best capable of protecting their own shareholders and their equity in the firms,” he said.“I was shocked because I'd been going for 40 years or so with considerable evidence that it was working exceptionally well.”
Let’s translate. None of the passengers cared that the train was out of control and the driver taking a long, comfy nap because the sense of speed was so exciting. Who knew there could possibly be a crash?
The people running the world’s finance system couldn’t be trusted even to look after their own longer-term survival. Short-term advantage was all.
No mention of their customers’ interests.
The conservative elite – bankers, politicians, much of the media – were shocked. But they soon recovered and the bandwagon rolled on.
The foundations, though, were crumbling. Privatisation was being firmly rejected by voters across the democratic world. The fundamental deficiencies of the unregulated market – the restriction of competition as companies swallowed each other, the disregard for the public interest, the domination of commerce by executives running corporations solely for their own benefit – could not last forever. Now this pernicious system is, at last, dying.
You can see the signs of its mortality everywhere. No politician without a death-wish could today propose the privatisation of anything. Governments are finally challenging powerful oligopolies like Australia’s gas industry. Shareholders are voting down executive pay deals.
At the launch of the federal budget the Treasurer, Jim Chalmers, foreshadowed a new regulatory regime for the energy sector. Surging prices have forced the government to “consider a broader suite of regulatory interventions than we might have otherwise.”
In Victoria, the Andrews government will begin the reversal of Jeff Kennett’s power sell-off. The energy corporations cannot be relied upon to make the huge investments necessary to replace coal with renewables. Only governments will do that.
The State Electricity Commission will be revived with an initial $1 billion public investment to provide enough renewable power to compensate for the loss of the Loy Yang A coal-fired power station, which will close by 2035, a decade earlier than planned.
“The new SEC will become an energy market proponent under a 10-year plan to deliver cleaner, cheaper energy, with all profits invested back into the network – making sure it’s the Victorian public, not offshore coal companies, who enjoy the returns,” said the Premier, Daniel Andrews.
The people of countries like Australia, Britain, Canada, New Zealand and the US are no longer willing to allow the most privileged few to go on getting richer and richer while the rest of the population falls ever further behind. Those who live in countries which (unlike the US) have viable electoral systems are turning back the tide.
There’s a lot to roll back. Health care that’s unaffordable or absent. Too many ambulances that don’t arrive. Too many hospitals that kill people. Too many schools that can’t teach, power bills that can’t be paid, toll roads that can’t be afforded, too many citizens of the world’s richest nations living in poverty, too much misery and too much despair.
The new century has arrived – distressingly late, but it’s here now.