The Rudd Essay & The Global Financial Crisis

Luke Foley

This is an edited version ofa talk given by Luke Foley, NSW ALP Assistant Secretary, to the Sydney Branch of the Australian Society for the Study of Labour History, 16 September 2009.

Thank you for the opportunity to speak on the subject of the Global Financial Crisis and Labor’s response. I want to talk not only about the current crisis but also about some lessons from history. This is the second major global financial crisis that the Australian Labor Party has confronted whilst in government. The Great Depression saw the Scullin Labor Government flounder before annihilation at the ballot box in December 1931. Of course the parallels between the two crises have been drawn by commentators, but the key point for our discussion is the qualitatively different response from Labor in government.

I should also say initially that we are nowhere near out of the woods yet in dealing with this crisis. Nothing that I say should be taken as inferring that we are. There will still be pain in the form of unemployment for many, possibly some negative growth in the future, and dislocation as government inevitably makes tough decisions about spending. But what is now clearly emerging is that the Rudd Labor Government’s actions have been vindicated – by the economic data, and by international organi­sations like the World Bank and OECD which have applauded the Australian Government’s actions. So while it may be too early to talk about lessons from this crisis, it is an appropriate time to look at the actions of the government and consider what lessons the past offers the labour movement.

We should however, quickly recap the speed with which this crisis hit Australia, and the world. It’s been called an economic tsunami, which is an apt description. The crisis began with an unending stream of bad news corning out of the world economy in early 2008. US house prices were falling month after month, a significant number of American households were defaulting on their mortgages, and this in turn was causing banks to get into difficulty. Foreign banks were drawn into the US crisis as risky mortgages had been parcelled up into securities and sold on to buyers across the globe. This included banks in the UK, Ireland and Iceland, and pension funds in places like Norway.

The default losses stemming from the GFC are now estimated to range between $2 and $3 trillion: a figure three times larger than our national GDP Big name banks like Lehmann Brothers then started collapsing. This threatened to freeze the global borrowing sector, and the contagion spread to Australia and other countries in our region. In Asia exports to the US fell through the floor. Even China started to suffer from a slowdown in its growth as its near neighbours fell into recession. Australia instantly saw a massive decline in demand for export products, particularly for mineral exports.

In the face of this crisis the Rudd Labor Government faced a stark choice – to sit and wait, or to act. The Australian Government took the decision to respond swiftly and decisively to the crisis, playing a leading role in international discussions on stimulus and rearguard act.ion to stabilise the banking sector. While countries like Germany, France and Canada were arguing the merits of stimulus spending from an ideological viewpoint, the Rudd Labor Government acted to Go early, Go hard, Go households. The Rudd Government’s stimulus was aimed at household expenditure ­thereby assisting with employment in the most exposed industries of the economy: hospitality, retail and other service industries. The Government didn’t hedge its bets on stimulus and did go in hard, aware of the lessons from Mexico and Japan where governments intervened in a half-hearted way or held back from a full stimulus.

The government acted with stimulus in two ways: through the immediate injection of cash into the economy in the Economic Security Strategy, and with long-term infrastructure investment through the Nation BuildingStimulus Plan. The first of these is of course synonymous with the $900 payments. The second is yet to be fully appreciated as school halls and science labs continue to be put up across the nation and local government and state governments roll out federal funding for key road, rail and other projects.

It’s worthwhile to just briefly mention some key policy decisions as the crisis unfolded to understand the Significance of the Government’s response.

Stabilising the banking sector with the Bank Deposit Guarantee, so that economy didn’t freeze-up.

Providing Special Purpose Vehicles for car financing, a strangely exposed part of the economy to this crisis, with potentially huge flow-on costs to manufacturing jobs in the car industry.

  • Providing a 30 cent in every dollar investment tax break for small and general businesses buying eligible assets, so that business kept buying.
  • Boosting the Home Buyers Grant to keep the housing market going.
  • Installing ceiling insulation in 2.7 million Australian homes to promote new, green jobs,
  • Building 20 000 new social housing dwellings and 800 .new houses for the Australian Defence Force.

Importantly the Government’s response also went to the international heart of the crisis – with the national response working in tandem with diplomatic efforts to reform the architecture of the global economy, as well as reforms required to strengthen the global financial system.A key point I want to make to you is how much of a ‘Labor’ response the Rudd Government has made to this global recession. This wasn’t a neo­monetarist or neo-Iiberal response as others advocated; it was a thoroughly social democratic response, and one which has learnt the lessons from history well. Kevin Rudd, in his 2009 essay in The Monthly magazine, highlighted what he believed to be the causes of the crisis:

It is a crisis which is at once institutional, intellectual and ideological. It has called into question the prevailing neo-liberal economic orthodox)’ of the past 30 years – the orthodoxy that has underpinned the national and global regulatory frameworks that have so spectacularly failed to prevent the economic mayhem which has now been visited upon us.

In his essay, the Prime Minister squarely laid the blame for the crisis at the feet of neo-Iiberalisrn – the economic orthodoxy that arose from the stagflation crisis of the 1970s, and which has dominated economic policy through the 1980s and 1990s. It’s an ideology that rejected regulation of the market system and rejected the human values that underpin much government action. There is no doubt that the lax regulatory environment in the United States around finance provision and the trading of stock derivatives were the critical triggers for the crisis. The second black mark against the neo-liberals was the absence of warning bells built into the system, The liberal Party is yet to appreciate the dynamics of this crisis and why social democrats have responded the way they have. The conservatives are yet to learn the lessons many of us have from looking at the Depression crisis of the 1930s.

Our Prime Minister is, as he never tires of telling us, a proud Queenslander. Perhaps he has learnt lessons from studying the career of another Queensland Labor figure, ‘Red’ Ted Theodore .Thcodore held a NSW Federal seat after resigning the Queensland premiership and failing to win a federal seat in that state. Theodore was the brilliant Treasurer and the strongest man, in the Scullin Labor Government.Tragically, a politically motivated Royal Commission distracted him from dealing with the Depression in those desperate months in the second half of 1930. The traditionally monetarist and deflationary policies advocated by the Commonwealth Bank’s Sir Robert Gibson and the Treasury officials, backed by Sir Otto Niemeyer from the Bank of England, and swallowed byTheodore’s replacement as Treasurer, Joe Lyons, were adopted in the Melbourne Agreement of August 1930.

At their essence these policies mandated balanced budgets from Australian governments, federal and state, and wage cuts for workers. Theodore’s work pointed to another possible response to the crisis, one which was never followed. Theodore’s method was to use credit to increase expenditure and therefore employment. Theodore outlined a plan for £18 million in expenditure, with 6 million for wheat growers and 12 million for employment on public works. Expansion of domestic purchasing power was seen to be vital; as Theodore said ‘It is this stimulus in trade; it is this active buying and selling of goods and commodities that is so much needed in Australia today’.

Theodore quoted the then unknown economist John Maynard Keynes in the House, and received strong endorsement from economists like Professor Robert Irvine at Sydney University who was a follower of the economic theories of }.A. Hobson, a proto-Keynesian On 7 February 1931 Theodore presented his proposal to the Premier’s Conference. Of course before it could be implemented the political crisis overtook the economic crisis. Two clays later Jack Lang launched the ‘Lang Plan’ – a populist distraction if there ever was one. We can only guess as to what the Theodore Plan may have done for the Australian economy.

Joe Lyons, a tragic figure in the Labor Party, along with a number of colleagues joined the conservatives in opposing Theodore’s actions as Treasurer. In a further act of betrayal, the Langite members of the House Jed by Jack ‘Stabber’ Beasley, crossed the floor and defeated the government. The Langites purpose was to hurt Lang’s enemies, especially Theodore.At the subsequent general election, Labor was decimated in its worst ever defeat, but the monetarist policy advocated by the Nationalists and the bankers was never vindicated.Australia’s national income was soon to decline by 30 per cent, her real national product by 18 per cent, and unemployment of trade unionists was to reach 30 per cent in the second quarter of 1932.

Labor lost its way in the Great Depression. It hasn’t this time.The domestic political ramifications of international crises have been acutely felt by the Australian Labor Party throughout our history. The role of decisive leadership and clear values are perhaps the most important lessons from this crisis for the Labor Party in the long-term.

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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

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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