The troubling experience of economic reform
Anyone who turned forty with the new millennium will have spent all their adulthood living through what we so blithely call 'economic reform'. Everyone knows what it is. Deregulation, privatisation, labour market reform, user pays, tax reform, cutting government spending, more competition, privatisation, tax reform (the GST), and-the latest instalment-welfare reform. Watch this space; we are assured there will be more!
Some things are agreed on all sides. One of them is that economic reform came as a take-no-prisoners top down re-engineering of a whole nation and society. We had to rid ourselves of a whole history of 'protection' and 'institutional inertia' and make ourselves ready for competition in the new ruthless global economy. Do it, or wither as a banana republic! No-one was left in any doubt about the mighty challenge facing us. But almost no one remembers that the economic reform bundle (or, if you prefer, 'structural adjustment', 'liassez faire', 'freeing up the markets', or 'economic rationalism' - all these terms mean the same thing) came to us out of the Cold War as a 'one best way' of fighting our way out of a long post-war boom that had given more peace and plenty to ordinary people than it should have done.
In the early 1970s international business organizations were forming to bring the drifting free world capitalist nations to their senses. Something had to be done first about the so-called 'British disease', about creeping stagflation, and about the long term fall in the profit share of large corporations. In 1974 the Brookings Institution declared that the after-tax profit rate for United States corporations had fallen since 1948, from just under eight percent to just under five percent.
The long post war boom was not working so well for the big corporations. A report to the Trilateral Commission, one of the first global peak business associations, turned free market economic theory into a political program that would shift the burden of co-ordination from 'overloaded' governments paralysed with too many 'irresponsible demands', to the markets. Thatcher and Reagan would crash through and make it happen. The markets would reduce expectations and administer the needed disciplines to the people, the unions, the professions, the media and the 'value intellectuals'. These would 'give capital a chance', beat the socks off the old Soviet empire, get rid of big government, and pull the European social democracies into line.
Malcolm Fraser softened Australia up with the Campbell Report (that would later recommend financial deregulation) and some restructuring of the federal bureaucracy - and the young dry economists were brought up into position. The hard men of Labor were waiting to show they could deliver better economic management and better outcomes for business than the old guard in the Liberal Party. In 1982 they won government and got their chance. From there on the people would have nowhere to go, with the two main parties competing with each other to deliver always more economic reform.
After twenty years of reform?
The results have been dramatic. As the advocates for reform will hasten to say, we now have a strong economy, one that survived the Asian meltdown of 1997 unscathed. Employment is high, interest rates are low. And now it's powering on and indeed leading the world, with GDP increasing at somewhere around 4 per cent per annum.
All that is true. But if GDP is up, how come Australia is down? The economy has indeed been 'restructured'. As with every other nation our national accounts keep tabs on who gets what by dividing national income into three slices: the government share; the wage and salary share; and 'gross operating surplus' or, in other words, profit share. And sure enough economic reform has kept its promise and delivered a huge change.
Over the twenty years from 1980 to the turn of the millennium the total wages share has fallen from 60 per cent to 54 per cent, as the profit share has risen from 17 per cent to just on 24 per cent. The government share has stayed at about the same low level - it may come as a surprise to learn that, by comparison with other OECD countries, we have for a long time had low levels of government spending, and a small public sector. It never was 'bloated' as Peter Reith and John Howard used to tell us so insistently throughout the late 1980s.
And, yes, as GDP has soared we find that the real unit cost of labour has fallen for twenty years and more. Indeed, Professor Bob Gregory's figures tell us that in 1996 young men of between 25 and 34 years of age were already bringing home, in real terms, $75 less per week than their fathers were twenty years earlier (in 1976; moreover, now they can expect to get pushed out of a deregulated labour market at age 55). The good news is that they are going to live twenty years longer than their grandparents; the bad news is that their retirement incomes are in a black hole (in part, because they depend on the whims and ethics of the big end of town).
Look a little deeper and we can see that economic reform has delivered a huge redistribution of income, resources and capability from the bush to the city, from the public sector to the private sector, from families to the market economy; from consumers to producers- the GST takes 10 per cent of the input costs of corporations and charges it to you the consumer; from the bottom 70 per cent of wage and salary earners to the top 10 per cent; and, the big one, from wage and salary earners to corporations. Corporations are the big winners from economic reform as they were always meant to be.
Our experience of reform
How do we experience the economy? And more particularly, how has middle Australia (defined as just about everyone who is neither rich nor poor) experience economic reform? They know who the winners and losers are. And they seem to have a fairly clear idea of what has happened to their incomes over long periods of time.
Economic reform assumes that people will not notice what is happening to their incomes providing that you move resources away from them in small bites spread broadly over large groups over a long period of time. Providing that the floor rises, huge relative losses can still be experienced as small gains.
But that is not the way it is experienced. The theory must be wrong. About 90 per cent of them know that 'people on high incomes', 'rich people with lots of assets',' big business', are the runaway winners from reform. Nothing surprising about that. What is more heartening is that they have not been snowed by the ideology. Huge majorities of them know that 'people on low incomes', 'small business', and 'ordinary people generally' are more likely to be losers rather than winners from economic reform. And they know that 'people in the middle' have missed out.
One more thing. Neo-liberal economic theory would have us believe that the market is the best way of rewarding people for effort. It follows that changes in the distribution of income reflect effort, worth, and due reward for the real contributions of the respective stakeholders to the larger economy. Strange then that, in the last three years of the longest boom in living memory, a majority of middle Australians are saying that the distribution is not fair.
They worry about jobs, jobs, jobs. And they believe that the incomes and job prospects of Australians are falling. In the last three years of the millennium, as the economy settled into boom conditions, we find that the number of middle Australians who say that wage and salary earners are the losers from economic reform climbs some 13 percentage points to 70 percent. And again, rather unsurprisingly, about 80 per cent of them say they are more insecure now than before reform began some 20 years ago.
The dominant mood is one of anger, and it is most keenly felt by those who have faired worst; yet, significantly, it is still the majority view. Again, the economic theory is wrong. It assumes that work is a 'disutility', or in other words a negative thing that we are induced to do with carrots and sticks (sticks are to be preferred because they cost less than carrots). We are angry because labour market reform is an assault on the dignity of work.
People experience their own work as something more than a tradeable commodity. For them it's largely about identity, meaning, personal independence and making a contribution - and, hence, something that satisfies inner social needs. Intrinsic motivations matter as much or more than extrinsic rewards. The market recognises only the latter and so pays in the wrong currency.
It's hurting families. Over half of middle Australia believes that families are changing 'a lot'. And three-quarters of those giving that answer say that, for them, it is the negative rather than the positive aspects of those changes 'that stand out most'. In the wake of twenty years of economic reform they find themselves running out of coping strategies.
Sending two people out into the labour market instead of one, getting more education, delaying fertility, moving in search of a better job, and then, when all of that runs of out of steam, going into too much debt. It's here, as the family faces the dull compulsion of the market without the capacity to smooth their incomes over time, that middle Australia most clearly experiences the truth about economic reform - namely that it reduces quality of life.
If GDP is up and the economy is steaming ahead, how come that, for the first time in remembered history, parents see their own adult children facing a future in which they have to settle for less - a world in which they are less likely to own their own home and one in which, for the first time, education and quality health care may cost them more than they can afford.
At another level, they are saying that there is something fundamentally wrong with a theory that says that the goodness of a human family should be judged on its capacity to put the market before its own social needs. Between two thirds and three quarters of middle Australia thinks that 'big business has too much power', that it is exploiting the people, and that corporations should be regulated more firmly.
Middle Australians are not closet 'socialists'. Indeed, they carry within them their own very successful history of market democracy. They like business to flourish and make good profits. Yet, in the situation in which economic reform has put them, they are 'revolutionaries'. They want government to make business work for the people rather than the other way about.
Most people have waited in bank queues and on the end of telephone lines for long enough to understand what economic reform means. They know that 'increasing shareholder value' means downsizing, trashing jobs, and poor service. They know that 'streamlining government' means slashing the public sector, cutting the entitlements of citizenship, and forced reliance on the market for privately funded health, education, and retirement.
The Middle Australia survey suggests that the ideology of economic 'reform' may even have had a perverse effect. Indications are that a substantial slice of middle Australia has taken the promises of reform at face value and so expected economic restructuring to make things better for them. Now that they see what reform has taken from them they blame government, and perhaps expect it to do more, rather than less, to put things right.
They have certainly not, as the reformers so hoped, given up on government and thrown in their lot with the market. Huge majorities of them think that government can do 'quite a bit' rather than 'very little' to fix a whole range of things, including reducing unemployment, improving health and social services, reducing poverty, cutting crime, creating more jobs, supporting families, reducing the gap between rich and poor, making businesses pay fair wages, and supporting communities.
For twenty years we have allowed ourselves, our society, to be re-defined from the top down, as a stubbornly resisting sludge through which we must somehow drive the economy. In this warped view of the world, society reappears only as a generic externality of the economy; as a frustration to the market that must somehow be overcome; as an idiot host; or just simply as a dump for the unpriced human and social costs of operating corporations - overwork, unemployment and underemployment, degradation of the public domain, scrambled time-horizons, unsettled expectations, personal aggression, disrespect, stress related illness, depression, and the list goes on - with all of this 'collateral damage' uncontroversially demonstrated by international comparative studies.
So we should not be too surprised to find that middle Australia has been unnerved by economic reform. People know, as Michael Leunig once said, that we are 'joined together by more than the weather'. Their conversations with each other are saturated with moral anxiety about a lost sense of responsibility and about duties, obligations, entitlements and rights. They have a pretty good understanding that 'putting the economy first' means throwing real standards into the furnace as fuel for an economy on steroids.
A generation ago, economic development used to mean industrialisation. Now it means eating yourself, your culture and your social ties to intimates and strangers alike. Australians have always had a healthy regard for self-reliance, but that does not mean that they are willing to redefine themselves only as strategic actors who face each other only as competitors for scare resources - so that the big end of town can have from them always more!
Despite saturating propaganda from the marketeers and the advertising industry, they also seem to know what the best international evidence has been saying about happiness and quality of life. Personal fulfilment and happiness is always a struggle, and in the end a personal accomplishment. Neither government nor business can give it to us ready made. But they can certainly make it harder to achieve.
What that evidence tells us is that happiness depends first of all on psychological traits and personality characteristics that have little to do with social and economic structures. But after that, family, friends, relationships and intimacy always come top of the list - in every developed country. Good health is right up there too, together with purposeful tension-free leisure, and interesting work.
The variable that always comes right down near the bottom, never accounting for much more than 10 per cent of the variance, is material well-being measured as per capita dollar income. What economic reform does is to turn the hierarchy upside down and put dollars at the top and make that the common denominator of value for all the things that matter more.
Economic rationalism is a doctrine which says that 'economies markets and money offer the only reliable means of setting values on anything' and which sets out to destroy our public and social institutions to make it so. If you were to tell our middle Australians that economic reform has ushered them into a bright new world of 'choice and opportunity' they would laugh you out the door.
They would do the same if you told them that economic reform was something that they had chosen. Most of them now recognise that they were thrown into to the Anglo-American libertarian economic path to please the big end of town. With Malcolm Fraser, they now fear an all too foreseeable situation in which 'all the good assets in Australia are owned by ten foreign corporations'.
For middle Australia, economic reform is going sour. It is as if we already knew what the evidence has been telling us for quite a while. Societies that seek to make the economy serve the people do better, even on conventional economic indicators, than those that try to make the people serve the economy. The neo-liberal 'hydraulic model' tells us that we must have weak governments to have strong markets. A well ordered society needs strong markets and strong active governments and strong families all working together to put the people first. Middle Australia wants good, active, interventionist governments that will lead to make it happen.
Michael Pusey is Professor of Sociology at the University of New South Wales. This paper is the basis of his address to the Evatt Foundation's breakfast seminar on his new book, The Experience of Middle Australia. The Dark Side of Economic Reform (Cambridge, 2003), which examines the impact of economic reform on the experience of 400 middle Australians in five capital cities. Michael's earlier book Economic Rationalism in Canberra. A Nation Building State Changes its Mind (Cambridge, 1991), brought the term 'economic rationalism' into common usage. A version of this paper was also published in the Australian Financial Review on 9 May 2003.