The recent sharemarket crash has apparently triggered growing trade tensions between the US and China on one hand and the UK and Europe on the other. However, you don’t have to dig too deep to find the real cause. Increasing numbers of commentators and economists are laying the blame for the recent sharemarket wobbles squarely at the feet of neoliberalism. It is time for the business community to accept that sensible reform is needed, before we all end up with something a lot worse.
The recent crash has been coming for some time now. It has been three years since the Brexit vote and will soon be the third anniversary of Trump’s win.
The moment the Conservative Government in the UK gave up on the idea of a ‘soft Brexit’, it was assured of rocky economic times. These are now coming to a head. Similarly, Trump’s anti trade rhetoric is now coming back to haunt him.
The Cause is Neoliberalism
The driver behind both Trump and Brexit is now well established: a large part of those societies feel left behind by the economic reforms of the past 30 years. The reforms have seen their standard of living stagnate or decline, while the rich grow richer. These people therefore lash out and vote in populist leaders who threaten to bring the whole house crashing down. The result is growing extremism that is heading down the road to facism, crony capitalism and/or communism. This is all before we even consider the environmental challenges the world is facing.
Reform is clearly needed, but there is a risk of throwing the baby out with the bathwater. Capitalism has brought us many great things and hugely reduced poverty over the past hundred years. So how can we keep the best of it and solve the problems we face? The answer is to roll back neoliberalism.
What is Neoliberalism?
Commentators use the term “neoliberalism” in a lot of different ways. Some even use it interchangeably with capitalism. Let’s be clear about what we mean.
Neoliberalism emerged in the 1970s and 80s. The argument was that a small state was the answer; for businesses to flourish, all government had to do was get out of their way. Getting rid of regulation was crucial, as was lowering taxes.
This, of course, led to a growth in massively powerful corporations around the world and a growing gap between the rich and the poor. The problem is that this actually stops capitalism from working properly. This happens in two major ways: lack of competition and child poverty.
As these corporations have grown, they have killed off their competition, which has contributed to the poor productivity growth we now see. And, as the gap between rich and poor grows, more children grow up without access to opportunities. That means society doesn’t get the best from many of its children and some become a net drain on society.
The New Zealand Version of Neoliberalism
New Zealand has one of the better tax systems in the world in that it doesn’t leave too many loopholes for rich people to escape paying tax. The one exception we all know about is property. Our lax taxation of property has led to huge amount of speculation and some of the highest property prices in the world. This has made a lot of people very wealthy, without paying any tax. And by the way, a capital gains tax excluding the family home wouldn’t have changed that situation much. To be effective, we needed it to include the family home and to have been implemented 30 years ago.
Income inequality has remained steady in New Zealand since the mid 90s – but for the sole exception of property. People locked out of the housing market have seen their rent grow faster than their income for the past 30 years. The cost of housing is by far the biggest cause of poverty in New Zealand.
And where there is poverty, there are children who are not reaching their potential. We haven’t fixed the cost of housing and nor do we help children from poor households catch up with their peers when they get to school. Most poor kids turn up to school 2 years behind and never catch up.
New Zealand also jumped on the neoliberal bandwagon with competition policy. While other countries have woken up to this failure, we still have some of the weakest competition policy in the world. This has allowed big business to continue to rip us off in many industries such as petrol, supermarkets, and building supplies. The good news is that New Zealand businesses tend to pay their fair share of tax, with the exception of the big multinationals. The Government has promised to crack down on this, which is great.
Finally, there is an environmental component to this. New Zealand’s regulation of the environment has enabled people to make huge private profits and pass the costs on to society. The best example of this is the dairy boom in the South Island, which is now threatening fresh water supplies.
Neoliberalism has served our elites well, but it is brewing a backlash that will hurt everyone, as we are seeing in the UK and US. We need our elites to stand for bold, progressive change or risk losing everything they have built.