The supposed failure of liberal-centrism is anything but

So often nowadays we hear that liberal-centrism has failed and that we need to look to ‘radical, new’ ideas for solutions. Indicators of this supposed failure are the stagnation of wage income, the concentration of economic power, the global financial crisis, the rise of the Chinese model, Trump and Brexit. The ‘radical, new’ ideas that we supposedly need are anything but. On the left we hear calls to return to a communitarianism that hasn’t existed since the enclosures act and to return to a ‘Keynesian’ economics that we had to move away from in the 80s because of stagflation and a range of other crushing maladies. On the right, we hear calls to resurrect tariff barriers, resource nationalism, anti-immigration and national champions, not to mention the gold standard. Frankly, this was the economic program of fascism. There is nothing new in any of this.

More importantly, this whole discourse is nonsense on stilts. Liberal-centrism has not failed. Our present woes are instead the result of moving away from liberal-centrism on the part of all sides of politics. This is understandable among fringe politicians with strong ideological convictions. For them, centrism was only ever a means of winning over swing voters and thereby government. It is less understandable among self-styled liberal-centrists, who seem to be rapidly degenerating into triangulation-obsessed political hacks incapable of drawing on the richness of liberal centrism to craft effective solutions to contemporary challenges. They struggle because they have failed to update themselves on advances in liberal-centrist thinking. They consequently think liberal-centrism is out of ideas when it is they who are out of ideas. The most successful economies of the OECD—notably Australia and the Scandinavian countries—are already benefitting from cutting edge models from liberal-centrist policymaking. Nations in the doldrums are weighed down by a greying political and intellectual class that can’t get its mind out of the 1980s. 

Liberal-centrism is fundamentally about enshrining competition and opportunity and helping them to work in harmony. Competition must be fostered in the economy, in political leadership, in values and in ideas. Such competition results in efficiency: the allocation of resources to their most productive uses, leading to welfare maximisation. But such competition is relatively facile if it is not underpinned by a powerful architecture of opportunity that gives everyone access to markets, institutions, voice and knowledge. The left-wing goal of equity is critical for the right-wing goal of efficiency. If opportunity is not equitable, then hegemonic actors can attract resources not because they are the most productive but merely because they are the most established. Meritocracy degenerates into aristocracy. Efficiency is similarly critical for equity, because efficiency enlarges the communal pie, providing more capacity for redistribution. For example, a competitive and thus productive economy provides increased tax revenues that can be funnelled back into the provision of education, health and infrastructure.

The result of healthy competition and fair opportunity is a dynamic economy and society in which old, obsolete ideas, values, leaders, products, ways of doing things, industrial structures and so on are abandoned so that resources can be reallocated to new things that are better suited to the times and better in general. Economics calls this process “creative destruction” with reference to firms, but its principles can easily be extended to leaders, institutions, norms and a range of other things where ossification harms our societies. 

State-of-the-art liberal-centrist policymaking achieves this combination of competition and opportunity by assiduously combining government, market and community tools in evidence-informed ways to simultaneously achieve equity and efficiency. Markets, government and community have different relative strengths and weaknesses. One of these tools used alone will rarely produce a best-possible outcome.

Markets are exceptional at processing information from a complex world and using it to efficiently allocate scarce resources. But markets are incomplete and market failures exist, and there is often a role for government to effectively correct them and thereby improve efficiency further. Markets also do not deliver equitable outcomes. Here, the government has a comparative advantage as a vehicle for redistribution, poverty reduction and risk management, which are normal goods that societies want more of as they grow wealthier. In carrying out this role, government should not forget that incentives matter—policy should try to limit distortionary effects on market behaviour in order to deliver equity efficiently. The comparative advantage of community is scale. The modern state is monolithic, impersonal and often clumsy. The market is callous. Utilising community tools can improve the extent to which policy takes into consideration local conditions and values, reacts in a timely fashion to changing circumstances in its operational context, and delivers outcomes in a somewhat organic manner that attracts by-in from affected stakeholders and gives them a sense of control.

These principles come together in what you might call ‘hybrid’ policy designs. An archetypal example is the Danish flexicurity system of industrial relations. Far from being socialist, the Danish labour market is actually one of the freest in the OECD, with limited controls on hiring and firing. This makes it a dynamic and efficient market, but it also exposes workers to the ravages of the business cycle and the relentless crush of competition. To correct for this, the state provides income insurance as well as extensive access to and funding for retraining programs—so-called ‘learnfare’. This ensures income security without forcing firms to provide job security and thereby stymying labour market dynamism. Furthermore, it means that recently unemployed workers who struggle to find work have a straightforward way to improve their skills, increasing their ability to find a job and the wage they are paid when they do go back to work. This results in steady wage increases for workers over the life course, and makes them respond to bouts of unemployment by becoming more resilient to future periods of unemployment. This contrasts with systems like that of the UK and US, which are short-sightedly fixated on getting people back to work as fast as possible—so-called ‘reactivation’ or ‘workfare’. Recently unemployed workers in such systems struggle to get ahead of the labour market, which ironically makes them more dependent on the state in the long-run as their wages decline and their skills become gradually obsolete.

The success of flexicurity depends substantially on good faith interaction with it on the part of the state, unions, employer groups and education service providers. The government acts as a risk-manager and information facilitator, two roles in which it has a natural comparative advantage. It helps workers smooth out their education consumption decisions over time rather than forcing them to make large education expenditures, often on credit, with dubious long-run payoffs. It also helps employer groups communicate to education providers what skills they need, education providers to workers what programs they should enrol in, and employees to government what kind of welfare payments would allow them to retrain effectively and become less of a burden on the system. The system is underpinned by a strong protestant work ethic, which prevents the provisions from getting so generous that people become ‘dole-bludgers’. These corporatist and cultural elements provide benefits typically associated with community-based policy tools.

The end result of flexicurity’s ingenious combination of governments, markets and the community is efficiency, equity, competition and opportunity. More specifically, Denmark has achieved low unemployment, steady wage growth, and a high level of comfort among its workers with the idea of frequently changing jobs—a critical attitude for prospering in the fast-moving and globalised markets of the 21^st century. Such a labour market solution is exactly what politicians on both the left and the right are clamouring for. Yet they are overlooking ideas like flexicurity because it doesn’t fit into old ways of thinking about policy.

The kind of hybrid policy thinking that underpins flexicurity has not penetrated the greying craniums of most of the OECD’s political class, which remain stuck in the debates that characterised the period from 1950–1990. This was first the era of Keynesian stimulus spending and heavy state involvement in the economy, financed by America’s immense post-war wealth, which it had to use to rebuild its debtors otherwise they couldn’t have repaid their war loans. This period terminated in the horrors of stagflation, which precipitated a necessary rebalancing back towards free markets in the period from 1975–1990. This era of so-called structural reforms, which are often dismissed as ‘neoliberal’, were an important corrective to inefficient state-based models with excessive government involvement in the economy. A similar thing had taken place earlier when the welfare state was rolled out as a corrective to the inefficient and staggeringly iniquitous outcomes of untrammelled free-market (albeit colonial) capitalism, which ultimately collapsed in the Great Depression.

The debates of the structural adjustment era were fundamentally about the appropriate role of government in the economy. They were substantially informed by the theories of the Chicago School of Economics, which had developed a comprehensive understanding of the relevant issues and how to communicate them over the previous few decades. Market reforms were enacted to bring about competition in areas where there was very little reason to think government involvement was necessary to correct market failures or ensure equity, like the Australian airline industry, where the national carrier was privatised and the market opened to new entrants. Prices fell precipitously, and new lines were opened up as competition grew.

In general, policy was rebalanced towards efficiency where large gains could be made at relatively little cost to equity. An interesting example is, somewhat ironically, Reagan’s tax cuts. As Thomas Sowell documents, Reagan’s changes encouraged the wealthy to take their money out of low-interest but tax-free government securities and instead invest it in the real economy. After the tax changes, they could make more money by achieving high returns on investment than they could by avoiding taxation. The result was an explosion in inequality as the rich got very wealthy on their investments, but also higher government revenues and more productive investment in the economy. Now of course Reagan spent most of those revenues on bombs, but if he had been more interested in equity he could easily have used it to fund transfers, as the Australian government did.

The history of structural reform is critical for understanding the present political and economic climate. There were inevitably losers from the transition to more market involvement in policy settings, and some nations were better than others at compensating these losers. Those that were prosper nowadays, while those weren’t are wracked with upheaval and class unrest. Typically, the nations that considered the losers undertook structural adjustment in a way that brought markets and government into harmony through hybrid policy innovations. Those that did not consider losers simply shunted government out of the economy to make more room for the market. Now that’s neoliberalism: an ideological commitment to markets even when a better option is available.

Those nations that undertook structural adjustment in a way that enshrined liberal-centrist principles of both competition and opportunity have achieved both equity and efficiency in public policy since. Two prominent examples are Australia and Denmark, both of which undertook structural adjustment under centrist and highly technocratic governments. These countries are today characterised by a preponderance of hybrid policy innovations. They have witnessed growth without a major rise in their post-tax-and-transfer gini coefficients (a measure of inequality). Those nations that did not undertake structural reform at all because of equity concerns, like Japan and France, have seen their gini coefficients remain steady, but they have also steadily declined economically in recent decades. Finally, those nations that undertook structural adjustment with only an eye on efficiency and not equity did reap tremendous growth in the short term, but this has come at an equivalent cost in equity. And, critically, this inequity has empowered vested interests whose capture of the institutional apparatus of these nations is now strangling efficiency as well.

The most prominent examples are America under Reagan and Britain under Thatcher. These two nations just happen to be the sites of the largest upheavals of the past 12 months in Brexit and the election of Donald Trump. These governments were motivated to reform largely by ideology, not wisdom. So much is clear from, among many other things, Thatcher’s privatisation of Britain’s rail network. Railways are a natural monopoly, meaning that a free market approach to their management does not result in healthy competition, but rather rent extraction by a hegemonic firm. There is thus no reason to expect privatisation to lead to more efficient provision. And indeed, Britain’s railways today are an expensive embarrassment, with providers extracting huge charges from customers despite only sclerotic improvements in service because customers have no alternatives. Competition is non-existent because the now private railways remain monopolies.

Thatcher’s unsophisticated privatisations of natural monopolies is indicative of the fact that her government reformed Britain in a right-wing direction not because it understood where the introduction of markets would be beneficial, but instead because of an ideological conviction that markets were always better than government. Her administration certainly did a lot of good, but with tremendous collateral damage. The harms of the structural adjustments of Reagan and Thatcher came about not so much because they went too deep on structural reform, but because they went too derp.

Unfortunately for America and Britain, the ideological intensity of the structural reform period has left their political discourses mired in outmoded ways of thinking not only among the descendants of Thatcher and Reagan but also among their opponents. Critics of Thatcher and Reagan point to the equity costs of structural reform and the cases where markets were introduced in places where they don’t belong as evidence that markets are bad in general. They fail to understand how markets work or why they failed in these specific cases. The inheritors of Thatcher and Reagan’s legacy respond by pointing to the benefits of structural reform in those places where introducing markets had wonderous benefits and led to immense growth. Meanwhile, they fail to become cognizant of why markets worked in those cases and not others, or appreciate the huge equity costs involved. This tendency is starkest in the area of privatisation, with left-leaning parties now calling for extensive renationalisation. In some cases, like railways, this is sensible. But the arguments put forward for nationalisation are not couched in terms of why nationalisation is sensible in in some case for reasons x, y and z, but simply that privatisation is bad in general and nationalisation will inevitably be better. This fails to comprehend that if there was a case for privatisation in the 1980s then nationalisation under the old model must have had serious shortcomings. Both sides have failed to understand their problem or seek out innovative tools to fix it.

So deep are the ideological scars of the 1980s that few politicians have taken the opportunity of the last 30 years to understand the nuances of governments and markets or equity and efficiency, or how the former can work together to bring about the latter simultaneously. Instead, they are stuck in an old and incorrect dichotomous way of thinking wherein markets produce efficiency and government produces equity. Both sides fail to appreciate complexity. They think simplistically and categorically.

A common example of this crude thinking is attacks on consumption taxes (typically in the form of a value-added tax or a goods and services tax) because they are regressive, meaning that they disproportionately affect the poor. Such criticisms inevitably fail to appreciate that consumption taxes are also efficient because they don’t distort economic behaviour, and are not regressive if they are used to fund redistribution. Similarly, calls for tax cuts in the name of efficiency typically fail to appreciate that the consequent underfunding of public goods and basic services leads to underinvestment in human capital (i.e. education and health) and infrastructure, which is ultimately highly inefficient. This is clear as day in the United States right now.

A more complex example is calls for free tertiary education among American democrats on the grounds of its importance for social mobility. If funded from general revenues, free tertiary education is actually regressive. This is because the overwhelming majority of people who attend university are from financially privileged backgrounds and will go on to make more money than the average taxpayer. They do not need state support. Free education in this case has the perverse outcome of working class taxpayers subsidising the education of elites. More generally, it also removes any price mechanism that might discourage people from overconsuming education. This is inefficient.

It is for these reasons that the Australian Labor Government of the 1980s reformed the then free and colossally expensive Australian higher education system so that universities charged fees, but these were capped, and students could get an income-contingent loan (ICL) with the interest rate indexed to inflation to pay for them. ICLs only need to be repaid when a student begins to earn over a certain threshold (around the median household income in Australia). It is then collected with extreme transactional efficiency through the tax system. Tax collection is automated in Australia and thus very cheap and effective, and the collection of student loan repayments piggy-backs on this system. Repayment burdens, which plague other student loan systems, are eliminated and equitable access to education is ensured. The Australian ICL system, known as HECS, is an archetypal hybrid policy. You rarely hear about it from international politicians because it is a little too complex and insufficiently partisan to trigger them. 

Simplistically, what ideological politicians fail to appreciate is the notion that while trade-offs are inevitable in public policy, bargains can be found if one tries hard enough. A bargain in this case is where you can achieve a relatively large gain in efficiency at only a small cost in equity, or vice versa. This is often possible when one combines market, government and community tools in a sophisticated way, like in HECS. But ideologues are typically not even interested in having this discussion because their personal preference for efficiency or equity is so strong that they would happily make bad trade-offs provided their preferred criterion was maximised.

What we are witnessing today is not the failure of liberal centrism, but the failure of non-centrist politicians to understand liberal-centrism and the very good answers it has to our contemporary problems. The left wing and the right wing exhausted their answers decades ago; the left with the advent of the welfare state, and the right with structural adjustment. From here on out, things are going to be more complex than simply more government or more markets. There will always be enormous scope for normative debate in politics and governance, but if politicians are interested in providing solutions that will keep them in power over several electoral cycles, they are going to have to embrace the technical complexity and sophistication that characterises the centre of policymaking. Liberal-centrism will always hold answers because it is a fundamentally dynamic doctrine. It is about ensuring that the new and better can push out the old and obsolete. Politicians who are sympathetic to liberal centrism need to see it through more than the lens of polling and start to acquaint themselves with these answers. Otherwise we risk being plunged back into the ideological darkness of the 1930s. 

This article was original published here, in The Australian Rationalist.