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John Quiggin on progressive reform.

Boris Frankel, When the Boat Comes in, Pluto Press, 2002.

Apart from having easily the best title in the history of Australian social criticism, Boris Frankel's 1992 volume, From the Prophets Deserts Come generated plenty of anticipation as the first part of a projected work in three volumes. Having skewered neoliberals and postmodernists alike, whilst offering only hints of an alternative approach, Frankel promised to put forward a policy agenda in subsequent volumes. After a delay of nearly a decade, he has produced his second volume, When the Boat Comes in.

The first half of the book is an updated assessment of Australia's economic and social position at the beginning of the twenty-first century. The discussion is wide-ranging, transgressing a range of disciplinary and theoretical boundaries, and is almost uniformly excellent. In fact, Frankel largely delivers what postmodernists only promise. As he points out, despite rhetoric about transdisciplinarity, postmodernists and cultural critics have rarely linked their cultural preoccupations to any of the broader issues of economic and social policy. The same theoretical position in matters of cultural criticism can equally well be combined with `progressive' orthodoxy, Blairite `Third Way' politics, or outright capitulation to the values of the advertising industry.

Frankel gives an excellent discussion of financialisation of the economy, the decline of manufacturing and the problems of agricultural sustainability. In particular, he points out how the advent of globalised financial markets has fundamentally transformed the nature of the `fiscal crisis of the state' that first emerged in the 1970s.

My only disappointment is that, while devoting considerable attention to the financial, manufacturing and agricultural sectors, Frankel does not present any sustained discussion, as opposed to frequent passing mentions, of the health, education and community services sectors. Given the importance of this sector in any progressive policy program, it would have been useful to have Frankel's insights into the impact of the last decade of neoliberal `reforms'. In addition, this neglect contributes to one of the problems in Frankel's discussion of policy options--a failure to distinguish clearly between income redistribution and public provision of community services.

Although there is much more of interest in Frankel's analysis, my focus will be on his policy prescriptions. I am certainly not a disinterested commentator on this issue. Along with other commentators such as Bill Mitchell and John Langmore and organisations such as ACOSS, Frankel correctly identifies me as a proponent of the policy agenda pursued by the Left for much of the past two decades, public sector expansion funded by a variety of new taxes. Frankel argues that this agenda is politically, and perhaps also economically, infeasible. He says:

The choice confronting anti-poverty advocates is stark: to continue to repeat--decade after decade--the fruitless call for the adoption of progressive tax measures, or recognise the political futility of this approach and adopt different ways of raising revenue and minimising poverty and unemployment ... The other major problem confronting social reforms is that even should they succeed in persuading the ALP to fight and win an election on a platform of higher and progressive tax policies, how would this reform government avoid the classic counter-productive experiences of vaguely left-of-centre governments like Whitlam's in Australia or Mitterand's early 1980s government in France?

Frankel's conclusion is that, at least initially, it is necessary to look for policies that do not fundamentally challenge the framework of neoliberal globalism. His preferred approach focusses on the use of superannuation funds to finance socially progressive and ecologically sustainable investments.

There are a lot of issues here, and it is possible to accept parts of Frankel's argument without accepting the whole. In particular, there is no inherent conflict between Frankel's policy proposals and the `old' left agenda. A coherent policy framework might include both, or neither, or some mixture of the two.

Frankel's first argument, that a tax-based agenda is politically unsaleable, relies partly on the claim that such an agenda is unacceptable to powerful interest groups and to the electorate as a whole. As the quote above indicates, he also relies on the observation that the Labor Party has been unwilling to adopt even moderately left-wing policies.

As regards the Labor Party, there is little to say, except that, having backed away from the neoliberal reform agenda it pushed during the 1980s and early 1990s, Labor has proved extremely reluctant to advocate anything (particularly at the national level). Any discussion of possibilities for Australia must therefore begin with a suspension of disbelief, assuming, for the sake of argument, that the ALP will either resume its historical role as the party of progressive social reform or be replaced by some other political force. Neither looks likely at the moment, but then, who would have predicted in 1980 that a Labor government would, within a decade, privatise the Commonwealth Bank?

The experience of the Blair Government in the United Kingdom is instructive. Despite leaders who took office with the stated, and sincere, intention of maintaining Thatcherite economic policies, particularly with respect to taxation levels, they have found themselves forced by public demand for improved services to raise taxes, first by stealth and, in the 2002 Budget, overtly.

Frankel's book went to press before the shift to the Left was clearly evident in Britain. Still, he might have mentioned the experience of New Zealand, where a Labor party (one that seemed even more hopeless than the ALP in the mid-1990s) was elected on, and implemented, a pledge of raising the top marginal tax rate from 33 per cent to 39 per cent. The New Zealand Labor government looks set for a landslide re-election and the Blair Government's poll standing jumped in the aftermath of the 2002 Budget.

Australian experience is more equivocal but scarcely a cause for despair. Labor was comfortably re-elected after the tax summit in 1984, despite introducing a capital gains tax which had been assumed to be electoral poison after the defeat of 1980. John Howard was narrowly re-elected in 1998 on the basis of the GST, despite an anti-tax scare campaign by Labor. State and local governments have raised taxes fairly steadily over the 1980s and 1990s, without obvious electoral consequences. Finally, survey evidence has repeatedly shown that a majority of Australians would pay higher taxes in return for improved community services.

The real issue, then, is the opposition of powerful interests and particularly of the financial sector. As Frankel observes, this opposition may be reflected not only through political processes such as lobbying and financial support of anti-Labor parties, but also through more direct resistance, in the form of capital flight.

The need to respond to the pervasive power of financial capital is clearly the central issue in any progressive political strategy. It is not clear, however, that Frankel's proposed strategy would succeed in outflanking such opposition. To the extent that it diverts investment away from its most profitable uses, and towards more socially progressive ends, it has the same real effects as an increase in taxation, and would presumably arouse the same opposition. Moreover, unlike proposals for, say, higher rates of personal income tax, Frankel's agenda involves large-scale direct intervention in the core activities of financial markets. Although it would create opportunities for some financial market participants, it would reduce or eliminate the roles of many others. The resistance would presumably be correspondingly vigorous.

Fortunately, the power of financial markets rests largely on faith, and that faith has been ebbing rapidly over the last few years. The idea that financial markets are omniscient and omnipotent arbiters of national economic policy is being displaced by the recognition that, in many respects, they are little more than upmarket casinos. We are at the moment in The Wizard of Oz (originally an allegory on the spurious power of gold) when the curtain is swept aside to reveal the fraud behind it.

Leaving aside questions of political feasibility, it is useful to assess the Frankel strategy on its merits, using a tax-based strategy as a basis for comparison. Broadly speaking, the two agendas are comparable in scale. Tax-based strategies such as that of Work for All (Langmore and Quiggin 1994) have typically envisaged a transfer of between 1 and 5 per cent of GDP from private consumption to public expenditure (roughly $7 billion to $35 billion as of 2002). The real rate of return to superannuation investments has been between 5 and 10 per cent in recent years, though longer-term experience suggests a range more like 3 to 8. Taxing returns or redirecting investments to more progressive but less profitable uses might capture an annual flow equal to 2 per cent of the total. Assuming, with Frankel, that total superannuation funds will ultimately be around 150 to 200 per cent of GDP, the potential resources are 3 to 4 per cent of GDP.

As I've already suggested, the most promising agenda for progressive reform is likely to be an eclectic one, rather than a single Big Idea. A mixture of progressive tax reform and creative use of superannuation policies could finance a substantial policy agenda without pushing any policy instrument to the point where it would meet insuperable resistance.

Frankel presents a range of variants on his proposal. To my mind, the most promising version is one that restores some form of the old 20-30 rule, under which the concessional tax treatment of superannuation was conditional on a requirement to hold 30 per cent of assets in government securities, of which 20 per cent had to be Commonwealth government bonds.

The sale of government bonds to superannuation funds could finance both ownership of income-generating assets such as Telstra and non-commercial, but socially desirable, investments in projects such as salinity mitigation. A combination of this kind would be financially sustainable because the rate of return to equity investments like Telstra is, on average, considerably higher than the rate of interest the government pays on bonds.

In the longer term, though, a more aggressive response to the financialisation of the economy is needed. Only when the financial sector is cut down to size, in both an economic and a cultural sense, will a renewed social democracy be feasible. Frankel mentions the Tobin tax, the perennial favorite of the Left (and one of my own) in this respect, but a more comprehensive agenda of reregulation is needed. With the emergence of endemic financial scandal in the United States and elsewhere, such a possibility no longer seems farfetched.

The failure of free-market policies is evident, and increasingly widely recognised. The time is ripe for a move beyond critiques of neoliberalism to positive alternative programs. Boris Frankel has made an important contribution in this respect.

John Quiggin is an Australian Research Council Senior Fellow at the School of Economics, Australia National University.
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Title Annotation:When the Boat Comes In
Author:Quiggin, John
Publication:Arena Magazine
Article Type:Book Review
Date:Aug 1, 2002
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