To this end, many governments are implementing fiscal stimulus packages. These packages usually include a tax cut/cash handout coupled with public investment in infrastructure. Such packages are aimed at immediately boosting demand and employment while improving the productivity of an economy.
Most countries have also responded to the crisis with deep cuts in interest rates, which are intended to stimulate demand and the supply of credit.
The contents of fiscal stimulus policies are contestable. The balance between cash and investment is hotly debated. As a general rule, parties on the right have generally favoured tax cuts while parties from the left lean towards infrastructure investment.
Despite frequent political disagreements on the composition of stimulus packages, there is an increasing consensus that such government expenditure is an appropriate response to the crisis.
Unfortunately, government and political responses to the financial crisis have not been limited to crafting prudent stimulus packages. If they had, we would have less to worry about. We could have braced ourselves for the rough economic ride in the hope that some relatively sensible responses to the crisis would help minimise the impacts of the bumps along the way.
Governments and political parties the world over are pursuing agendas other than simple fiscal stimulus in light of the crisis. It is these agendas that are great cause for concern because of their potentially disastrous long-term consequences.
In particular, it has recently become fashionable to push an anti-market populist agenda. There is an increasing propensity of mainstream politicians of a particular ideological inclination to use the financial crisis as an opportunity to push long their long held anti-market views.
Criticism of the market was an inevitable by-product of the financial and economic crisis. There are many that blame the market system for wiping out trillions of dollars in wealth, ruining livelihoods and destroying hope for any economic growth in the coming year. A number of world leaders, from Russia to Venezuela, have been gloating over the apparent failure of the capitalist system.
Some of this sentiment has been infecting more mainstream political leaders as well. Kevin Rudd, the Australian Prime Minister, in an attempt to position himself as a global opinion leader, suggested that Hayekian policies and neo-liberalism had failed. He argued that the financial crisis was an epoch changing event that marked the end of “the great neo-liberal experiment”.
Mr Rudd’s position is flawed because there has in fact been no “great neo-liberal experiment”. Certainly, Reagan and Thatcher were zealous in their application of free market ideas but their worst excesses were tempered when they were replaced in government. The reality is that market fundamentalist policies have been softened by the strength of social democratic parties, social realities and democratic political systems. On the whole this has improved government policy.
Admittedly, Mr Rudd does acknowledge the importance of markets and market principles. However, by painting a picture of vanquished Hayekians and the end of neo-liberalism, Rudd polarises debate when consensus should be sought. This serves to add fuel to the fire of anti-market sentiment when it is least required. Many of the more extreme European social democrats, who have long been wedded to regulations that stifle economic growth and social innovation, will no doubt be pleased by Mr Rudd’s intervention.
The trouble is that there are insufficient voices talking up the benefits of markets and market mechanisms as an approach to achieving beneficial policy outcomes. Even the leadership of economically liberal political parties are becoming reticent about vigorously advocating pro-market agendas even if they make sound policy sense.
Let us not forget the importance of market-orientated ideas in the regulation of greenhouse gas emissions and other negative externalities. The great efficiency gains that are a result of introducing market principles into standard government practice should not be overlooked. Let us also not forget the great benefits to consumers and overall wealth that have resulted from opening economies to global competition.
The potential consequence of the anti-market ideas that are currently getting easy traction is a return to inefficient and unnecessary command and control style government policies. These often serve to limit individual choice, reduce competition, increase costs/prices, disadvantage consumers and, ultimately, slow the rate of economic growth. Simply put, the drive to regulation that is now in vogue raises the spectre of suffocating over-regulation.
Without a pro-market consensus voice talking up the benefits of effective markets and the use of market tools/principles to achieve policy outcomes, some of the market orientated policy innovations of the last twenty five years may be lost in a wave of anti-market sentiment. I, for one, have been happy with 25 years of economic policy innovation in Australia and have not seen this time as a great neo-liberal experiment despite transgressions by the Howard government (most notably in labour market policy).
The problem is that anti-market positions can be popular. It is dependent on our political leaders to avoid scoring political points in a time of crisis. They should be working to find economically sound policies to soften the crisis and shield the people from its worst effects without resorting to cheap anti-market populism. The view should be towards long-term sustainability rather than the ballot box.
Policy and regulatory responses to the crisis should pass the good policy test. New policies should be well targeted, evidence based, well designed, the least cost option and with expected benefits outweighing expected costs. In most cases populist and anti-market policies fail this test resoundingly.
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