December 2008 – January 2009


Managing the risk

By Judith Brett
Illustration by Jeff Fisher.
Illustration by Jeff Fisher.

The big lesson of the past few months of financial crises is that government is the ultimate risk manager. When all else fails, be it the weather, our marriage, the banks or even our child-care provider, we turn to the state. Natural-disaster relief is a regular feature of Australian politics, income support for single parents is now well entrenched and many people have always thought that child care was an essential service best provided by governments, but it is a long time since most of us thought much about whether our money is safe in the bank.

When All Else Fails is a book by a Harvard-based historian of political economy, David Moss, on the American government as a risk manager, from the introduction of limited-liability laws in the early nineteenth century through to the consumer-protection laws of the late twentieth. Moss argues that, despite the reputation of American political culture as laissez faire and market-oriented, the government of the United States has been an active manager of risk since the late eighteenth century, when it began attempting to regulate finance to encourage trade, investment and entrepreneurial activity. It invented the limited-liability company to restrict shareholder risk. Shareholders might lose their investment if a business failed, but they would not lose their house, as risk was shifted from the shareholders to the creditors left holding the unpaid bills. Banks were increasingly regulated, to foster confidence and prevent panic-driven runs; and bankruptcy laws were changed, so that failed entrepreneurs were not permanently excluded from economic activity.

In the twentieth century, governments' focus shifted from finance and business to the population at large, with the state gradually guaranteeing citizens against a range of personal risks: accidents at work, illness, unemployment, old age or being born to poor parents. The twentieth-century history of the welfare state is the history of the expansion of risks that governments are prepared to protect their citizens against, in order to provide them with ‘social security' and, in the case of children and young people, equal opportunity. Governments differ in the range of risks they cover and in the means used - for example, in the balance between social-insurance schemes and those funded from general revenue - but all now provide their populations with a range of risk-management services unimaginable in the nineteenth century.

Moss's book was published in 2002, and in it he observed presciently that the internationalisation of financial risk enabled by the revolution in information technology would test public risk management in the twenty-first century. Indeed! As I write, world leaders are working frantically to stop the global economy sliding into recession, but they are in unknown territory as they try to re-establish trust and get credit moving again.

Also novel in the current crisis is the number of people exposed to the share market through superannuation and direct investments. According to a study by the Australian Securities Exchange, in 2006, 46% of Australian adults were exposed to the share market in some way and 38% were exposed directly. With the introduction of compulsory superannuation as an alternative to old-age pensions, and the phasing out of defined benefit schemes, individuals have taken on more of the risk in managing their retirement incomes. This has made the financial meltdown much more difficult for governments to handle, as they try to reassure not just businesses and financial institutions but hundreds of thousands of risk-averse small investors, all of whom are endowed with a sense of entitlement to their now-lost returns and a belief that an annual overseas trip, or at least one to Queensland, is their due after a life of effort. This is tricky psychological territory for governments. Savers have always been self-righteous, seeing their accumulated wealth in terms of the effort required to earn it and the consumption they denied themselves in salting it away. Will small investors regard their lost money in the same way, and blame the government? Or will they take it on the chin, offsetting the extraordinary asset-price growth of the past few years against their recent losses?

Probably a bit of both, but one thing that is clear from recent months is that those who thought that neo-liberalism - or economic rationalism, as we call it in Australia - represented an epochal shift in relations between states and markets, governments and their citizens, were wrong. The right-wing champions of deregulation who argued that markets and individuals were always wiser and more efficient than governments, and the left-wing social democrats who wrung their hands at governments' retreat, were generalising on the basis of too short a historical time span. Instead, what was happening was a shifting of the lines of responsibility between government, market and individual provision, and an experiment with the reallocation of some responsibilities; but our reliance on government as the risk manager of last resort has not shifted one iota. In times of crisis, when all else fails, it is the government we blame and to the government we turn for the solution.

Which brings us to the second and far greater risk facing humanity: the weather. Even if you are still a climate-change sceptic, it is clear there is at least a very high risk that the world faces ecological disaster; and we are used to governments taking responsibility for defending us against the risk of improbable events that have disastrous consequences. It is, after all, the main reason for our national defence budget. Given the scale of the problem, we need governments to lead the way, but the reduced reliance on public-sector provision in the recent, neo-liberal past offers some salient lessons.

In tackling climate change, the two key issues are energy and water. Even if the unprecedented drought in the south-east is not caused by climate change, it is posing major risks to food production, domestic water supplies and ecological systems. In Australia, one of neo-liberalism's major strategies for rebalancing states and markets was the privatisation of state-owned enterprises: banks, transport and communication providers, water and energy utilities. With privatisation, assets shifted from the state to the corporate sector. It was meant to make raising capital for reinvestment in infrastructure easier, and it broke up the powerful public-sector unions, which were the bane of state governments. Victorians will remember the striking trams that blocked city streets during the government of John Cain. And the New South Wales Labor government is in terminal disarray after the union-dominated party rejected the privatisation of the electricity sector and forced Premier Iemma's resignation, in early September.

Those on the Left often bemoan the privatisation of water and power utilities, and the effect of this on environmental sustainability. They assume that the private sector will always put profit before people, and that the public sector is somehow naturally progressive and sympathetic to green ambitions. One look at New South Wales, or at any of our state Labor governments, should show that to be a myth. In Queenland, Anna Bligh's government is insisting on its right to issue water licences, with little apparent concern for the downstream consequences. All the state governments except Tasmania's have committed to expensive, energy-intensive desalination plants as part of their long-term water strategies. All are moving at a snail's pace on more environmentally sustainable building regulations. And none has decisively fast-tracked private solar-power generation with generous rebates and feed-in tariffs, although South Australia's government is the best in this area.

It is true that federal Labor has much better environmental credentials than the federal Coalition, and that the environment went backwards under Howard, both in fact and as a political value. Kevin Rudd seems to be holding the line on the introduction of a carbon-trading scheme in 2010, while the Coalition persists with economy-versus-environment rhetoric, arguing that the global financial crisis means we can't afford it. But at the state level, Labor's penchant for corporatism and its links with the union movement are serious impediments. Think about the unholy trinity of Gunns, the Lennon government and the CFMEU, and their united determination to build a pulp mill in the Tamar Valley, despite the damage it will do to Tasmania's small wine, food and tourism businesses.

The Labor Party is a creature of the industrial revolution, born to fight for the rights and wellbeing of the industrial working class. It did a great deal to convince governments to create the welfare state as a risk manager of the life chances of those with little capital. But it is ill-suited to thinking flexibly and creatively about how to live in a dry, post-carbon future, particularly while wedded to a union movement that, as we have learnt from the timber industry, will fight to protect the jobs of workers no matter what the environmental cost, and has little interest in small producers. The state Labor governments have shown that in managing the biggest risk we all face, the ALP has no claim to be our best bet.

So here is some advice for the Liberals, whose best chance of regaining political power soon is in the states. Fight the Labor governments on infrastructure, and on alternative water and energy provision; and rediscover the home as a place of production, not just of consumption. Encourage large water tanks and do whatever it takes to get solar panels onto our sunny rooftops. It may well not take a lot, as rainless day after rainless day panics more of the population into wanting to do something.

The Liberal Party prides itself on being a practical party that has faith in people's capacity to make the best choices for themselves and their families, Malcolm Turnbull recently told the Weekend Australian. So give them a bit of a hand to make the best choices. This would be a public-private partnership with a difference, where the hundreds of thousands of people who have been persuaded to take responsibility for their own retirements are also encouraged to invest to become mini-producers of power and water services.

Creative leaders apply the old arguments and symbols in their party's ideological toolkit in new ways, to solve new problems, and this suggestion ticks a lot of boxes for the Liberal Party's professed philosophy: it is about individual choice; it is a public-private partnership that encourages private investment in infrastructure provision through the contributions householders will make to the initial investment; it puts the home, the Liberal Party's historic symbol of independence and self-provision, at the centre of a public policy; it will create lots of jobs in the de-unionised small-business sector, particularly for the self-employed tradesmen who were the backbone of Howard's working-class support; and it might even attract the vote of the moral middle class, which the Liberals lost to Labor more than three decades ago.

Will the Liberal Party listen? Probably not, but it needs to get some new ideas from somewhere. The brouhaha following the publication of Peter van Onselen's edited collection Liberals and Power: The Road Ahead revealed just how bereft the party is. Its deputy leader, Julie Bishop, relied on a plagiarising staffer, and its immediate past leader, Brendan Nelson, on the ghost-writing skills of his speechwriter, for chapters which talk about yesterday's problems and yesterday's solutions.

David Moss, with whom I began this piece, remarks that mediocre politicians are like flypaper for ideas, picking up almost anything that comes along, whereas those politicians who emerge as problem solvers at the great crises and turning points in a nation's history are those who can pick the strong arguments from the weak, and can hear the ring of truth in a cacophony of advice and special pleading. They are also those who can take decisive action, and reassure their populations as they turn to governments for solutions to unprecedented problems and risks. Crises define political leaders: they test their skill and nerve, and they remind us how much we depend on them. And if they seem to get it right, they can become heroes: in historic memory Winston Churchill is the hero of World War II, rather than the fool of the Dardanelles campaign and Gallipoli. Early in John Howard's leadership, he responded decisively to the Asian financial crisis and the breakdown of civil order in East Timor. Later, however, his failure to handle crises well, as with the Tampa, or even to know when we were in them, as with the environment, fatally undermined his chances of being remembered by history for his crisis-management skills.

In the year since Kevin Rudd defeated John Howard, we have seen three styles of Rudd leadership. There was the symbolic healer of the early days, when Australia finally signed the Kyoto Protocol and Rudd made his gracious and intelligent apology to the Stolen Generations. There was the bureaucrat, promising to tackle the policy backlog of the Howard years with his committees and inquiries and reform rollouts. And since September we have had the crisis manager, as Rudd took quick and decisive action to try to stop the Australian financial system from unravelling and the economy from slipping into recession. This has transformed the perception of his leadership capacities, particularly among journalists. Yet on the environmental crisis, he has not achieved a breakthrough. He is sticking to the plan for carbon trading, but has been unable to act decisively or effectively on the disaster of the Murray-Darling Basin, where he is saddled with unimaginative and mediocre state Labor governments that are seemingly incapable of grasping the seriousness of the ecological crisis. This failure gives the Liberals a historic opportunity to break through with new solutions, rebuild their political credibility and reclaim their place at the creative heart of the nation. What are they waiting for?

Judith Brett

Judith Brett is an emeritus professor of politics at La Trobe University. Her latest book is Doing Politics: Writing on Public Life.

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