The 1984 election, 40 years ago this month, marked a momentous shift in direction for a country on the brink of bankruptcy. In the second of two articles, Danyl McLauchlan considers the sharemarket crash, the beginning of the end for the Lange-Douglas government but not the neoliberal economic path that would forever change New Zealand. (To read part I, go here.)
Most of the world knew it as Black Monday: the sharemarket crash that hit global financial markets on October 19, 1987. In Europe, the US and Asia, it came to be seen as a correction: American shares were overvalued, early versions of automated trading algorithms triggered rapid sell-offs. Central banks in those economies acted quickly, stabilising markets and shoring up their finance sectors.
In New Zealand, Black Monday was on Tuesday and it plunged the economy into a five-year recession. It came nine weeks after David Lange’s Labour government was re-elected for a second term.
During the campaign, Lange indicated that the economic turbulence and political chaos of the previous three years was over; now, it was time to enjoy the benefits of those reforms. Finance minister Roger Douglas and associate ministers Richard Prebble and David Caygill – the Troika – thought differently. Their work was not yet done; it had barely begun.
War on intervention
Of the many right-wing finance ministers deregulating their economies in the 1980s, Douglas was the most radical, the most ambitious, the least inclined towards moderation. In his first term, he went to war on government intervention in the finance sector, and after the crash, the suddenly impoverished nation discovered that the shady trading practices that most developed economies ban as a matter of routine – insider trading, pump-and-dump schemes (boosting the price of stocks through misleading statements), brokers taking positions against their own clients – were possible. There were no restrictions on the amount of leverage investors could take on, no interest rate caps or credit restrictions, no capital requirements.
The Douglas-era sharemarket became a gigantic, fraudulent, speculative bubble, and when the international markets fell, New Zealand’s collapsed. Share values halved over the subsequent months; tens of billions of dollars were wiped out. The nation’s capital markets took decades to recover. Most New Zealanders looking to invest shifted their money to residential property, permanently traumatised by the sheer scale of the wealth destruction and the lawlessness that enabled it.
For Douglas and his allies, the crash provided further proof of the underlying fragility of the economy and the urgent need to move even faster with their reform programme. But for many of the Troika’s caucus colleagues, it was hard to accept that the recession was somehow the fault of ex-prime minister Sir Robert Muldoon’s protectionism. This seemed to be an avoidable catastrophe of Douglas’s own making. They’d long suspected him of holding radical ideological beliefs, and he was obviously too close to big business – but now, a new suspicion entered their minds: that even accounting for ideology and patronage he didn’t seem to know what he was doing.
Keynesian economics
On the ground floor of the Reserve Bank, directly across the road from Parliament, there’s a machine called the Moniac. Built in 1949 to a design by the New Zealand economist Bill Phillips, the Moniac looks like a large Perspex wardrobe full of columns, pumps and tanks filled with water, identified with labels like “Consumption Expenditure” and “Investment Funds”. It’s a computer that uses fluidic logic instead of digital electronics and, when you switch it on, the water flows around the system solving macroeconomic equations.
The Moniac took its name from “money” and an early digital computer, Eniac. It embodied a central assumption of mainstream economics in the mid-20th century: that a nation’s economy was like a complex machine. Just as machines were built and fixed by engineers, economies would be operated by economists. They would design them, fine-tune them and fix them when they broke, all according to the scientific principles laid out in John Maynard Keynes’ magisterial General Theory of Employment, Interest and Money, the 1936 text that invented modern macroeconomics.
The Keynesian framework became the standard for advanced economies in the post-war era, leading to three decades of widespread prosperity and growth. Muldoon had taken this engineering approach to its most radical conclusion, tinkering with everything and screaming at anyone who questioned him that he was the only person who understood our economy.
One of Keynes’ most persistent critics was the Austrian economist Friedrich Hayek, who believed there was a fatal flaw in the great man’s philosophy. Consider the fluid flowing around the pipes and tanks of the Moniac. It is made up of water molecules, and these are heterogeneous and predictable – but an economy is made up of people. We are individualistic, complex, self-moving agents. We have access to local information about our own lives, and we can change our plans as the world changes.
For social scientists to assume they could predict the behaviour of millions of humans and make plans on their behalf was, Hayek scoffed, “the pretence of knowledge”. People needed to be free to make their own choices, signalling their preferences via prices and markets instead of allowing a handful of hubristic planners to decide everything for us.
Keynes’ system might work for a while, Hayek warned, but over time, politicians would realise they could manipulate the economy for their own electoral interests. They would promise social justice and economic growth, but they would use the power of the state to deliver cronyism and patronage. Their interventions would serve the wealthy and powerful. The more they interfered, the more damage they’d inflict on the productive sectors. As economic conditions deteriorated, the public would demand more security, more welfare. To pay for all this, planners would impose more radical interventions, more control, trapping the economy in a doom loop until everything collapsed.
Rise of the neoliberals
Keynes had debunked the liberal economic theories of the 19th century, which had failed to perform during the Great Depression. Now Hayek’s disciples and fellow travellers – most notably the Chicago economist Milton Friedman – debunked Keynes, blaming his framework for the high-inflation, high-unemployment, low-growth conditions of the 1970s.
They developed their own macroeconomic models, optimising for low inflation, low interest rates, low, broad-based taxes, minimal state intervention and access to global free markets. It was a more sophisticated, mathematical version of the doctrines behind 19th-century liberalism, hence neoliberalism, although its adherents often prefer the term “classical liberals”.
When Margaret Thatcher was opposition leader of the Conservative Party in the UK, she found herself in a debate with her policy council about the party’s values. Legend has her producing Hayek’s The Constitution of Liberty from her handbag, slamming it on the table and declaring, “This is what we believe.” But it’s not clear that Roger Douglas or his fellow revolutionaries believed – or even understood – the theoretical basis behind their reforms. (Douglas, now Sir Roger, declined to be interviewed by the Listener for this series.)
When economist Don Brash delivered the annual Hayek memorial lecture in 1986, he confessed he’d never read Hayek or Friedman, and he doubted any of his co-architects were familiar with them. This may explain the chaotic nature of the process.
Friedman – who believed strongly in financial market regulation enforcing transparency and accountability – would have had fits over New Zealand’s Wild West sharemarket of the mid-1980s. And it would explain why our experience with privatisation was unusually catastrophic.
In 1984, the government owned nearly everything – ports, airlines, banks, the post office, the railways, the phone network, coal mines, forests, printing presses, radio and TV stations, hotels and ski-fields. Nothing worked very well, just as the neoliberals predicted.
The Forest Service managed the conservation reserve and spent decades clear-felling the nation’s native forests. The Post Office ran the telephone network, new phones took 3-6 months to install, and the government refused to allow married women to list their maiden names in the phone directory. People posted their Christmas cards in early November to ensure they arrived in time. It was illegal to move freight around the country on the roads: everything went through the railways, and these were notoriously slow, losing shipments and occasionally entire freight trains and their consignments.
Most of these services ran at a loss. Rail, postal services and forestry were the most inefficient because they functioned as de facto welfare systems in the full employment economy. (This reached its high point in March 1956, when only five people in the entire nation received the unemployment benefit.) By 1984, unemployment had reached 5%, a post-war high, and in 1988 it surged again as the government’s corporatisation programme swung into action.
On April 1, 1987, many of these aged and sclerotic government entities were transformed into state-owned enterprises, or SOEs. Henceforth, they’d be run like corporations and expected to return a profit.
During the next four years, tens of thousands of workers lost their jobs, most of them across the rail, forestry and postal services. Many were rural workers, disproportionately Māori and by the early 1990s, Māori unemployment stood at 25%. They found themselves looking for work in an economy crushed under high interest rates – 18% by the end of 1987, farms were going bankrupt, the freezing works were shutting down. Many of the SOEs returned a profit but government welfare costs exploded. Long-term unemployment became a perennial challenge for the social welfare system.
Privatisation at pace
It was widely speculated that corporatisation of the state’s assets was a prelude to privatisation. During the 1987 election campaign, Labour assured the public that this was not the case, but once re-elected, it began the privatisation process.
Similar projects were underway in Australia and the UK – but those governments quickly encountered a fishhook in their ideology. Many of the state’s most valuable assets were natural monopolies. Rail, mail, telecommunications. If these were operated by the government, there was a degree of accountability through the electoral process, but a privately owned monopoly could price-gouge its customers and inflict significant damage on a nation’s economy.
The Thatcher government spent 10 years privatising British Telecom; Australia took 25 years to sell off Telstra, beginning in the early 80s and floating its final tranche of shares in 2006. Their political leaders knew how vital it was to get the regulatory settings correct, to try to develop competitive markets and to maximise returns for the government; to bring the public with them.
None of these were priorities for Labour’s Troika. Speed was everything. The legislation to privatise the telecommunications network – until then part of the Post Office – was passed overnight as a Budget measure. There was no public scrutiny, no regulatory review. In 1990, the company, by now the Telecom Corporation, was sold to a consortium of US telecommunications companies, with minority shares going to a handful of domestic merchant bankers.
Telecom quickly became the most-hated corporate entity in the country, loathed for high prices and terrible service. It spent decades fighting any attempt to regulate it. Business journalists referred to Telecom as a lobby group and law firm with a tele-communications company attached. The dotcom booms of the 1990s and 2000s passed New Zealand by because its tech sector was dominated by a predatory monopoly. The economic damage was incalculable. In 2008, Helen Clark’s Labour government finally legislated to break it up.
Stupendous profits
Why weren’t the state assets floated on the sharemarket? Wasn’t “the market” the organising principle of the neoliberal revolution? Partly, it was because the government had already wrecked the sharemarket. But the public could not help but notice the stupendous profits made by the financiers arranging these deals.
The merchant bankers Michael Fay and David Richwhite made an estimated half a billion dollars off the asset sales of the 80s and 90s, and successive governments struggled to explain how this happened and what value the financiers delivered, especially considering the very poor quality of the deals that were made.
In June 2000 ‚the NZ Herald business columnist Brian Gaynor estimated that asset sales amounted to a loss of about $8 billion to the nation – worse than Muldoon’s Think Big project that the neoliberals considered the epitome of state failure.
The big split
In early 1988, Lange delivered his famous “cup of tea” speech, announcing an end to Douglas’s reforms. In November, he sacked Richard Prebble from his state-owned enterprises portfolio and a few weeks later Douglas was replaced as finance minister. The Troika attempted a coup aimed at replacing Lange with Douglas but lost the leadership vote by a large margin.
In August 1989, Labour’s cabinet voted to reinstate Douglas to the finance portfolio. Lange resigned, replaced by Geoffrey Palmer, who was then ditched six weeks out from the 1990 election in the face of polls predicting a historic defeat. Mike Moore became one of our shortest-serving prime ministers.
National’s campaign slogan in 1990 was “a decent society”. It would be a more compassionate government, not quite restoring the nation to the old regime but rededicating the state to its core functions of healthcare, education and welfare. It won by a landslide and in the immediate wake of victory, learnt Labour had lied to the country about the state of the government’s finances. Instead of a modest surplus, there was a deficit of $3.7b and the Bank of New Zealand – now partially privatised with the government still owning 51% – required a $620 million bail-out before the end of the week.
National met this new crisis with 1991′s infamous “Mother of All Budgets”, slashing welfare and introducing user-pays to health, education and state housing. Child poverty doubled; crime increased. Unemployment hit 11%.
The public was furious: they’d been lied to for three elections in a row, and their fury drove the campaign for electoral reform. Lange had, in 1987, promised the public a referendum on the electoral system. No one knows why he did this: his party was vehemently opposed to a referendum. So was National, but it felt compelled to match Lange’s pledge.
In 1996, the public voted for the mixed member proportional (MMP) system, deliberately designed to constrain the power of future governments. Supporters of Rogernomics ran a furious campaign against MMP. Cartoonist Murray Ball suggested that the best reason to vote for MMP was “to look at the people telling you not to”.
In Lange’s 1996 valedictory speech, he thanked “those people whose lives were wrecked by us, because we did do that”. The line is often quoted in isolation: a rare fragment of regret for the victims of the revolution, but he elaborated that the owners of those wrecked lives “had been taught for years they had the right to an endless treadmill of prosperity and assurance, and we did them … They hate me because I was the symbol of what caused that assurance of support and security to be shattered.”
There was much truth to this version of events. A succession of external shocks combined with mismanagement from the National and Labour regimes of the 70s and early 80s turned a prosperous nation into an inward looking, dysfunctional economy with low productivity, soaring debt and a rapidly expanding welfare system subsidising middle-class consumption.
When it all collapsed, the public blamed Lange and Douglas rather than the preceding governments that lied to them, pretending it could all go on forever.
But it’s also true that the recklessness of the Lange-Douglas government exacerbated what its predecessors had ruined. It delivered a speculative bubble resulting in a devastating sharemarket crash; it responded with a brutal monetary policy prolonging the recession; it cast tens of thousands of people out of work in the midst of this catastrophe.
When National’s Jim Bolger and his finance minister Ruth Richardson took over in 1990 – different government, same pseudo-ideology – they forced the most vulnerable victims of the reform programme into abject poverty. The Muldoon economy, currency crisis and BNZ bailout became alibis for a sequence of cruel and unrelated crimes.
A legacy of failure
Was it worth it, after all, despite all the suffering? Probably not. Many left-wing commentators – including University of Auckland emeritus professor Jane Kelsey – have noted that neoliberal revolutions generate “Fire” economies: finance, insurance and real estate become the focus of commercial activity. Sectors like manufacturing and primary production – places of job creation and productivity gains – diminish, replaced by banks and property speculation.
New Zealand became the canonical version of this, its economy dominated by the Australian banks and the residential property bubble. In Not in Narrow Seas, economist Brian Easton – Rogernomics’ most outspoken critic over the decades – takes grim satisfaction in assessing the revolution’s economic legacy.
“The economy stagnated between 1985 and 1993, returning to the zero-growth track which the Rogernomes had condemned when in opposition,” Easton wrote.
“After 1993, the economy began growing, but at about the same rate as the OECD again, some 15% below the old growth track and 20% lower than Australia with its more sober liberalisation. Rogernomics was an abject failure by its own standards.”
In 2021, Treasury published He Tirohanga Mokopuna, a combined statement on the state’s long-term fiscal position in light of Covid. It found that the gap between tax revenue and expenditure would continue to grow, leading to a blowout in net debt. Labour responded with a massive increase in spending; the National-led government that replaced it cut taxes.
After the coalition’s May Budget, Sir Roger Douglas (he was knighted in 1990) alleged that National and Labour were yet again competing to wreck the economy. “We’re in as much trouble today as we were in 1984,” he wrote. He recommended radical reform.
There is a doomed, Muldoon-era quality about the macroeconomy, an aggregate of corporate welfare handouts and election bribes across multiple governments: protected industries, an incoherent tax system, a vast system of tax subsidies, transfers and rebates, deteriorating trade, low productivity, low growth, bleak fiscal projections, crumbling infrastructure, mass immigration to Australia.
If New Zealand maintains its historical pattern of dramatic political change every 40-50 years, we are due another revolution. Conditions are ripening, if not yet ripe, for some political entrepreneur or ideologue to change everything – some descendant of Michael Joseph Savage? Muldoon? Douglas? Something we haven’t seen before?
In Wellington, it’s raining, and the institutions and dignitaries have a derelict, haunted effect, already half swept away by the chaos and the floods to come.
