Upend the trickle

Listen to this essay 21 minute listen If the people around you are spiteful and callous and will not hear you, fall down before them and beg their forgiveness; for in truth you are to blame for their not wanting to hear you. – from The Brothers Karamazov (1880) by Fyodor Dostoevsky If Western democracies were companies, they would be dismissed as lifestyle businesses whose managers (ie, political leaders) run them to promote their own interests and wealth. Leaders pursue projects that benefit the few, rather than national goals, and leave their countries with low economic growth, heavy debt and rampant white-collar crime. We entered this era of an unjust social order, political malaise and destabilisation almost half a century ago when the US president Ronald Reagan and the UK prime minister Margaret Thatcher introduced libertarian reforms that were embraced globally. At his first cabinet meeting as president in 1981, Reagan distributed copies of Mandate for Leadership, whose 3,000 pages came out of the Heritage Foundation, a conservative research group in Washington, DC. This became the ideology of neoliberalism, which advocated a smaller state, industry deregulation, tax cuts, strengthened defence, and roll-back of social engineering. A year later, 60 per cent of the Mandate’s proposals had been adopted by the Reagan administration, and The New York Times called it ‘the manifesto of the Reagan revolution’. His initiative engaged Thatcher, and spread globally to dominate public policy in democracies around the world. My perspective is that of an engineer with a career as a corporate strategist and, more recently, finance academic. In 2000, shortly after the Y2K scare, I left the corporate world for academia and research into decision-making by international finance organisations. In a round of industrial tourism, I interviewed more than 50 finance executives in Istanbul, London, Melbourne and New York. This led to three books, including Applied Investment Theory (2016), which criticised the justice system’s failure to prosecute corruption and criminal activity in large companies and among elected officials. A framework used in corporate finance to explain the behaviour of organisations and individuals is the structure-conduct-performance (SCP) model, and it can help us understand the effects of the changes that Reagan and Thatcher brought to Western democracies. SCP conceptualises decisions within a multidimensional framework; when applied to countries, this framework postulates that their conditions are driven by the structure of institutions, laws and conventions; which drives the conduct or decisions of government, individuals and organisations; and that in turn leads to performance or outcomes. Reagan and Thatcher asserted that unleashing markets and shrinking the state would ensure prosperity. Their signature initiatives of industry deregulation, tax reduction, market liberalisation and labour market reform won the day. It did not take long, however, for the trickle-down effects of tax cuts funded by government debt to prove disastrous. Most obvious was the Black Monday stock market crash of October 1987. Neoliberalism had reduced the capacity of public institutions to manage systemic risks, and – as the authority and ability of government to regulate industry shrank – moral hazard spiked. Infrastructure is a simple way to illustrate the realignment between state, markets and democratic institutions over the past half-century. Following the Second World War, Western governments invested heavily in transportation networks, energy systems and other public capital. Privatisation and deregulation reversed this trend, with cutbacks to public works projects: when roads and bridges, water systems and so on aged, productivity faltered. Promises of prosperity by Reagan, Thatcher and other advocates of neoliberalism were mistaken because it brought only fragility to previously prosperous democracies. From an SCP perspective, the trickle-down of market liberalisation and financialisation brought slowing growth, rising debt burdens, institutional weakness, and declining public trust. Some basic facts help to understand these claims, and give a sense of the impacts of neoliberal policies. Consider financial data since 1980 for the rich liberal democracies among the members of the Organisation for Economic Co-operation and Development (OECD). Reduced tax revenue forced governments to rely on borrowings, and government debt – as shown in the left-hand graph of Figure 1 below – surged from 40 to 65 per cent as a share of GDP. Meanwhile, government expenditure kept pace with the economy at almost half of GDP. In the right-hand chart of Figure 1 below, we see the economic consequences of high, unfunded government debt. The blue line tracks growth of GDP per capita, which gradually slowed from nearly 3 per cent annually in the 1980s to barely 1 per cent today. At the same time, deregulated credit markets encouraged households to borrow, and their debt more than doubled as a proportion of GDP. Quite obviously, neoliberalism did not deliver on its promises of economic growth and increased personal wealth. The big winner from 50 years of neoliberal policy has been the finance sector. As government and household debt surged out of control, global capital became ever freer, bankers’ propensity for risk surged, and speculative activity flourished. Financial institutions grew dramatically in size and influence. In the US and the UK, financial institutions have become a power in terms of profits and political influence. But, as shown in Figure 2 below, they set up a roughly seven-year cycle of market bubbles followed by crash and recession, which created super, unearned wealth for investor elites. Meanwhile, the middle class and below saw home ownership and comfortable retirement drift out of reach, especially for Gen Y. Probably the most powerful impact of neoliberalism has been on governance. Weakened corporate governance led to spectacular bankruptcies, with equally poor government strategy such as the failure to find promised weapons of mass destruction in Iraq, the 2008-09 global financial crisis, and over-the-top COVID-19 lockdowns. These generated anger and frustration that still linger, as indicated in Figure 3 above, where the rising global uncertainty index gives a rough but illuminating perspective on popular political sentiments. The decline in the economic stability and health of Western political democracies over the past 40 years is not simply a run of bad luck, because it did not occur in countries such as China and India that resisted its blandishments. Bad decisions that inflicted sweeping damage to democracies came from deliberate structural misalignments between democratic institutions and social and economic realities. Rectifying the malaise in Western political democracies requires realignment of the political paradigm, starting with support for decision-makers who can foster improved institutions and practices. Though it may seem counterintuitive, we must raise the pay of top government officials. Consider the annual base salaries for heads of government of OECD member countries: around half fall in the range US$150,000-400,000; only Switzerland and Australia are higher, and the rest are even lower. The base salary of the US president has been fixed at $400,000 since 2001, while the UK prime minister’s salary of around £170,000 (cUS$230,000) is less today than that paid to Gordon Brown in 2009. While money is not the only driver of occupational choice, underpayment invites mediocrity and the entitled, and encourages corruption. Political salaries need to be competitive. Leaders of government should be remunerated by reference to the compensation of CEOs of major domestic companies, with the pay of other politicians and senior government officials brought into line. In a mid-ranking country like Australia, trebling the base salary of members of the national parliament from a piddling US$170,000 per year would cost less than $80 million. That’s a cheap price for sound management of a $2 trillion economy. Better-paid and better-financed candidates will help shake up the political duopoly Voters paying their politicians more will expect better candidates and deeper competition. Their choices will be enhanced by more complete disclosure of candidates’ assets and interests, as required for candidates in India. Media denigration of politicians’ personal lives is an obvious deterrent to meritorious candidates. Australia has faced this, and allows individuals to sue for serious invasions of privacy when information relating to them has been misused. The cost of election campaigns is another major impediment, especially to candidates from outside the establishment. Emerging candidates and parties would be helped by democracy vouchers as introduced in Seattle city elections, which are distributed to voters during election campaigns for them to support preferred parties or candidates. Many democracies run longstanding two-party political systems: Liberal and Labor in Australia, Labour and Conservative in the UK, Republican and Democrat in the US. Even though parties swap government after every election or two, they co-ordinate through continual exchange of ideas. This duopoly structure stymies new directions and substantive reform (Noam Chomsky’s observation that ‘the smart way to keep people passive and obedient is to strictly limit the spectrum of acceptable opinion, but allow very lively debate within that spectrum’ comes to mind). Better-paid and better-financed candidates will help shake up the political duopoly and more closely review democracies’ performance. Many politicians have a growth-first agenda. The Florida governor Ron DeSantis, for example, told his electorate: ‘We need a new generation of leaders who will promote policies that will foster economic growth.’ This imperative is important in light of the management truism that ‘what gets measured gets managed’, even when it’s pointless. The most common measure of democracies’ performance is gross domestic product (GDP), which is a dumb yardstick because it simply records the value of goods and services that have a price. We get no information about their social or political meaning; nor details of other activities. As a result, unhealthy citizens, expenditure on wars, and rebuilding after accidents and disasters can all increase GDP. It does not count any value from the productivity and other benefits of free services such as the internet and AI (beyond their development and any subscription costs); nor does it count natural resources, unpaid labour or improvements in quality. GDP growth at all costs encourages poor policy. Business corporations with a ‘triple bottom line’ such as profit, people and the planet better recognise social ideals than GDP. One country that acknowledges this is New Zealand whose Living Standards Framework measures the wellbeing of individuals and institutions as well as the country’s wealth. Such balanced measures should be a minimum standard for all governments. Voters increasingly resent the burgeoning global oligarchy of the most wealthy and best-connected. Thus a survey across OECD countries in 2023 found that seven in 10 respondents want a more equal distribution of economic resources, and half think that disparities in political power are too high. This concentration of wealth encourages oligarchs to protect their interests at the general community’s expense Hard data back up these concerns. As shown in the left-hand graph of Figure 4 below, in large democracies, the share of total wealth held by the richest 1 per cent fell to its lowest levels around the mid-1980s. But it has rebounded since then: that 1 per cent now holds more than a quarter of total wealth in France, Germany and the US, and more than 20 per cent of the wealth in Australia, Italy and the UK. This concentration of wealth encourages oligarchs to protect their interests at the general community’s expense. Most obviously, they introduced big money into politics, as evidenced by a US study in 2025, which found that 30-45 per cent of private contributions to presidential candidates come from the wealthiest 1 per cent of voters. Oligarchs have frozen out citizens and structured ‘cartel parties’ that use state resources for themselves. Government economic policy is now a major source of oligarchs’ income. According to the management consultants McKinsey, higher government debt and easier credit increase financial assets in the private sector and promote asset price inflation. This disproportionately rewards wealthier households because they derive more of their income from financial, rather than labour, earnings. Similar benefit comes from corporate welfare, free markets and deregulation. The benefit of increased government debt to wealthy households is confirmed in the right-hand chart of Figure 4 above. Since 1980, government debt in Western democracies almost doubled its share of GDP, while the proportion of wealth held by the top 1 per cent jumped by a quarter. The risk from oligarchs’ power was summed up neatly by the futurist Aldo Grech: ‘Politics has been shaped through money and access’ and ‘a very small minority has steadily rewritten the rules that govern economics, labour, housing, healthcare, media, and even attention itself.’ The solution is to more closely tie wealth to its producer to limit its lifetime and stymie entrenchment of a hereditary ruling class. This would come from throttling excessive inter-generational transfers through a progressive death tax. Many countries share the US experience that nothing seems to deter corporate fraud, systemic gambles and political misconduct. Congressional inquiries were all that confronted Enron and WorldCom, Wall Street and the financial crisis, Volkswagen’s emissions-test manipulation, big tech antitrust bills, and the opioid crisis. The US senator Elizabeth Warren expressed widespread frustration at ineffective control of such white-collar crimes when she pointed to blatant fraud during the financial crisis of 2008 and complained that ‘not one major bank executive was even charged, much less prosecuted and taken to trial.’ Two impediments are obvious. First is the reigning medieval legal principle of mens rea (Latin for ‘guilty mind’) which makes conviction for crime contingent on proof of intent so as to distinguish criminal acts from accident or negligence. Intent is obvious with crimes against person and property, but it’s very difficult to prove with white-collar crimes such as fraud and market manipulations. Strict liability should be extended to cover the fraud tolerated in many industries A second impediment to prosecution of white-collar crime is the artificial separation between responsibility for regulatory breaches and criminal offences. As examples, workplace fatalities are investigated in most countries within a department of labour or similar; and financial fraud and misreporting are investigated by securities regulators. But regulators lack investigative expertise, can become too close to their industry, and can lack independence, as evidenced by the revolving door between them and the corporations they are supposed to be regulating. The principle of mens rea and the bureaucratic investigation of white-collar crime protect well-connected criminals. Securing accountability requires the introduction of strict liability where individuals and relevant company officers become legally responsible for criminal and regulatory breaches. This already applies to most traffic, product liability and environmental offences, and last year the UK introduced a new strict liability corporate criminal offence of failure to prevent fraud. Strict liability should be extended to cover the fraud tolerated in many industries, and penalise criminal incompetence as evidenced by bankruptcy, workplace fatalities and the sale of faulty products. Defence would be confined to a reasonable belief that the action was legal, and intent is relevant only when determining the sentence. Regulatory breaches and white-collar criminal offences should both be investigated by a common police force, independent of the crime and perpetrators. The best example is Singapore, whose police force has a Commercial Affairs Department that investigates a wide range of financial and corporate offences, including fraud, market misconduct and company law breaches. Let us close with the oft-neglected ‘how’ of political transformation. In 1962, Thomas Kuhn wrote the book on its preconditions. The most relevant is accepting that the existing paradigm is ineffective, which is clear from voter dissatisfaction and loss of faith in leaders of the major democracies. As evidence, in elections held in 2024, voters around the world swung against the incumbent government in every developed country that held elections. The times also favour structural political reform. In their review of the many elections of 2024, the Stockholm-based International Institute for Democracy identified ‘a profound and growing … sense that we are at a historical juncture where we must revisit and reassess the strength of our democratic culture and institutions.’ Moreover, today’s conditions resemble those of the dynamic Roaring 1920s, which also began after a shock pandemic, saw rapid introduction of new consumer technologies (cars, the telephone, movies, airplanes), cultural dynamism (jazz, Art Deco, Surrealism, psychoanalysis), as well as strong growth in economies and financial markets. The decade ended in the crash of 1929 and the Great Depression, but they were followed by sweeping political reform (Keynesian fiscal policy, adult suffrage, consolidation of political parties, and voter-driven initiatives). There is no shortage of ideas to reform our democracies. Because voters acting as democratic troops in peaceful demonstration of mass dissatisfaction will always command attention, street protests involving at least 3.5 per cent of the population are almost guaranteed success. Other successful tactics include confrontational protests such as boycotts of elections, petitions and lobbying. Tackling the crisis in democracy requires more democracy Citizens’ assemblies are a promising path to political reform. These are best known in Ireland where 99 members of the public are randomly chosen to represent the country’s demography. They work like a super-jury to consider an issue over some days of meetings, and prepare a report with recommendations. Topics have included abortion, climate change, the challenges and opportunities of an ageing population, and drugs use. Even these modest proposals threaten entrenched politicians and their parties, oligarchs and corporations. Opponents are so powerful and organised that reforming the democratic system inevitably requires securing insider support. By the 20th century, Western democracies defeated the brutalities of material scarcity and political oppression. Today’s citizens are orders of magnitude better off than their ancestors in terms of income, technologies, health, and knowledge. Even so, aspects of basic wellbeing – such as rising income and affordable, quality housing – are receding for many. Performance has also been poor on non-economic measures such as public health, environmental quality, trust in science, and infrastructure reliability. So, what happened? Recalling our structure-conduct-performance model, the short answer is that neoliberal reforms beginning in the 1980s weakened the institutions on which democracy depends. Tackling the crisis in democracy requires more democracy that breaks the monopoly position of ineffective incumbents and conservative duopolies. This comes through incentivising better-quality election candidates and alternative parties, modernising institutions, and rebalancing economic power.