The Commonwealth Public Service has a well-earned reputation for integrity. To preserve that integrity, we must defend its best traditions when they are breached. It is unfortunate that strong and prompt action was not taken on two 21st-century revelations of corrupt behaviour in areas of commonwealth responsibility: the Australian Wheat Board’s relationship with the regime of Saddam Hussein in Iraq; and the payment of bribes by the Reserve Bank’s note-printing subsidiaries. Justice was not seen to be done in relation to people who may have had responsibility in various ways for serious corruption.
The election of three Palmer United Party senators at the 2013 election requires us to think through how we manage conflict-of-interest issues in our Parliament. The leader of the party, Clive Palmer, has major mining interests, including in Queensland coal, that would be affected by the removal of carbon pricing. (They would also be affected by the removal of the MRRT; while quantitatively of less importance, the principle is the same.) Palmer has made it clear that the three senators will be subject to party discipline under his leadership in using their votes within the Senate.
Palmer has been asked whether he would withdraw from his mining investments if elected to the Parliament. He responded that he would handle the conflict in the way that would be appropriate on the board of a public company: by removing himself from discussions affecting his interests.
Palmer’s expressed concern about the role of lobbyists in our political life is a positive and welcome contribution to a debate that should go much further. His statement that he would recuse himself from decisions affecting his own private interests is welcome and appropriate. It is important that the leader of the Palmer United Party advise senators who have acknowledged his leadership to adopt the same approach: they too should recuse themselves from decisions in which their leader has a material pecuniary interest. The democratic legitimacy of a Senate decision to abolish carbon pricing that depended on votes from the Palmer United Party would be tainted.
The early twenty-first century has seen a major change in the role of private interests in the policymaking process that has made reform in the public interest more difficult. This has placed a smog over the policymaking process, rather than an impenetrable wall. It has created an environment in which governments can lose their nerve and do the bidding of private interests. However, the evidence so far indicates that private interests are still not able to block a government with a clear idea of its objectives and which seeks to appeal to the electorate in the name of the public interest.
CONCLUSION
I am writing this in the week after the September 2013 election. The data that comes in week by week is confirming that the economy is growing well below capacity. Employment is growing much less rapidly than the working-age population. The resources industries are subtracting from growth in incomes. Our competitiveness in resources continues to decline as the exchange rates of all our main competitors fall much more than our own: Indonesia and South Africa for coal; Brazil (and sometimes India) for iron ore; Russia for natural gas and other minerals to China. There are no signs yet of an expansion in investment and production of the industries outside resources – nor should we expect this with Australian costs way above those of other countries.
The mood among business is a bit better than before the election, but the economic fundamentals are a bit worse. The exchange rate has retraced some of its decline. Estimates of the budget deficit for this and future years were greatly increased at the end of August 2013, and yet we are now much more comfortable with the bigger deficit than we were with a smaller one.
The election has been followed by a shift from talking down to talking up the economy in the News Corp majority press. Consumer and business confidence has continued to rise since the August cut in interest rates. There has been a lift in some of the financial markets. There is talk that increased confidence from the change of government will lift spending and economic activity, and even that the resources boom will burst back into life. That the employment and growth and budget and external payments challenges will go away.
Sorry. That’s not the way the economy works. Increased investment in any industry is shaped by calculations of expected profit. None of the purported increase in confidence and none of the high-profile election promises of the government will change profit calculations in ways that increase investment. None will help us to meet the fundamental challenge: to improve Australian competitiveness and to increase investment and activity in trade-exposed industries while keeping the budget on a path to long-term stability.
There are some mercies. Unlike in the early months of 2013, no one close to the levers of power is saying anymore that a strong dollar is unavoidable and possibly desirable – but nor is anyone saying that there is an urgent need to improve Australian competitiveness. In fact, the government has said that it will not make any large policy change to lift productivity until after another election.
The public signs are that policy has settled into somewhere between the ‘business as usual’ and ‘budget stimulus’ approaches identified in Chapter 5. The treasurer has spoken of increasing infrastructure investment as a stimulus to the economy after the resources boom. Public spending on infrastructure is a good way to provide stimulus, and much better if it is guided by sound analysis of the costs and benefits of alternative investments. Somewhere between business as usual and stimulus is a better place to be than austerity, which had such prominent support from much of the political elite in the media, business and Opposition through the last Parliament. But it cannot be the main response to our challenge.
Business as usual plus stimulus may lift employment and output, as it did in the crisis following the Great Crash of 2008. But it won’t do it sustainably, because our budget and external financial outlooks are weaker now. Stimulus is just storing up problems for the future unless there is a large real depreciation. And if there is a large real depreciation, not so much of a stimulus is needed to restore full employment.
The fall in the Australian dollar so far in 2013 helps, but it is not nearly enough. We may get lucky and the tightening of monetary policy in the United States and elsewhere may take the dollar lower again. Or it may not – or not until the chance to avoid high unemployment is behind us.
As noted, the hard part of the adjustment will be turning the fall in the exchange rate into a real depreciation. Real depreciation means decreasing real incomes for many businesses and households, and for Australians on average. There are beneficiaries of real depreciation in the trade-exposed industries, notably farming. But these are much fewer than the average Australian who has to tighten her belt. The biggest beneficiaries are those people who would otherwise have lost their jobs or whose businesses would have been damaged or destroyed in a much bigger downturn. They will not even know their good fortune because they will be unaware of the fate that has been avoided.
The politics will be all about the many who must accept lower real incomes. That is politically difficult in any context. It does not happen at all without effective leadership and public education based on a sound programme of reform to improve efficiency and equity.
The fall in the dollar so far has occurred without a framework for turning it into a real depreciation. There will be resistance and political tension associated with every bit of the squeeze on living standards. Whether the policies can be maintained through this pressure will depend on whether the prime minister and his government can explain the necessity and the fairness of what is being done. In short, making this big adjustment work depends on building a new reform era.
The new Australian political culture makes a prime minister seeking to govern in the public interest vulnerable to attack from an Opposition focused on unpopular developments and measures. The Dog Days provide exceptional opportunities for negativity. The approach of the Opposition matters for reform. Whatever it might do to its own hopes for early return to government, an Oppositio
n that offers broadly constructive support for a new reform era, with criticism focusing on departures from a clearly articulated conception of the public interest, would improve the prospects of a successful Australian transition.
AVOIDING THE NEED FOR SUCH PAIN IN THE FUTURE
Australians should be able to agree on one big lesson from this latest episode of resources boom and decline. When strong growth in newly industrialising countries increases demand for our commodities, neither government nor business knows how much of the increase is here to stay.
History tells us that after a period of boom, commodity prices usually pull back a long way. Because we do not know how much of the increase will stay with us, governments should hold back on spending most of the increment in revenue until we know more. The reason for this is that it is painful, politically difficult and economically wasteful to increase costs and force changes in industry to accommodate them, and then to remove the increases in living standards and costs and rebuild the industries that have been destroyed. Better to wait and see whether the changes are necessary at all.
A second reason for delaying the spending of revenue from high export prices is that they are likely to be followed by an investment boom to expand supply. This increases the demand for domestic labour and supplies, while pushing up domestic costs and the real exchange rate. Best not to let increased government spending exacerbate the increase in costs. If government has saved the increased revenue from the temporarily high export prices, it can spend it on infrastructure and in other productive ways when the boom is receding.
The lessons are similar for the private sector. Temporarily high prices are not a licence for reckless expansion. Caution will avoid the destruction of value that comes with writing down boom-time capital investments when the end of the boom makes production unprofitable. There is no need for a repetition of the destruction of shareholder wealth that we have seen in the Australian thermal coal industry in 2012 and 2013.
These are old lessons that we should not have had to learn anew. We had to learn them anew because many people thought that this time was different. They thought that this time was different because in the huge Chinese economy there was no limit to demand for the goods that Australia supplied. Above all, this time was different because the Reform Era had instilled a new flexibility in the Australian economy, so that if our costs and real exchange rate rose when prices and investment were temporarily high, they would fall smoothly, without cost and painlessly if and when the boom ended.
‘This time’ never turns out to be completely different. Never different enough to warrant the abandonment of prudence.
Would it help to save the increment of revenue in a sovereign fund, as Norwegians and others have done with success and profit? Yes, if it helps to institutionalise the idea that the higher revenues are temporary and should be saved. Yes, if it makes it easier politically not to spend the increased revenue. There is nothing magical about a sovereign wealth fund to manage cyclical variations in revenue, but if it helps with saving boom-time revenue, let’s have it in place for the next time round.
HOW WILL YOU KNOW IF I AM WRONG?
I began the book by saying there are two possible futures for Australia in the period ahead. One is business as usual (now with talk of it being tempered by stimulus spending on infrastructure). This gives us economic growth well below our capacity of 3 and a bit per cent per annum, slowly deteriorating employment conditions for a growing population, and a slow squeeze on real incomes. The officially projected budget surplus in 2016–17 does not materialise. The modest economic growth is worse than it looks because it is dominated by increased resource exports that contribute relatively little to Australian jobs and incomes.
The other possible future contains an early and large real depreciation, with a hard start but better outcomes. A fair distribution of the burdens of adjustment, and strong reform to raise productivity and efficiency, are part of the ‘real depreciation’ strategy. Greater spending on demonstrably productive infrastructure is a useful complement to depreciation.
Other contributors to the contemporary Australian economic discussion say there are other alternatives. The resources boom will revive, and consumption and investment are about to take off. The reader will know soon enough who is right and who is wrong – but alas, not soon enough to avoid hard years for many Australians if my diagnosis is correct.
I have written with some confidence because I have been living for a long time with the issues raised in this book. But let us remember the story of Chapter 1. The big currents of economic development are inherently uncertain. China may fail in the implementation of its ambitious structural reform; this would hold up some of Australia’s resources boom for a while and then dump us much harder. A combination of other large developing countries may grow so strongly that we enter a new resources boom in a few years’ time. A new crisis in financial markets could appear as the developed countries’ central banks phase out their exceptional monetary policies.
The policy reforms that I have suggested in Part 2 would give us a good start on doing harder things if the future deals us a worse hand than I have anticipated. And it will do no large harm to have started to improve competitiveness and avoided excessive expansion of domestic spending if the future unfolds in a favourable way.
You will know that I was unnecessarily worrying my fellow citizens if the weakening labour market of the past two years goes into reverse before too long and takes us back to the full employment of the official projections in 2015–16, and if the budget deficit starts shrinking rapidly after this year (as in the official projections) – and all without large real depreciation or concern about the financing of our external deficits.
However, the reader should be worried that I might be right if the availability of employment for a growing population continues to drift downwards and there are no signs of increased investment in trade-exposed industries. Or if we deal with immediate employment problems by increasing domestic spending without a big improvement in competitiveness, and Australian indebtedness to foreigners starts to grow strongly again.
I hope that neither of these latter circumstances arises. But if they do, we will have to make a late start on the largest adjustment challenge to face any but the oldest living Australians.
WHAT IF AUSTRALIA GETS IT WRONG?
If I am right and Australia gets it right, we will endure a period of moderate falls in living standards, without any part of our society suffering badly from the adjustment. After a while, living standards will start to rise again – moderately, in line with the higher productivity growth that a new reform era has made possible. We will be in a sound position to manage any major disruption to the international economy. We will feel comfortable with our democracy, and others will see our democratic capitalism in a positive light.
Tolstoy tells us in the opening of Anna Karenina that every happy family is the same, while each unhappy family is unhappy in its own way. He oversimplified the story of happy families, but he was right that there are many ways that things can go badly.
If we fail to take an early opportunity to adjust down the cost levels that have hung over from the China resources boom, we can look forward to economic instability, inflation, stagnation and high unemployment. Governments will do their best to deal with parts of the problem where solutions seem to be constrained less tightly by political reality, and stir up new nests of opposition for their troubles. We will become an unlucky country, run by second-rate people who share the country’s bad luck.
The downside from getting it wrong is big. Rising and high unemployment and business failures would place great stress on many of our people and on our institutions. If our country fails the challenge, Australians would be foolish to ignore the weakness in our democracy that contributed to failure – the rise in power of private interests; the fragmentation of the national conversation about policy; increasing comfort
with conflict of interest. We would be wise to heed the lessons from the political history of other resource-rich countries in which democratic institutions have been broken by the power of resource-based wealth.
It matters to Australians that the public interest wins in the great struggle to shape the aftermath of the China resources boom. At a pivotal time in the spread of modern economic development throughout the world, the fate of democratic capitalism in our ancient continent matters for others as well.
ACKNOWLEDGMENTS
The central economic policy idea in this book is that the prospects of full employment and low inflation without external financing problems are determined jointly by the levels of expenditure and competitiveness, and not by the level of expenditure alone. The intellectual origins of this idea go back to James Meade (including his visit to Australia in the 1930s), Roland Wilson, Trevor Swan and then Max Corden. Failure to apply this insight was a cause of the Australian recessions of 1974–75, 1982–83 and 1990–91. Marx said, in his reflections on the rise of Louis Napoleon, that history repeats itself the first time as tragedy and then as farce. This books tries to help Australians to avoid having to find a word to contain both tragedy and farce.
On the macro-economic framework, I have benefited a great deal from discussions over recent years with Max Corden, Peter Jonson, David Gruen, Martin Parkinson, Gordon de Brouwer, David Vines and Glenn Stevens. Of course, none should be blamed for the resting place of my thoughts that is recorded in this book. I have received helpful comment on the evolving macro-economic issues from seminars and conferences at which I have discussed versions of the macro-economic framework at the University of Melbourne on several occasions (including a joint seminar with Peter Jonson at the Institute of Applied Economic and Social Research), the Australian Treasury, the Australian National University, the Economics Society of Australia (separately at the ACT and Victorian branches), Victoria University, Peking University and the Australian Agricultural and Resource Economics Society.
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