Sunday Sanity Break, 29 December 2019 – Australia’s economic rescue
Updated: May 1, 2020
Happy new year, gentle readers, and every good result for you and your loved ones in 2020.
Readers will be aware of my unhappiness about the state of the Australian economy and the lack of coherent advice likely to greatly improve matters. Today I report on the first such contribution I have seen, which comes via the January February edition of Quadrant magazine. This is an essay by Andrew Stone, summarising a just published book that gives me hope that Andrew’s recipe for great economic improvement will be taken up by our government as a powerful antidote to the relatively poor results ever since Wayne Swan became Treasurer and the rapid turnover of Prime ministers became the rule.
Andrew Stone’s book is called Restoring Hope: Practical Policies to Revitalise the Australian Economy, and his article’s title is similar but more punchy. It is published by Quadrant books. I will comment on the best points of the article, but for the full story you will enjoy the book. Quote are from Andrew Stone’s article, which is published in Quadrant's January-February 2020 issue.
Economic outcomes in the past 12 years ‘have been a difficult and dispiriting … in contrast to the optimism, , strong jobs growth and rapid real wage that marked much of the Howard government (after a rocky start)'.
During recent disappointing years, living standards increases have been ‘anaemic’, less than half the strong growth in the years of Howard and Costello. Labor productivity over the decade ending in 2016 was more than one-third weaker than in the previous decade. Disappointing productivity has constrained income growth. Here is a killer comment. ‘At the same time, house prices have surged higher and have renewed growth after a brief period of reduction'.
Jobs growth has been strong but the pace of strong immigration has nevertheless maintained pressure on Australians to find jobs. Management of the nation’s finances has also been disappointing in the post-Swan era. Howard and Costello had paid of the Hawke-Keating debt and then some. Swan and the Rudd-Gillard-Rudd prime ministers spent like drunken sailors with far more spending during the Global Crisis than needed. In addition, (a point Andrew Stone did not make), Swan’s deficits encouraged the view that government money was to be spent with no discipline or even sensible planning. Coalition Treasurers since have just about restored fiscal balance but there is (so far at least) no store of money for use when another big negative shock occurs.
‘Finally, looming over all of these economic and fiscal problems are demographic developments that will make them more acute over time, while magnifying the political obstacles to their solution with each year they remain unaddressed. The fundamental problem is that Australia’s birth-rate is below “replacement rate”, as it has been since the late 1970s, resulting in an aging population’.
‘Nor is massively ramped-up immigration a solution to Australia’s aging problem – despite widespread belief to this effect among Australia’s political class and public servants’.
Detailed matters follow, but another powerful paragraph concludes: ‘Without policy action, then, Australia faces significant population aging and a resultant decline in labor force participation’.
Very rapid immigration, as Australia currently has welcomed, has produced ‘depressed wage growth, heightened job insecurity, surging house prices, and increased pressure on infrastructure (roads and public transport, parking, schools, hospitals and so forth’).
Prime Minister Morrison has just shaken up people in his senior advisor group. He should challenge one of these presumably intelligent and competent people to prepare a rebuttal to Andrew Stone’s powerful paragraphs presented here. January 1 would seem like a suitable deadline. Henry Thornton would be happy to provide publicity.
Andrew Stone then switches to lifting output growth, also around 1 % lower that output growth on the Howard era. This requires:
Stronger productivity growth, and
Less vital, but still important, improved workplace participation.
On the first issue, the viable list from current articles and books is not easy to discover. Typical things are ‘tax reform’, ‘welfare reform’ and ‘improved skills training’. But since the great years of Hawke and Keating, and Howard and Costello, serious tax reform has eluded governments. Serious welfare reform or effective workplace reform have also largely failed.
My proposed way to increase productivity comes from a group including Richard Morgan, Mark Rayner, Colin Tease and this writer. Here is a discussion.
Andrew Stone has a different approach. The three ‘levers’ available to the Australian government, and ‘an achievable near-term productivity agenda’ are:
Federal-State relations, and
Australia’s energy markets.
Education reform has been tried twice by the coalition and has ‘largely-failed’. Likewise, federal-state relations have for decades been ‘stubbornly-resistant to substantive change’. As has repeated Commonwealth meddling in electricity and gas markets, with obvious failure; indeed efforts in the past 15 years have made these markets far worse, turning Australia’s previous cheap energy sources into very expensive sources.
Andrew Stone, however, believes novel opportunities exist that would help. Higher education, for example. Turn the Higher Education Loan programs into joint loans owed by universities and students. My presumably impossible approach would be to restore third class universities to technical schools to begin to achieve a better mix of skills in the Australian economy.
Stone’s next example proposes an innovative reform – to allow State governments to receive income taxes paid for by people in each state. Good idea in my view but awfully hard to achieve such a transformation. Think of the annual bureaucratic and multiple government punch-up on this subject.
‘Finally, but most importantly in terms of reforms to increased productivity, is to find ways to restore Australia’s cheap energy sources, a situation lost over the past 15 years. ‘Careful identifying the underlying causes of these disastrous developments, and comprehensive addressing them in in a politically achievable way, ...‘.
I certainly hope Andrew Stone spells out a concrete plan to achieve this in his book. My proposal would be for the Commonwealth government to roll back private sector ownership of existing electricity and gas suppliers, starting with the groups who have the highest average sales prices.
Andrew Stone then tackles the issue of reducing risk to the economy from future events like those of the Global Financial Crisis (GFC). Here are his suggestions and, for what it is worth, the list has my full support.
Monetary easing in the GFC reduced cash interest rates from 7.25 to 3 % in five months. Now cash interest rates are 0.75 % and leave no room for further rate cuts at a time of ‘gentle slowdown’. Too late to do better, and a parallel article by Andrew’s father John Stone provides a powerful negative analysis of the current senior members of the RBA’s staff and RBA policy.
During the GFC, Australia’s net debt was fully paid off which allowed deficit financing. Sadly far too much spending was undertaken, blowing up the Howard-Costello fiscal reform and leaving Australia’s net debt the highest on record. Sadly, the current government’s fiscal reform requires a degree of austerity that will need to be ‘sold’ by Messrs Morrison and Frydenberg. So far, the narrative of these worthies is 'she'll be right, comrades'.
During the GFC Australia was in the midst of the greatest mining boom in our history, thanks to China’s rapid growth and our superior resource troves. Now we are still doing well with mining exports but if we have a falling out with China we could lose this positive contribution.
The forth was the greater exposure of Australia’s economy to China’s rapid growth, which is still growing but clearly slower.
‘Given these vulnerabilities’, Andrew Stone correctly concludes, ‘it is urgent that we strengthen our defences against any economic shock, especially one centred on China – requiring budget repair as well as initiatives to enhance financial stability (by improving financial system regulation and the operational and objectives of monetary policy).
Andrew Stone has written a powerful book that deserves careful study by our political and economic leaders. Then a sensible plan must be devised and ‘sold’ to the voters. During more than the past decade of poor economic policies have been largely impotent and there has been little concrete effort to devise a plan and persuade Australians to accept it.
The current setting of monetary policy and the mere balance in the budget balance makes this a large challenge. ‘Gentle turnround’ is far from an honest evaluation of Australia’s current economic situation. The job of devising a viable plan has to be assigned to the Prime minister’s new key management team. Let us hope they have the clarity and courage to tell it like it is.
Surely Andrew Stone deserves a place at that table.
Incidentally, Andrew's father, the formidable John, has recently written two articles, the first on the decline of Treasury and the second (in the January-February 2020 edition of Quadrant), which applies the same logic to the RBA. In my view Stone the father is quite right on both cases, as in the case of the RBA my various articles as 'Henry Thornton' have clearly demonstrated over the past 15 years.
The most systematic failure was to move 'too little too late' when tightening monetary policy was required. (Recently, of course, moving down cash rates far too far was another version of previous timing failures.) Introducing a tax on capital inflow would have dealt with an excessive exchange rate far better than cutting interest rates. And there is still no coherent policy to deal with asset inflation, a lack that is likely to create the mother of asset crashes when current Monetary disequilibrium and/or Animal spirits turn down.
Fiona Prior sees Taika Waititi’s controversial new film ‘Jo Jo Rabbit’ and gives it a thumb’s up. More here.
Our cricket team is continuing its recent highly successful run and should sew up a series win against New Zealand today.