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The cost of the warm inner glow

By Nicholas Gruen - posted Thursday, 29 January 2009


Since the destruction of Sodom and Gomorrah, we’ve tended to moralise disasters - to see them as the just deserts for our natural sinfulness. Even in today’s secular age, debate on how to handle two crucial issues - the financial crisis and climate change - remains heavily (and unfortunately) moralised.

It’s true that both crises will test our moral qualities. In particular both call for the intellectual courage that’s necessary to see new problems afresh. And we need the moral courage, particularly among those aspiring to lead us, to forge new social consensuses around solutions which embody those insights.

Unfortunately the moralisers usually want us to take intellectual (and moral) shortcuts. They might give some of us a self righteous inner glow. But they’ll only hold us back. In fact they could make things worse.

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Activists make climate change politically compelling by moralising it and making it All About Us. They were scathing about the Government’s commitment to reduce its claim on emissions entitlements to 95 per cent of 2000 levels by 2020. That represents a per capita reduction of 25 per cent which seems pretty challenging to me - but there’s no accounting for (moral) tastes.

But here’s the thing. Arresting climate change isn’t all about us. As Garnaut has insisted, what really matters is building a truly global and binding agreement. And for nearly 20 years the major developing countries have resisted binding commitments insisting “you created the problem, you take the lead in fixing it”. Twenty years!

That underlines a further problem with moralism. The moralisers in rich countries feel queasy about forcing poor countries into binding commitments. Their real enthusiasm is the way the looming crisis might make rich societies mend our profligate ways.

But with China soon to be the largest global emitter that’s absurd. Imagine people being excused from water restrictions because they were poor. That’s effectively where moralism has got us in climate change negotiations. (None of this means we should be unprepared to offer compensation or to allow developing countries to temporarily increase their emissions - taking a heavier load ourselves - as we gradually decarbonise production.)

But what really matters is not how heavily we beat our breast in self denial, but how we maximise the chances of engaging the major developing countries. That’s why Garnaut’s most important recommendation was that we commit ourselves to unilaterally reducing our entitlements to emit whilst undertaking to dramatically intensify our efforts if a truly global agreement were reached.

Though Australian policy now embodies this conditional generosity in a diluted fashion, if the idea catches on with other developed countries, we might have made the game-changing difference that enables a truly global system to evolve.

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Moralism also threatens to befuddle our response to the financial crisis.

Right back to Adam Smith economists have preached the virtues of prudence and thrift which are the building blocks of investment for the future. That message has, if anything grown in relevance in the last generation as household savings have steadily declined and foreign debt has grown to fund consumption and mining investment.

And at a time like this it would be nice to have less foreign debt so we are less beholden to investor sentiment. But alas, that’s for the medium to long term. Saint Augustine’s prayer - Lord make me chaste, but not yet - may be comical, but this is one situation in which it’s the right prayer. Now is no time to increase our savings.

And yet, appealing to moral notions of thrift, neither the Government nor the Opposition has had the moral backbone to come clean and unreservedly endorse deficit financing as an appropriate response to the crisis. We should be prepared to run substantial deficits and it may be appropriate to run them for some time. It all depends on how things develop - in the international economy and our own.

But that’s not all that should happen. Because we can’t know when it should occur, we should begin now building institutions - for instance independent advisory bodies like the Productivity Commission - to impose disciplines on politicians to move from fiscal accelerator to brake and to increase savings as recovery takes hold.

Doing something like that would make all the difference - between genuinely learning from the mistakes of the past, as opposed to engaging in a bit more empty moralising about them.

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First published in the Australian Financial Review on January 13, 2009.



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About the Author

Dr Nicholas Gruen is CEO of Lateral Economics and Chairman of Peach Refund Mortgage Broker. He is working on a book entitled Reimagining Economic Reform.

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