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Freedom in the next decade

By Rowen Cross - posted Thursday, 26 March 2009


The GFC presents a regulatory conundrum that governments have so far failed to solve. Trade liberalisation and deregulation has increased the size and reach of Multi-National Corporations (MNCs), and since the 1990s there has been considerable debate about the rise of MNCs and the ability of sovereign nations to regulate them across borders. Until now, governments have relied on the discipline of market forces as a form of regulation, although this looks more like government inaction in the absence of a better alternative.

So far the GFC has been met with co-ordinated global actions from central banks and governments, albeit in a reactive and ad hoc manner. Policy makers are now turning their minds to the sort of measures that are required to rebuild the global economy and prevent another crisis of this kind in the future.

The wrong path

While government-led intervention is the most appropriate way to resolve the GFC, the involvement of government in other areas often does more harm than good.

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There is a risk that governments will start presuming that all problems are best solved through government regulation. Individual liberties are often the first casualty of government regulation. Regulation invariably strangles liberty, so it is important that every regulation is a justifiable infringement of liberty.

Some commentators see the GFC as evidence of the failure of market based policies, and have called for greater government control of the economy. Advocates for big government ignore the drag that bureaucracy puts on economy growth. Big government also tends to spread its influence across all areas of society, which may lead to value-based policies that are an even greater affront to liberty. (For example, the Rudd Government is seeking to impose its social values on the broader public, with adverse impacts on the liberty of Australians, with, for example, compulsory internet filtering).

Above all else, governments must avoid knee-jerk, populist policies that do more harm than good. Some lobbyists are calling for increased trade protectionism, whether in the form of special industry relief packages (for example, the Australian governments’ A$6.2 billion relief package for the car industry) or broad-based policy changes (such as a rollback of the North American Free Trade Agreement in the USA). These calls should be resisted.

The better path

In the near term, governments should look to maintain high levels of employment and bolster public and private safety nets, especially those accessed by the unemployed and underemployed.

Appropriate fiscal policy - being government spending programs that build the productive capacity of the economy - is also called for during this part of the business cycle. Government spending that targets consumption, like one-off payments to pensioners and parents with children, are less effective in the long term, as those payments do not enhance the availability of choices in society once the money is spent. Conversely, expenditure on capital works will continue to make choices available for people long after the investment is made. (For example, government expenditure on a new train route creates transport and logistics choices once it is built, which remain available to society so long as the train route is maintained.)

The medium term challenge for governments is to identify and correct the regulatory and market failures responsible for the GFC without undermining the global system that so many people across the world rely on for their long term prosperity and freedom. This involves an analysis of markets to identify and structurally remove inefficiencies, such as inherent conflicts of interest, information asymmetry and incidents of moral hazard. A review of competition regulation is required to restrict the ability of large companies operating in monopolistic or oligopolistic structure from abusing their market power or becoming “too big to fail”. (Companies that are “too big to fail” should not be allowed to privatise profits in good times but then socialise losses, by calling on a government bail-out, when times are bad.)

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This is particularly relevant in Australia, where the banking, aviation and various other industries are dominated by big players.

Individually, people are already responding to the GFC by preserving their freedom. Consumer spending is down, as people defer key purchases and look to increase savings and reduce debt. Wealth preservation, rather than the pursuit of increased returns for greater risk, has become the preferred approach. Job security is now front-and-centre for Australians.

Maintaining freedom

The dramatic change in people’s fortune from the 2007 boom to the bust of 2008 and 2009 illustrates the transient nature of freedom. The choices available to someone at a particular time may not be there for them tomorrow. The availability of choices and the capacity to choose them, as components and measures of freedom, must be considered in terms of the sustainability and security of those choices.

As the GFC has shown, people’s freedom can be profoundly affected by circumstances beyond their control. However, the choices we have made in the past, and those that we make today, also have a profound impact on the freedom we will enjoy in the future.

Australians should consider, both personally and as a community, the long-term security of their freedom as well as how much they have at any given time. We should make choices with an eye to the future as well as the present so that, by making the right choices today, we can preserve and enhance our freedom for tomorrow.

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About the Author

Rowen Cross is a lawyer practising in the private equity, hedge funds and banking industries.

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Creative Commons LicenseThis work is licensed under a Creative Commons License.

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