Structural problems require welfare, tax, regulatory and IR reform

The global economy is in a parlous state. Australia's "miracle economy" is little better, except for the effects of what was looking like our biggest mining boom. But major mining projects are likely to be cancelled or postponed.

The Reserve Bank's interest rate cute was welcome. But structural reform is more important than monetary ease, and sadly there is no sign of relevant action.

We were told last week that Treasury secretary Martin Parkinson was assigning front-line responsibility for the economy to the Reserve Bank and monetary policy, with fiscal policy to be set largely in a medium-term framework. More important, except in major crises when all bets would be off, fiscal policy should rely on "automatic stabilisers".

So far as attempts to stabilise an economy go, I am in strong agreement with this approach, and this was a major theme of my 2011 book, Great Crises of Capitalism. This book, incidentally, asserted in its first sentence: "The global financial crisis of 2007-08 might still produce a Great Depression."

However, I am far from certain non-economists would understand the distinction "so far as attempts to stabilise an economy" is concerned.

It is surely Treasury's task to recommend structural reforms, and there is little recent information about Treasury's views on economic reform. To be sure, officials frequently draw to attention the recent evidence of weak productivity growth, and sometimes hint the policy reforms of the 1980s and 90s were responsible for the burst of productivity growth following those reforms.

But what is the current stance of officials on economic policy reform? Judged by results as well as speeches, Treasury was highly active in seeking to protect Australia from economic downturn at the time of the global financial crisis.

"Go now, go hard, go consumers" was the cry, with handouts to consumers, pink batts in (and then out of) people's ceilings, expensive (because rorted) school refurbishment programs and the profligate (and unnecessary) National Broadband Network.

The automatic response of the Rudd and Gillard governments has been to throw money at problems, and there is no evidence the Treasury has opposed this highly activist approach to fiscal policy.

Possibly Dr Parkinson's recent remarks -- if accurately reported -- represent a resetting of Treasury's approach to "stabilisation policy", and if this is the case I salute him.

One must assume, however, that Treasury's initiatives on the taxation front are still fully supported. What about the badly sold and extremely complex mining tax, which brought down a prime minister and which was then watered down to a point that will hardly bother the majors but will severely limit the activities of prospectors and junior miners?

The carbon tax is actually a giant tax-and-welfare churn that will generate little net revenue while imposing great administrative burdens and making little difference to Australia's CO2 emissions, and may well bring down another prime minister. And there has been a general increase in rules and regulations -- admittedly a long-term problem -- that experienced commercial leaders say is adding greatly to the burden of doing business in Australia.

Then there is industrial relations reform, another impediment to business, and especially to the health of small business. The recent fiasco about the necessary import of foreign workers must be sheeted home to political leaders, but there is a vast disconnect in the facts about Australia's labour market that has not even been acknowledged by Treasury or other officials. Official (ABS) estimates of the rate of unemployment below 5 per cent are contradicted by more accurate private sector statistics (produced by Roy Morgan Research) showing a rate above 8 per cent. Furthermore, Roy Morgan estimates a further 9 per cent of the workforce currently working part-time would prefer to work longer hours.

When one looks into the ABS unemployment data, it quickly becomes obvious it is deliberately biased downward by the definition that anyone who works one hour in a given period is classed as employed.

Forcing owners of small business to employ young people for a minimum term of three hours discourages the work ethic of youngsters as well as handicapping the businesses. More generally, many owners of small businesses say the difficulty of getting rid of unsatisfactory workers makes them slow to hire people, another systemic weakness of the current IR law.

The need for sizeable numbers of foreign workers is partly due to the size of the projects currently being planned. But the shortage of Australian workers is surely in part due to the fact that our various forms of welfare are sufficiently generous that most unemployed east-coast Australians just will not consider moving west or north to do jobs in hot, relatively uncivilised conditions -- relative to life in Brisbane, Sydney or Melbourne, or glorious east coast towns.

Am I right about this, Dr Parkinson? It would be highly instructive to have your view on this and other structural weaknesses of Australia's current economic policy settings.

The immediate problem, of course, is to maximise economic performance within the constraints of current policy settings. The international news in the past month has all been negative. The eurozone crisis keeps getting worse, with Spanish bonds at an unsustainable 6.7 per cent and Spain's third-largest bank in need of bailing out. US jobs growth has been disappointing and points to a slower-than-expected recovery in the world's greatest economy.

China's slowdown is acknowledged by the Reserve Bank as being more serious than previously thought, and quite possibly will be sufficiently severe to cause mining projects to be delayed or cancelled. India has just announced its slowest growth for a decade, and even Brazil (another "miracle economy") is in the doldrums.

Commodity prices have fallen substantially, although the weekend news included a sharp hike in the price of gold. This is part of a further flight to defensive assets, including German, Japanese, US and even Australian bonds.

Domestically, many non-mining industries are clearly struggling, the labour market is nowhere near as strong as official numbers imply, and goods and services inflation is under control. We are seeing examples of large, indeed outrageous, wage demands, a trend that will be watched closely by the Reserve. Share prices have been falling sharply, and house prices also.

Australia's structural problems require welfare, tax, regulatory and IR reform. Further rate cuts are appropriate now, but there is a risk of putting the monetary policy cart before the structural reform horse. I fear it is up to Glenn Stevens and his board to provide easier monetary policy while politicians fight about who can best run the economy more generally.

Roll on the next election, and we must hope for a government seriously interested in economic reform. There is a mighty job ahead to be done.