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A perfect political storm may sink Coalition

By Sinclair Davidson - posted Tuesday, 6 November 2007

Voters don’t like being told, "You’ve never had it so good".  It smacks of political complacency, and any politician making that argument deserves to be smacked.  Yet, it is very clear that Australians are enjoying an era of sustained prosperity.  Real disposable income is rising, interest rates are low by historical standards, and unemployment is low.  If there isn’t at least a chicken in every pot, there are plasma televisions in many lounge rooms.  People still have to go to work, still have to budget, and still have to make sacrifices so it might not feel like a golden era.  Yet, by almost any measure, our standard of living would be the envy of the rest of the world, and also certainly to our grandparents and great grandparents.

The puzzle then is to explain why in the face of objective criteria showing almost decadent prosperity, Australians are unappreciative of their wealth.  How is it that a government that has presided over much of this prosperity is likely to be flung out of office within weeks?  To borrow a phrase from the movies, the Coalition faces a perfect storm – a confluence of argument, circumstance and policy choices that are perversely interacting with economic biases and preconceptions.  Voters’ expectations are informed by objective reality and also a set of economic biases.  I want to examine these biases against the background of an important insight due to Joseph Schumpeter (1883 – 1950) – the famous Austrian economist.  He noted that individuals have a feudal notion of "job ownership".  The biases themselves are due to Bryan Caplan (1971 – ) – recent author of a provocative yet important book The Myth of the Rational Voter: Why Democracies Choose Bad Policies.

The notion of "job-ownership" is subtle, yet pervasive.  In his recent Schumpeter biography, Thomas K. McCraw argues that "Even today, the human impulse that lies behind this tendency has extraordinary power".  This idea is deeply engrained in even our language.  How often do we hear people speaking of "my job" or saying "don’t tell me how to do my job"?  To be sure, an individual may have a job, and may occupy a position, but in a capitalist economy they are not entitled to a particular job, nor generally will they own that job.  In the modern firm people work under the direction of management who have the power to settle differences of opinion by fiat.  Hierarchy is an important aspect of work – even in those organisations with a "flat structure".


This notion of "job ownership" survives in modern Australia and has been sorely tested over the past 11 years.  In particular it has been tested by the WorkChoices legislation.  By making clear that employees do not “own” their jobs the Coalition ignited economic fears that are inconsistent with objective economic indicators but are nonetheless deeply rooted in our psyche.

This particular economic fear interacts perversely with Bryan Caplan’s four "boneheaded biases" of democracy.  First, and foremost, he argues that individuals have an anti-market bias.  People do not believe in Adam Smith’s invisible hand – they are unconvinced that the profit motive will lead to socially beneficial results.  So when individuals indicate that they are concerned about labour market conditions, it does not help to argue the market will fix that.  According to Caplan, people distrust markets and believe that capitalists will conspire to suppress wages.  The ACTU campaign against the WorkChoices legislation merely confirms a pre-existing belief.

Schumpeter had written of a similar phenomenon which he related to traditional value systems being anti-materialist.  This idea survives in some modern value systems.  Peter Singer, for example, has argued, "We must reinstate the idea of living an ethical life as a realistic and viable alternative to the present dominance of materialist self-interest".

Anti-foreign bias is a tendency to under-estimate the economic benefits of interaction with foreigners.  There are three indicators that concern people here.  First, the current account deficit is very large.  The second, and of course related, idea is that foreign debt is very high.  Third, our "mining boom" is being generated by trade with China.  In the first instance, the current account deficit is of no economic import.  In an environment of floating exchange rates we should not worry at all about the current account.  The "mining boom" also needs careful thought.  It is not true that our economy has been "super charged" by mining, or that we owe all our prosperity to mining.  It is true that commodity prices have increased dramatically since 2003.  Yet when you look at economic performance over the ten year period 1995 – 2005 it is clear that Australian economic growth is consistent with the levels of investment in mining.  That investment level is only about five percent of GDP.

The issue to focus on is the foreign debt, and there are a number of points to consider here.  This is private debt, not public debt.  Second, it does not matter if debt is domestic or foreign it still needs to be repaid.  So the bias here is two-fold.  First the debt is undesirable because it is “foreign” and second the argument seems to be that debt itself is undesirable.  Traditional values systems such as the three major monotheistic religions all disapprove of debt and interest payments and we have expressions such as “neither a borrower nor lender be”.

Private debt is good; public debt is not.  For individuals the ability to borrow breaks the temporal income constraint.  The inability to borrow is a sign of under-development.  The fact that individuals do borrow vast sums of money and repay their loans in an open transparent financial system under the rule of law is a remarkable achievement.  From a corporate perspective, debt is associated with improved corporate governance.  As Bennett Stewart and David Glassman of Stern Stewart & Co. wrote, "Equity is soft, debt hard. Equity is forgiving, debt insistent, Equity is a pillow, debt a sword".  Corporate debt requires firms to be efficient, lean and mean.  A shareholder democracy, such as Australia, needs corporate debt.  This, of course, brings us into conflict with another of Caplan’s biases – the make-work bias.  He argues that individuals’ under-estimate the economic benefits of saving labour.  High levels of corporate debt would require less make-work and more value-add from labour (including management).  This, in turn brings us right back to the argument about job ownership and distrust of markets.


Finally, Caplan argues that individuals suffer from pessimistic bias.  By this he means people over-estimate negative aspects of the economy and under-estimate economic performance.  What will happen when the mining boom ends?  What indeed.  What did we do before the mining boom?  How do we explain the 12 years of economic prosperity that occurred prior to the commodities price increases since 2003?

The objective reality of the Australian economy is very good.  Yet voters may have a deep-rooted fear that their prosperity is not sustainable.  Given Caplan’s economic biases it is difficult to tell a plausible story about the continuity of that prosperity.  The Coalition is caught in no-man’s land – while it is true that Australian prosperity will be long lasting (barring any major policy mistakes) few are willing to believe when they say that.

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About the Author

Sinclair Davidson is a senior fellow at the Institute of Public Affairs and Professor in the School of Economics, Finance and Marketing at RMIT University.

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