Dialling triple zero on our economy

The current economic downturn provides an opportunity for governments at all levels to make investments that can enable the Australian economy to take a higher, sustainable, growth path.

There are a number of assumptions that the following article makes; the first is that most innovative government policy making should be at the state level, not the federal one. Our federal system is designed to encourage policy competition between jurisdictions, the federal government should foster this as the Keating government did. The vast majority of economic levers that will determine future prosperity lie with the states, whether it be education, health, urban planning, land use, environment, transport and so on. It is the states, not the federal government.

Second, the Australian economy is not in need of immediate fiscal stimulus. Official figures do not indicate that the economy is deteriorating rapidly. Unlike many other OECD (Organisation for Economic Cooperation and Development) nations, Australia’s economic sectors are not badly indebted: the government sector has virtually zero debt, household debt is largely underpinned by assets, and corporate debt is still reasonable in spite of asset decreases of 50 per cent.

Further, past neo-liberal regulation in Australia has meant that all our banks are well capitalised, still lending and profitable. Of the 10 banks with a AA credit rating or higher in the world, four are Australian. And of course, Australia is coming off a number of boom years that mean any slowdown is relative. When unsustainable growth ends, as we were told Australia was experiencing in 2007, sustainable growth can feel like a downturn.

Greater stimulus can be achieved through loosening monetary policy 

Household debt is underpinned by assets and savings

In January, the economy produced 1,200 jobs, and unemployment remains at generational lows of less than 5 per cent. These figures do not, on their own, demand the introduction of the largest fiscal stimulus package in our nation’s history.

Sovereign debt is increasing rapidly, and, some would argue, to dangerous levels. At this moment, is it ideal for the Federal Government to enter the debt markets? It could turn out that dramatic action is required; however, by then it may be beyond the government as its capacity to borrow has been extinguished by excessive borrowing in the present. At that point, we would regret the extensive use of debt now.

One of the reasons that the Australian economy successfully rode out the 1997 Asian currency crisis, and thus far the sub-prime debt bubble, was the dramatic drop in the Australian dollar. This event helped stimulate the economy substantially. Consider this: Australian mining companies can afford to reduce their prices by 50 per cent and still be receiving prices at an historic high in Australian dollars. Prior to this year the highest price that a gold miner received per ounce was $1,158 in 1980. Today, it is nearly $1,500 per ounce, in 2001 it was less than $400.

The problem is that this situation could be about to come to an equally abrupt end. The Reserve Bank has indicated that its easing cycle has come to an end, or at least a pause, which means when the carry trade on Forex markets resumes, the Australian dollar will be in greater demand, thereby driving the value of the dollar up, and reducing stimulus to our economy. No doubt the Reserve Bank’s decision was made with an eye on the Federal Government’s stimulus packages.

Equally, the downturn does provide an opportunity to address long-term challenges facing the economy as capacity becomes available, and political will to address these issues emerges.

What are these challenges?

Governments could use this capacity to alleviate some of the infrastructure bottlenecks that emerged during the boom. The two highest profile bottlenecks were infra-structure in export facilities such as port, rail and road; and the skills shortage.

Investment in such infra-structure and skills development would allow the economy in the medium term to grow at a sustainably higher rate. By sustainable I mean: a higher growth path for the economy that does not create imbalances like excessive current account deficits, or inflation.

Increased investment in education is always good. The benefits of more education have been proven almost as much as the benefits of sun screen. A policy focus in other countries that has not found broad attention in Australia is pre-kindergarten education. There are a number of studies that purport to show that every dollar invested in pre-kindergarten education returns up to seven times the investment.

Australia is strangely reliant on road transport. It is strange because we have very long distances to travel, fuel is not cheap, and our road network is not that good. Much of the lands between our capital cities are sparsely populated, and in Australia land can be compulsorily acquired, making the building of railroads comparatively easy. The vast majority of our people live on the seaboard, but virtually none of our domestic cargo is carried by ship. Our choice of preferred transport mode appears counter intuitive.

The Productivity Commission estimated that reducing the rail travel time between Melbourne and Brisbane from its current 72 hours to 24 hours, would add 0.75 per cent to GDP.

The Rudd Government should use this moment to remove whatever blockages there are to a more sensible transport infra-structure that improves GDP growth, reduces pollution and has lower depreciation costs.

Michael Porter’s analysis of company economics stated that the greater the barriers to entry in any market the better the economic returns for that industry. Put another way: the higher the market concentration, the lower consumer satisfaction. Australia has allowed, over nearly three decades, an unhealthy level of market concentration to evolve in some key sectors, these include banking, insurance, retail, petrol refining, property, the list goes on. The critical problem with this is that these sectors provide the capital, the risk offsets, and rental space that allow new entrants to enter the market.

The importance of new entrants is that they keep current market participants honest, even when they do not enter the market. The mere threat of new market entrants is enough. Competition provides the impetus for innovation, consumer responsiveness, more efficient businesses practices that deliver better outcomes for the broader community. In Australia, in key sector after key sector, that underpins the ability of companies to enter the market; our economy is dangerously concentrated.

Anything the Rudd Government can do to reduce barriers to entry will have an immediate impact on Australia’s economy and improve consumer utility.

There is a need to develop a sustainable economy. This is not just about environmental outcomes, it includes incentives that create a virtuous cycle of ongoing improvements. Broad ranging policies that provide incentives to continue innovation to save water, and also fund water saving projects are necessary. We live on the driest continent in the world with some of the cheapest water in the world. Over irrigation, due to cheap water, has made some parts of our land infertile, while harming major river systems. Implementing policies that incentivise water reduction will protect our long-term survival, and reduce damage to our land and river systems.

Demand for water efficiency and solar energy will increase around the world. Australia should lead the world in both areas. Our top researcher in solar energy left the University of New South Wales and set up in China. Our political establishment must ask why people leave this country when they have an innovative idea, why we do not lead the world in water and solar energy, rather than blithely accepting it and leaving it to business magazines to ruminate about.

Ultimately, economies are about people maximising their happiness. There is a growing school of behavioural economics regarding happiness: specifically querying why rising income and wealth has not lead to happier societies. A number of theses have been put forward, some compelling, some less so.

An emerging thesis is that those economies that are flexible, and provide their people with opportunities to explore their potential, tend to have the happiest societies. There does not appear to be one answer: a social democratic society such as Sweden does well, as does a freewheeling capitalist one such as the United States. In both instances there appear to be systems that enable choice; especially around child birth. National institutions that allow for upward economic movement, such as city colleges, or childcare programs, appear to add to happiness.

Australia spends a lot of money on welfare programs - like the baby bonus - that do not enable choice; redirecting these resources to programs that do so, will provide long-term benefits as seen in countries such as Sweden and the United States.

Healing our economy presumes there is something wrong with it. Thus far we have weathered the storm of financial doom from elsewhere well. But there are nagging issues that this moment provides us with an opportunity to explore and experiment with some solutions. Why are we not happier? Why has income distribution skewed away from long term averages? Why do some of our best ideas still leave our shores? Why do we not utilise some of our natural advantages?

The answers to these questions are not easy, or probably obvious, however, we have an opportunity to explore both questions and solutions, and in this moment, not be afraid of getting the answer wrong, knowing only that we will learn more from our failures than our successes.