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Australian policy: rational choices versus wishful thinking

By Chris Lewis - posted Friday, 22 May 2009


As suggested by the self-declared social democrat Lindy Edwards at the “Crunch Time Conference” in Sydney’s Trades Hall on April 22, 2009, Australia will struggle to address its current economic woes.

Though arguing that the current global financial crisis offers a new opportunity for social democracy, Edwards recognises that any hope for a return to Keynesian policies to manage the economy (controlling interest rates and offering stimulus packages) is likely to be short lived. This is because “governments do not have enough money to fix the size of the problem” and much higher debt is likely to lead to “the worst downturn in the electorate’s memory” and ultimately be “dubbed a failure and a huge waste of resources”.

So, Edwards, in her “search for new models of social democracy”, suggests that “one possibility might be to foster and build a new generation of not-for-profits” which can pressure corporations to become guardians of the public interest by providing good products and jobs. For instance, Edwards cites the example of not-for-profit credit unions which now provide lower cost banking and superannuation services.

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But Australia’s ability to remain economically successful will long remain determined by its competitiveness and efficiency, at least until the wealthy democracies decide greater protectionism is needed. All a competent Western government can do is adopt policies that balance competitiveness and compassion, a task that is indeed helped by sophisticated and extensive interaction between political parties, interest groups and public opinion.

Despite the Rudd Labor Government’s recent reliance upon much greater debt, Australia’s policy options, including any ability to fund extensive social welfare needs, remain tied to its ability to benefit from the demands of the international economy.

For instance, given that Australia does have a high reliance on foreign investment and supports greater trade, just imagine what would have happened to national wealth if we had maintained a company tax rate of 49 per cent in 1986 in such a competitive world. Even bigger spending nations with much more extensive social welfare systems now have company tax rates lower than Australia’s 30 per cent rate, including those often cited as successful social democracies (Denmark, Finland, Norway, and Sweden).

Australia may indeed come under greater pressure with governments picking up more of the burden placed on businesses to keep them here, a concern expressed by Edwards.

And while the centre of politics may be shifting to the left in democratic societies (including the US), at least in some policy areas, more painful reform may lie ahead as each nation continues its struggle to acquire enough resources to meet a variety of economic, social and environmental needs.

Difficulties for funding a variety of issues will indeed be complicated by ongoing economic competition, whether it be lower labour costs in many poorer nations (including China and India); or an ongoing push for lower corporate tax rates, although upcoming budgetary funding shortfalls may in time lead to a greater public demand for higher tax rates, especially if cuts to social welfare programs are not tolerated by democratic societies.

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But there may also be a need to provide greater resources to foreign aid or security needs around the world if democracy and the rule of law are to be promoted successfully or ignored. As long as national governments do not provide enough resources to help the vulnerable around the world, then there will be potential for militant organisations to rise either with the support of people or through violence, as is the case with the Taliban in Pakistan.

As I have argued consistently, despite concerns about the rich benefiting most in recent decades, any move away from freer trade will send the wrong message to the world, notwithstanding the right of anyone to highlight adverse effects evident in our societies.

While Edwards stresses our obsession with market liberalism which has allowed the powerful “to leverage” greater benefit and power which increases “the scope for exploitation”, many disagree. A 2007 international poll by The Chicago Council on Global Affairs and WorldPublicOpinion.org found that support for globalisation was strong in most of the 18 countries surveyed with support less than 50 per cent in just three nations. This included Australia (65 to 27 per cent), the US (60 to 35 per cent), and France (51 to 42 per cent), although well behind support in China (87 to 6 per cent).

Though a survey conducted for the BBC World Service between October 31, 2007 and January 25, 2008 found that 22 out of 34 countries now believed that “economic globalisation” was going too quickly (including Australia - 73 per cent), other poorer nations felt that it was occurring too slowly (Turkey, the Philippines, Indonesia, Brazil, Kenya, and Mexico). Interestingly, Australia was just one of six nations where a majority believed that its economy was fair (58 per cent).

I suggest a number of tips for so-called social democrats.

First, if we are to talk about equity, please note the importance of trade and foreign investment for poorer nations and what it means for Australia to adhere to international institutions that do promote freer trade on behalf of all nations (WTO), notwithstanding one’s right to highlight adverse effects in an imperfect and competitive world.

While I share Tristan Ewins concern about the need to ensure that no Australians are left behind with his plea prior to the federal budget (On Line Opinion, May 8, 2009), greater means-testing is the way to go in the longer term rather than extra aggregate spending as Australia does need to ensure that its taxation levels remain competitive, unless of course the left manages to convince the majority of Australians to accept higher taxation rates or deny poorer nations their trade opportunities.

Further, revenue in the future may be diminished by tougher credit rules for borrowers which is likely to have some impact on spending. As highlighted by Steve Keen (Debtwatch, April 13, 2009), Australia cannot rely on greater debt forever given it has risen by an average 4.2 per cent more than GDP growth for the past 45 years. And as the April 17, 2009 Frontline Weekly Newsletter from John Mauldin indicates, while US GDP growth averaged 2.7 per cent between 2001 to 2006, the average would have been just 0.25 per cent without mortgage equity withdrawal.

Even Edwards cannot ignore immense trouble ahead for Australia given that the number of working aged men in a full time job has declined from 88 to 66 per cent since the early 1970s, thus making it harder to sustain the 20 per cent of Australians mostly reliant on government benefits.

This leads to the second point which stresses the importance of national economic success in line with existing rules. Though we must make every effort to ensure that minority groups do not suffer, if economic success is not generated from interaction with the international economy, then we will have fewer per capita resources to meet various economic, social and environmental needs.

This is why some passionate Australians suggest the need for lower wages to aid Australia’s ability to attract investment, not because they are mean spirited on behalf of the rich, but because they recognise harsh realities. For instance, during October 2007, the then Health Minister Tony Abbott defended the Howard government’s industrial relations reforms on the basis that it would hardly be unjust for a government to promote a 10 per cent fall in wages if that was to cause employment to grow by 10 per cent.

But of course, such sentiment can hardly be understood by the left. Take the ABC’s Geraldine Doogue who could not understand why Mark Crosby of the Melbourne Business School would suggest that some inequality may be important for economic gain (ABC, Saturday Extra, May 9, 2009). After all, the evidence does indicate that it is the poorest nations that are growing faster in recent years: China, India, and Vietnam alone all had GDP growth rates of over 7 per cent during the 2000-2007 period.

The third point is the need for social democrats to be careful with their supposed certainty about knowing what is best, or the virtues of big government. For instance, while government and industry superannuation leaders preferred to promote the long-term benefits of super funds while my industry “balanced option” fund lost around 27 per cent from July 2007 to March 2009 when compared to the capital guaranteed option, I listened to Morgan Stanley’s Gerard Minack and removed my super from any exposure to shares and property, thus saving a considerable amount for my family and the odd friend.

Of course, any healthy democracy wants new ideas to deal with policy problems. For instance, with Steve Keen (Debtwatch) rightfully expressing his concern that Australian house prices are too high, and Andrew Leigh (Australian Financial Review, May 5, 2009) offering his personal opposition to Australia’s high home ownership rate and government policy, one may hope that such economists can explain how Australia can meet its housing needs given ongoing difficulties ahead for government and workers.

We also need ideas about how Australia can maximise its wealth given that manufacturing is still declining in terms of its proportion of Australian employment, and many retail jobs are being threatened by tougher access to credit.

It may even be the case that freer trade should be tempered for a while, especially in response to nations which do not play by the same rules. For instance, with China utilising a one-party state system, a relatively fixed national currency, a large pool of cheap labourers, and a growing middle class of highly skilled workers, it increased its share of world merchandise exports in terms of value between 1993 and 2007 from 2.5 to 8.9 per cent. In contrast, the US declined further from 12.6 to 8.5 (21.7 in 1948), Japan from 9.9 to 5.2, France from 6.0 to 4.1, the UK 4.9 to 3.2, and Australia and New Zealand from 1.4 to 1.2 after being 3.7 in 1948 (WTO International Trade Statistics 2008).

To conclude, I only hope that Australian commentators, including those who describe themselves as social democrats, offer fair dinkum analysis on behalf of battlers in order to honestly illustrate the ongoing struggle of Australian governments to balance compassion and competitiveness. Anything less based on wishful thinking is simply an academic masquerade.

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About the Author

Chris Lewis, who completed a First Class Honours degree and PhD (Commonwealth scholarship) at Monash University, has an interest in all economic, social and environmental issues, but believes that the struggle for the ‘right’ policy mix remains an elusive goal in such a complex and competitive world.

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