Australian policy: rational choices versus wishful thinking

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.