Tuesday, March 20, 2012
- attributed to JOHN MAYNARD KEYNES
WHETHER Keynes ever voiced these exact words is a matter of dispute. What is beyond doubt is that he expressed such thoughts and we remember them because they embody a profound truth. When we find ourselves in a new situation, our ideas must be flexible to respond to it.
Australia is now in a new situation, one unlike anything we have seen before. In the year to December 2011, investment in mining grew by more than GDP did. Mining investment grew by $8.24 billion; the volume of GDP grew by only $7.7 billion.
One industry located mostly in the outback is growing very fast. Most of the rest of the economy, located in the south-eastern cities, where the bulk of Australians live, is growing slowly or not at all.
The main reason our economy has hit a wall is that the Australian dollar has risen to hover around $US1.05 50 per cent above its long-term average of US70?. This has made a wide range of economic activity uncompetitive, forced firms to close and sent tens of thousands of jobs overseas.
Second, the Reserve Bank has set interest rates at levels appropriate for mining, not for the mainstream of the economy. Lending rates for home buyers are now at 2005-06 levels. Lending rates for small business are at late 2007 levels. The economy needs stimulus, yet interest rates are contractionary.
Third, governments are cutting spending to get back to surplus, and cutting hard because revenues have been clobbered by tax losses run up in the global financial crisis, by consumers' caution and by the lack of growth.
Our facts have changed. But our governments, the Reserve Bank and the federal opposition have not changed their minds. What is happening to Australia does not fit the stories each wants to tell us. So for different reasons their policy is to ignore it, and hope that it goes away.
One luminary tells of a recent conversation with a Chinese banker, who gave him an earful of his amazement at Australia's complacency at this threat to our industries. "What is your policy to deal with the dollar at this level?" the man from the world's most successful economy asked with vehemence.
In fact, the banker knew the answer: our policy is to allow Australian manufacturing and service industries to wither, hoping this will "free up" workers to take jobs in mining without causing inflation.
This is not good enough. Our manufacturers are constantly berated with advice that they must be flexible and nimble in responding to challenges. So they do; but it is ludicrous when the advice comes from those who are inflexible in their own job: policy.
Take the dollar. There has long been a consensus in Australia that floating the dollar was a good thing; I too was part of it. The dollar rose and fell over that time, usually between US60? and US80?, sometimes higher or lower. But firms facing trouble could tighten their belts and wait for it to change.
The situation firms face now is very different. Even well-run companies that took tough decisions to adapt to the crisis are now struggling. The dollar has made imports 33 per cent cheaper on the domestic market, and exports 50 per cent more expensive overseas. That is a huge blow to our competitiveness. China would not allow it to happen to its producers, nor would Singapore, South Korea, Taiwan or any other economic success story.
The Bank of Switzerland has drawn a line in the sand; it has intervened in the market to force the franc back below 1.20 to the euro, and keep it there. Central banks can do this because they can create currency. The downside is that increasing the money supply adds to inflation. But the risk of inflation getting out of control in a flat economy is remote.
We need to talk about this. We need to talk too about why Canberra is pledging a budget surplus that will impose a contractionary budget on an already weak economy.
In effect, Wayne Swan is promising us that he will bring down a bad budget that will be the opposite of what Australia needs. And Tony Abbott and his team are attacking him for not promising to make things even worse.
The Baillieu government is in a trickier position. The states have few sources of revenue, and ours is drying up. The Victorian Treasury and its Vertigan review have told ministers they should invest more, but pay for more of it from revenue. And in a normal world, that's the right advice. Victorians need to know that when the state runs a surplus today, it is to invest it in building new infrastructure, not to lock money away in the bank.
Victoria's economic slump into near-recession has been sudden, and due to reasons beyond any state government's control. The government has taken a long time to make decisions, but it is more important that it makes the right decisions rather than fast ones. The Baillieu team has been in power just 15 months. It did not expect to win government, and it came in with a lot of baggage from opposition, most of which it has slowly cast off. It now supports myki, the regional rail link and the desalination plant. Eventually it will abandon its silly policy to put armed guards on every railway station.
Its real problem is that it has yet to decide why it's there. It needs to have a credible central policy that tackles the real problems Victoria faces. It needs to have a story to tell, and be willing to go out, meet people and tell it.
Why was it elected? Primarily because transport infrastructure had not kept up with the demand for services. Building that infrastructure should be its policy. That would lift productivity, growth and jobs. The facts have changed, but that policy would fit them.