There is a natural desire for people to compare this current 2020-21 economic recession to earlier ones, with the most obvious comparison being the slowdown of 2007-08. This is particularly relevant given the commentary following Josh Frydenberg’s recent budget and the respective policy positions of the Liberal and Labor parties then and now.
People look at the levels of fiscal and monetary stimulus. They look at the levels of government spending and debt. They will look at levels of unemployment. But what people won’t look at is the cost of government intervention, not in immediate dollars but long term consequences so to assess whether it was worth it. To learn and to guide future policymaking.
But this is only part of the problem.
This current recession is different from any other recession Australians have ever witnessed. It is mostly a policy-driven recession. Never before and nowhere in history have national economies been shut down by design. There have been ample policy failures that resulted in economic slowdown, but this time the policies did what they were designed to do. A COVID recession was likely, but the depth and cost of this recession is entirely one of choice by our political leaders.
There has been much written about the policy decisions made by all levels of Australian government, in particular Victoria, to close or slow their economies. However, what has not been noted is that Government policies to shrink and retard Australia’s economy did not start this year. They have been implemented by state and federal Australian governments for over two decades.
Despite the economic ludditry espoused by our political leaders and media commentariat, economies are not driven by consumption, or in the lingua franca, insufficient aggregate demand. Economies are in reality driven by production. You can’t eat unless you produce something first.
From individuals to communities to nations, there is always sufficient demand. We are after all humans and humans always want more than we have. What constrains us is not insufficient demand but insufficient production to meet that demand. Stimulating consumption without an increase in production leads only to inflation.
Yet when it comes to production in Australia, our governments seem to go out of their way to make it harder for Australians to produce.
It has been a consensus and bipartisan project to increase the cost of production in Australia. Our governments have pursued and implemented policies to increase the cost of capital, the cost of labour and the cost of energy in Australia, the three key inputs of production. It should therefore not surprise that Australia’s economy has been slowing for quite a while. All the coronavirus did was apply the parking brake.
Start with the cost of energy. Thanks to the legislative efforts of prime minister John Howard and his environment minister Robert Hill, Australia implemented a renewable energy scheme in 2001. This laid the foundation for a massive increase in the cost of energy. While the target was small at the start, it laid the foundation for a significant increase by the Rudd government post-2007.
Coupled with other poorly designed and ill-considered policies by the Rudd, Gillard, Rudd, Abbott, Turnbull and Morrison governments, where once Australia had the lowest energy prices in the advanced world, it now has the near highest. Where once Australia’s high cost of manufacturing could be masked by low energy prices, Australians should not be surprised that there has been a decimation of Australian manufacturing. After all, there is a direct correlation between increased energy prices and decreased manufacturing output in Australia.
Move to the cost of capital. Thanks again to the legislative efforts of Howard, his treasurer Peter Costello and financial services minister Joe Hockey, Australia established the world’s first financial services licencing regime in 2001. This led to a massive increase in the costs to operate financial services business in Australia which in turn drove a large increase in the cost of capital. Did financial services licencing improve consumer outcomes? Check the report of the Hayne Royal Commission for the answer.
What it did do was change the economics of financial services leading to massive consolidation and returns to scale, rewarding the AMPs and the big banks. It worked a treat. As a balancing feature, all the small financial services business closed but the number of regulators in ASIC and APRA increased.
Thanks again to the legislative efforts prime minister Kevin Rudd, treasurer Wayne Swan and financial services minister Chris Bowen, a similar (to financial services) regulatory regime was implemented for the credit industry which recently came a cropper in the (in)famous wagyu and shiraz case. But again, ASIC grew larger and larger yet less and less effective. Oh — and prime minister Tony Abbott and his finance minister Matthias Cormann granted ASIC the power to fund itself through a direct hypothecated tax on the financial services industry thus bypassing Consolidated Revenue and proper parliamentary accountability.
Then there is the cost of labour which should be distinguished from the price of labour paid to workers. Thanks again to Howard and his industrial relations minister Kevin Andrews and their WorkChoices overreach, Prime minister Rudd and his industrial relations minister Julia Gillard wound back industrial relations laws to the pre-Keating era. The Rudd-Gillard reforms did not necessarily translate into additional salaries for workers but rather breathed new life into the industrial relations club giving structural cost advantages to big business over small and turning many previously economic small businesses uneconomic.
The net impact of these bipartisan policies was to fundamentally damage the productive base of Australia. Were it not for the minerals supercycle and the bipartisan mass immigration programs of the past decade, Australia would have been the economic basket case the Greens have long dreamt of.
Now, with the economic tide going out stopping Australia from mass importing labour, our economy is seen to be the pantsless profligate that it is.
Having seen this fundamental problem with the Australian unproductive economy, what have our leaders done? They have hit the demand stimulus button and encouraged citizens to take no thought for the morrow, forget about their savings, forget about their debt levels and go spend, spend, spend. Anything to address the productivity of Australia? No. That’s for the suckers who follow to clean up and for the citizens to pay for.
Got something to add? Join the discussion and comment below.