The AFR has a terrific piece today on the long running Ross Garnaut versus Mr Rainbow debate around Australia’s post boom adjustment:
The first vision, outlined by professor Ross Garnaut in his widely read and compelling 2013 book, Dog Days: Australia after the Boom, mapped a future in which the country was set to pay the price for having essentially squandered the good times of the boom years between 2003 and 2011.
As the world delivered the nation a major pay cut in the form of collapsing commodity prices and a plunging terms of trade, Garnaut warned of high unemployment and the prospect of a period in which the economy would – at best – “bump along the bottom”. Implicit in his argument was the spectre of the first recession in over two decades.
…In the other corner stands John Edwards, a Reserve Bank board member whose book Beyond the Boom offered a more hopeful account of the coming adjustment.
In Edwards’ telling, the looming pain of the post-boom years was likely to be less dramatic than many claimed it would be. His reasoning, in what at the time sounded like heresy, was his estimate that the boom added no more than about 3 per cent to gross domestic product over its near-decade long run. While non-trivial, he said at the time, it was far less than people imagined, and exactly equivalent to the increase in savings over that period.
Edwards argued – as he does today – that the economy and the labour force in particular was far more flexible than was commonly accepted. Rather than excoriate ourselves over a lack of 1980s and 1990s economic reform, it made more sense to focus on strengths, such as boosting vocational education, he wrote.
…Warwick McKibbin, a former Reserve Bank board member who helped referee Beyond the Boom, believes Edwards’ vision has turned out to be closer to the mark than Garnaut’s, whom he suggests mis-read the boom and its aftermath.
…In the end, it’s still too early to know who was conclusively right.
Edwards says there is much in Dog Days he supports, including its appeal for a “strong centre” in politics.
“The only real disagreements were over the likely extent of the downturn. He was expecting a recession, possibly a deep recession, and we haven’t had it.”
Garnaut, for his part, maintains the nation’s story is playing out as he anticipated, “with a long period of bumping along the bottom with stagnant or declining real incomes for most people.
“I didn’t expect a recession, although I felt it wasn’t out of the question if we played things badly.”
What is most important about this debate is that it is only half over:
To get through that first half we’ve borrowed our buns off with offshore debt at records, household debt at records and government debt going parabolic:
Yet living standards are still falling and have been for five years:
The RBA is claiming victory at halftime.
When the terms of trade crash is over in 2020 and we’ve had no crunch, the economy is growing, and we’re deleveraging, then I’ll accept that Mr Rainbow was right. Until then all he’s done is delay the adjustment at the risk of making it much worse.
