Bailout nation


Last night MB hosted a stonking bare-knuckle debate following my Can manufacturing seize its opening? post. One of my main reasons for writing the post was to expose the political economy in which we find ourselves. By that I mean what is currently accepted as reasonable behaviour in the relationship between government, business, the media and the people.

There is no doubt whatsoever that the boundaries in these relationships have changed dramatically in the past decade and not for the better.

How so? First, some history.


In his book, The end of certainty, Paul Kelly describes how the Labor government of the 1980’s swept aside many decades of protectionism and rent-seeking behaviour and forced businesses to compete in a global setting. The result was a spectacular turnaround in Australian productivity through the nineties as businesses as diverse as board shorts and bionic ear makers flourished in global niches.

The key ingredient in this success was a context of simple rules for business in which they aimed their best innovative efforts at competing for custom, rather than lobbying government for captured markets.

We cannot say the same of today. We now live in an environment in which any business that is threatened with significant job losses can lobby successfully for a bailout. And surely, Australia’s failing productivity performance is, in part, the outcome.

So how did we get here? I see several very important moments. The first is the arrival of the mining boom and its effect on pretty much everyone. As I showed recently, in its early years, the mining boom delivered bounty across the nation via its bailing out of, and then enabling the further growth of, the housing bubble. Along side that, and of increasing importance in redistributing mining revenues, was mining royalties and corporate taxes that enabled tax cuts for individuals. Since 2008, this has become the primary redistribution channel.


This largesse has two effects, one psychological and the other structural. The psychological element is of entrenched entitlement thinking, a general expectation of easy prosperity that is anathema to the spirit of meritocracy. The second element, the structural shift, is that it is now government that controls enormous swathes of money in the economy. All state governments have virtually doubled their revenues in the past decade. Many parts of the private sector cannot say the same. The role of government is thus commensurately larger in all of our lives.

The next important shift occurred in 2007 when BHP and Rio sought to merge. There was no justification for the merger beyond the monopoly gouging of the Chinese. Yet the government rubber stamped it as mining executives paraded their influence across the capital. The ACCC blessed it. And a green light was sent to everyone that Australian rent-seeking was the new black.

Thankfully, the GFC arrived just in time to kill the deal. But the GFC also bought with it a greater calamity for the fading culture of competition in Australian business: the conduct of the bank bailout.


When the GFC struck, all four large Australian banks faced imminent insolvency as they could not roll over their wholesale debts. Of course, it made no sense whatsoever to let them fail, given a simple guarantee of these debts was enough to stabilise them (as well as a few small demand side measures!). But the conduct of that bailout was dreadful. It was and remains shrouded in a secrecy I facetiously call Invisopower! And it drew in government, the RBA and regulators, none of whom have addressed the bailout with candour. For the most part, all we get is the endlessly repeated platitude that they, and the banks, are world class.

This secrecy painted in glowing neon lights across the Canberra sky that it was open for back door business. And it wasn’t long before business came knocking. In fact, they were invited. Throughout 2009, the Rudd Government negotiated its original Carbon Pollution Reduction Scheme (CPRS) behind closed doors. The policy was announced up front, and an endless procession of special exemptions were struck with business interests as they traipsed to Canberra.

Then the same approach was adopted with the Resource Super Profits Tax (RSPT). Only the negotiations didn’t proceed fast enough and the business interests publicly attacked the government. The special exemptions were then negotiated with a gun shy new Prime Minister.


This newly defined set of boundaries (or lack of) has thus given birth to a new business methodology. Interest groups now determine elections and our leaders. In 2007, the Coalition government was put to the sword in part by a union campaign against Work Choices. The in 2010, the miners slayed Kevin Rudd.

All of these episodes have the consequence of encouraging rent-seeking in business. In an economy dominated by concentrated monopolies, duopolies and oligopolies this is a red rag to a bull. Why compete when you can simply lobby or pressure the government to prevent competition. Even as both you and the government trumpet your “free market credentials”.

Then there is the small consequence of our fraying democracy.


One wonders where this political culture comes from. It is tempting to see it as the triumph of state political practice over federal. After all, state politics is basically the business of negotiating with interests and Labor has been doing it in the major jurisdictions without much interruption for a long time. Kevin Rudd came from state politics, as did the new wave of number crunchers. Any reader analysis in this regard would be welcome.

There are other factors too. The role of the infrastructure sector in 2000s is important. Their recruitment of former politicians and key bureaucrats smelled of regulatory capture. There is also the calamitous failure of the ACCC in allowing duopolies and oligopolies to form in every major sector. Then there is the collapse of some sort of independent centre in our media.

Then again, maybe it’s just the way it all goes. As Karl Marx observed, capitalism has an inherent tendency towards ever greater concentration. Then collapse.

About the author
David Llewellyn-Smith is Chief Strategist at the MB Fund and MB Super. David is the founding publisher and editor of MacroBusiness and was the founding publisher and global economy editor of The Diplomat, the Asia Pacific’s leading geo-politics and economics portal. He is also a former gold trader and economic commentator at The Sydney Morning Herald, The Age, the ABC and Business Spectator. He is the co-author of The Great Crash of 2008 with Ross Garnaut and was the editor of the second Garnaut Climate Change Review.