Mad Monkenomics

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For the past week or so we’ve all been subjected to a thrashing at the hands of Wayne Swan for being pessimistic about the economy. This appears to be the government’s new economic narrative to help us understand the bizarro world in which we find ourselves – in the midst of an epic mining investment boom with rising unemployment. To Swannie this is all the result of us failing to feel the love for our new economy – that is, we’re saving too much and should spend more.

That it was the government and its fiscal cuts and the Reserve Bank’s “make room for mining” rate rises campaign as well as the radical embrace of nose-bleed levels for the currency by both that played a central role in bringing this about seems to have escaped the Treasurer.

Likewise the higher savings rates for both government and private sector that had to happen anyway because of the structural change in global markets’s perceptions of credit worthiness and our private bank’s enormous reliance on unstable wholesale funds.

I set this scene as a frame of reference through which we can now also judge Wayne Swan’s opposition. Earlier this week, in a longish speech Tony Abbott gave us a peak at his vision for Australia’s economic future. The general political thrust of the speech is to paint Labor as a high spending, high taxing government and the Coalition as the reverse. More importantly, the rhetoric does actually filter through the Mad Monk’s macroeconomics:

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At the heart of our plan for a stronger economy is getting government spending down and productivity up so that borrowing reduces, the pressure on interest rates comes off, and taxes can responsibly come down. The first act of an incoming coalition government will be to prepare the carbon tax repeal legislation to take the pressure off the power prices and transport prices that feed through to every price in our economy. Australians can have tax cuts without a carbon tax but only if we get government spending down by eliminating wasteful and unnecessary programmes and permanently reducing the size of government.

No good government would ever spend more than a billion dollars putting pink batts into roofs and a billion dollars to take them out again. It wouldn’t spend $16 billion on over-priced school halls while the standards of academic achievement actually fell.

A good government wouldn’t spend $2 billion buying Victorian brown coal power stations only to close them down; or $11 billion buying Telstra’s copper wires only to shut them down too; or $50 billion plus on a National Broadband Network that people don’t need and don’t want to pay more for.

The last coalition government turned an inherited $10 billion budget black hole into consistent surpluses averaging nearly one per cent of GDP. At the last election, the coalition identified $50 billion in responsible savings – starting with a reduction of 12,000 in the size of the Commonwealth government payroll.

OK, so I agree that a net transfer of transactions from the public sector to the private would boost productivity. That is if the Mad Monk can cut government spending and recycle those savings as tax cuts, or privatise certain government operations all to the good (within the limits of public sector provision of essential services).

But, the low and even medium hanging fruit for privatisations is long gone. As well, we have here an implicit promise to deliver spending cuts beyond a net transfer, ongoing Budget surpluses at 1% of GDP. What effect will this have nowadays? I’ll first observe that broadly speaking, yes, lower government spending will contribute to lower interest rates. However, it also comes with three possible outcomes. GDP is the sum total of transactions in government, the private sector and the external sector. If one runs a surplus or deficit in any one then the others must make up (or down) the difference. Given Australia’s external sector runs a deficit, by arguing he’ll deliver a fat surplus, Abbott is basically saying that the nation’s private sector must either go deeper into debt or make more with less (that is, boost productivity) to balance the equation. The third option, as we’ve seen so beautifully in Europe, is to have a recession.

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So, which of these is Abbott planning? First, he outlines lot’s of cost savings:

Finding savings is a big task but we’re up for it and will release all our costings in good time for the next election. The starting point will be programmes that have become bywords for waste. Discontinuing the computers in schools programme, which parents are now having to pay for anyway, could save over half a billion dollars. Not proceeding with the extra bureaucracies associated with hospital changes that no one will notice could save over half a billion dollars. Not proceeding with the so-called GP super clinics which are delivering new buildings not more doctors could save about $200 million.

Big savings could be made in the government’s $350 a throw set top box programme since Gerry Harvey can supply and install them for half the price. Vastly reducing the number of consultancies (which have cost over $2 billion over the past four years) would produce significant savings. Not proceeding with the carbon tax would deliver $31 billion in savings over the forward estimates period with a net improvement of $4 billion in the budget bottom line. Not proceeding with the mining tax would deliver $14 billion in savings over the forward estimates period with a net improvement of $6 billion in the budget bottom line.

After a quarter century of reform that made Australia one of the world’s miracle economies, the tragedy of the past four years is the damage that’s been done to our fiscal position with almost nothing lasting to show for it; and the changes that have been wrought that are almost designed to make our economy less competitive. Make no mistake: the coalition supports a high wage economy. My best moments as employment minister were the figures showing ever higher real wages and record job increases. It was possible to have more jobs and higher pay then because there were productivity increases to sustain them.

Righto, productivity, a fine idea. But how are we actually going to achieve the increase? Here’s one way:

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There are many problems with the government’s so-called Fair Work Act: there’s a flexibility problem, a militancy problem but above all else a productivity problem which is hardly surprising when workplace negotiations are always meant to involve outside union bosses rather than the employees of a business. A serious review of the Act would have been given to the Productivity Commission rather than to departmental officials even under the auspices of a distinguished committee. Higher productivity begins with more adaptable and creative workplaces, not with new government programmes. The coalition will save business $1 billion a year in red tape expenses by requiring each department and agency to quantify the costs of its regulations and to set targets to reduce them.

I agree that the pendulum on IR has swung too far and needs to come back to the centre. However, this is simply a recipe for making labour cheaper, which may boost productivity some so long as wages fall relative to profits. But roughly three-quarters of productivity growth is generated through investment. Where’s the plan for that?

My view is that like Wayne Swan, Tony Abbott doesn’t give a hoot about productivity. Both are addicted to the same economic management model pioneered by Peter Costello: cut government spending and interest rates and boost private sector debt. Despite all of its privatisatons and tax cuts, the Howard/Costello model killed productivity:

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While running big surpluses:

And of course huge current account deficits as a percentage of GDP:

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If the Mad Monk launches his “bigger cuts than Swannie” crusade at a time when Australians are ready to borrow (a long way off in my view) then this would happen again. Although it’s also a certainty that it would run quickly into the new normal’s checks and balances on just this kind of growth model: the RBA, credit ratings agencies and global markets who have all warned consistently that expanded offshore borrowing is the last thing they want to see.

If the Mad Monk’s cost-cutting commences while consumers continue their current rebuild of savings as well as bank funding profiles then he’ll risk a recession.

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Both political parties are living in the Halcyon shadow of a Howard/Costello growth paradigm that was of its time and has passed. Productivity, competitiveness, innovation and exports is the conversation that we need to have now.

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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.