It’s slowly dawning on the press that we’ve made a mistake hanging our economic future so exclusively upon China. There are a number of quite good takes on this today but The Australian has a quote from former White House adviser, Pippa Malmgren, that is to the point:
A FORMER financial adviser to the White House says Australia made a big mistake in neglecting trade and investment links with the US and other major economies while it became fixated on selling commodities to China over the past 10 years.
…”Why do Australians restrict themselves to the flight to Shanghai and Beijing?…It always makes sense to diversify, but for whatever reason Australia didn’t diversify over the past decade; they’ve just said ‘the US is history, China is the future. And now the US is coming back to life and China is weakening — and for Australia it’s too late to rejig the model. I think Australia has made a very big mistake in that they have pegged their future principally on China. It would behove Australians to focus more on the one market which has always been there for them, which is the US…In fact Australia is about the only country that is not a net beneficiary of the fact that manufacturing is leaving China. So why isn’t Australia attracting it? Because Australia pegged its future not only exclusively on China but exclusively on resources.”
Pippa is a friend of mine. She is a former financial markets adviser to the Bush White House and a smart lady to say the least. More to the point, she is an economic neo-liberal. Yet here she is asking why it is that we embraced the Dutch disease thrust upon us by global markets. Given this, it is perhaps a good moment to ask, who’s fault is it?
Over such a long boom, it’s not an easy question to answer and in some very important sense is artificial. It’s all 20/20 vision in hindsight after all. Nonetheless, there are a series of mistakes that it is reasonable to call out our elite on. In the end, they all come back to one fundamental error, too much of the boom was spent and not enough saved, overheating the economy, driving external debt and the dollar too high and hollowing out everything not bolted down or a hole in the ground.
The Macfarlane RBA used the boom to rationalise its housing bubble (20% blame)
The RBA of Ian Macfarlane offered easy money for far too long. From the moment it came into being, it slashed interest rates on reasonable inflation levels resulting from the productivity-related growth of the late nineties. As Phil Lowe has written, it is a mistake to lower interest rates simply on the back a positive supply shock such as this and disregard the results, such as rising asset prices. By the time Macfarlane awoke to this simple truth in 2003, Sydney’s housing bubble was huge. But as the terms of trade boom began, bailing out the mistake, his RBA continued its easy money policies and rather than deflate, the bubble went national with Brisbane, Perth, Melbourne, Adelaide and Hobart (cities far and wide, many unaffected by mining directly), all followed Sydney house prices skywards. By the time he retired, Australian inflation expectations were, to say the least, firmly entrenched:
More than anyone, the Macfarlane RBA established an expectation of rising asset prices to replace traditional savings. Under its watch, a chronic current account deficit became a borrowing glut.
The Howard/Costello regime gave us too much of a good thing (30% of the blame)
Accompanying the Macfarlane era’s easy money years, fiscal policy was too easy. Yes, Howard and Costello paid down public debt to very little, established the Future Fund and installed a tax on spending in the form of the GST, but they also exacerbated falling savings rates with fiscal largess and giveaways that were overly generous. Capital gains tax alterations boosted asset prices and successive tax cuts had us all borrowing and spending like drunken sailors with no thought to the future. Shortly after leaving office, the resulting mountainous external private debt imploded in the GFC, the banks were effectively nationalised, and suddenly the savings rate (which had already begun to turn) rocketed.
The Rudd/Gillard/Swan regime botched the solutions (20% of the blame)
The GFC stimulus was well handled with the exception of one policy. When Treasury sent its proposed stimulus package to Cabinet, there was no First Home Buyers Grant boost in it. It was added by the pollies. The result was a blow-off round of housing speculation in 2009 that saved growth but missed the opportunity to deflate (not crash) Australian asset prices. The resulting re-inflated bubble has dogged every move made by the RBA since. Rather than extra capacity freed by the GFC being redeployed into the renewed mining boom, the RBA has had to raise rates and the dollar and force capacity to free up. That is, it embraced Dutch disease as a way to prevent the mining boom overheating the economy again. We simply should have allowed housing to deflate in 2009 even via recession if necessary.
Since then, the Rudd /Swan team tried to install a Resource Super Profits Tax that would have helped shore up government savings for many years yet and may as well have helped contain the second round boom (though it was probably too late) But its policy process ruined the chance of getting the tax over the line with the body politic. It was rushed, poorly designed in a political sense and opened the way for a violent mining backlash. This failure will dog the country for many years to come.
In the face of this, the Gillard government and its executive embraced Dutch disease as Australia’s saviour, extrapolating unsustainable Chinese growth endlessly into the future.
Unethical mining and media companies (10% of the blame)
Presented with the opening offered by the Rudd/Swan team’s poor policy process, mining companies engineered perhaps the cheapest and easiest bloodless coup in the history of democracy, with the help of hapless media firms. Australia was left naked before an onslaught of investment that, by definition, meant an increased reliance upon very few commodities going to even fewer countries.
The Australian people (20% of the blame)
We all did this in some measure to ourselves.
In sum, I give to you, the Dutch disease blame donut: