Warwick McKibbin is at the AFR today giving everyone a caning. The thrust of his piece is that two conflicting forces are bearing down on Australia at once. The first, as we all know, is the China driven repricing of our commodities and the structural change towards a greater production share for mining. The second is less widely understood:
An energy revolution is under way in the US. Our research suggests that the energy boom from unconventional oil and gas in the US could raise the economic growth rate by 0.5 per cent per year for at least the next decade. Lower energy prices and a renaissance of energy intensive manufacturing such as petrochemicals are already stimulating the US economy.
…The energy transformation in the US directly lowers Australia’s terms of trade because Australia is an energy exporter. This has important implications for exporters of coal, oil and gas. The Fed will need to move away from quantitative easing as soon as possible, which implies rising nominal interest rates. The flow of capital into a growing US will probably raise long-term real interest rates globally.
This is not dissimilar to my own view, though I remain less bullish on the US. The US housing recovery is a low interest rate animal. The moment rates rise it’ll evaporate in my view. So I am less constructive on the path of real interest rates.
But I do accept the conflicting forces outlined by McKibbin. A long term upwards revaluation of commodities and downwards pressure from capitalist advances in supply.
McKibbin then turns his attention to Labor’s policy failures in addressing these challenges:
Union power was allowed to raise the cost of labour…A poorly designed carbon tax raised the cost of energy. The cost of doing business accelerated due to a fixation with nanny state regulation. Any pretence of fiscal discipline was discarded. Large subsidies were given to the multinational car makers – the list of poor policy goes on. Australia’s competitiveness problems today are as much about high input costs caused by bad policy as they are about a strong currency.
A fair assessment in terms of a politics-free ideal. For years McKibbin has argued for a single global carbon price, which would be brilliant if it were possible. The post 2009 alternative of running a much tighter fiscal policy would also be fantastic if accompanied with tax reform (which McKibbin also calls for) to reduce unproductive investment in property. If not, the lower interest rates and dollar that would have resulted would soon have been reversed by property speculation and any gains in competitiveness lost. Assuming the right tax reform, I would also have no problem with letting the car-makers go. Australia would retain a balance of tradeable sectors if the dollar were lower.
In fact, McKibbin is pretty much arguing for policy perfecetion. He closes with an endorsement of further productivity-enhancing government infrastructure spending guided by the Productivity Commission, for congestion pricing, for less pork barrel spending and tax reform. All self-evidently good ideas.
He closes with a hay-maker thrown at Tony Abbott:
Australia desperately needs the next prime minister to be a leader rather than one who is a fighter.
McKibbin offers a very useful benchmark against which the compromises of real politik look hopelessly inept. The problem is, the further we get from his prescriptions, the harder it is to turn back.
