Two schools of thought or ‘narratives’ are suddenly apparent in the Australian economic commentariat.
The first is not new. The ‘all good’ school is a continuation of the ideas that have dominated Australian economic thinking for nearly three decades. Roughly called the Pitchford thesis, it is the belief that private debt cures all ills. So long as the debt is in the private sector then there is simply no reason at all to be concerned about it. There are no limits to household leverage and no consequences to running consequently large current account deficits. Competitiveness is not an issue and they only wave a vague hand at productivity.
According to this school, when the mining boom ends, there is no issue with returning to the old model of debt-led growth supported by high growth in net exports emanating from the so-called “third phase” of the mining boom. Those extolling this school of thought include Chris Joye, Adam Carr, Stephen Koukoulas, Jessica Irvine and Michael Pascoe (forgive me, this does paraphrase some folks’ views, but in the broad brush stroke it is right). Paul Bloxham and Ross Gittins are also tenured lecturers at this school even if they have recently started sounding doubtful.
The opposed school of thought or narrative is more new, is less sanguine and more ideologically diverse. Typically it sees Australian private debt at already unstable levels. It argues that the mining boom has bailed out households and that its end will pose a very serious challenge to the nation in an adjustment to competitiveness, debt levels and falling incomes. Let’s call it the “at risk” school.
It contains post-Keynesians like Steve Keen right through to economic “drys” like Ross Garnaut. Of course, MacroBusiness has been in this school for the past three years as well. Others include Warwick McKibbin, who has argued the need for money printing to lower the dollar as commodity prices slide, as well as for the need to revisit surplus politics. Legends Bob Gregory and Peter Jonson have issued dark warnings. Senior economic commentators Tim Colebatch, David Uren and Terry McCrann have argued over a long period that an over-attachment to China is a considerable national punt and have become increasing concerned of late. David Bassanese has also joined the team in the past several months arguing for faster rate cuts.
Last week Ken Henry weighed into the ‘at risk’ school, arguing that Australia has squandered much of the mining boom largesse. He was joined over the weekend by former Reserve Bank governor, Bernie Fraser and former Treasury Secretary Ted Evans, all of whom argued Australia needs to refocus on productivity and infrastruture and is vulnerable in the event of a shock (again apologies for the lumping together but its broadly right).
The most obvious observation we can make when juxtaposing the two schools is that the “risk” school is a mix of Baby Boomers and Generation X, has far greater experience of commodity cycles and has a strong orientation to public service. It also has considerable experience dealing with the power of vested interests. The “all good” school, on the other hand, is largely Generation X and/or real estate, stock market or political interests.
So which narrative is winning the debate? That’s not an easy question to answer, mostly because it depends upon what yardstick you use to measure success. If we think about it in terms of influence over policy, it is clear that authorities have hitherto occupied the “all good” school but are being forced by the reality of a persistently under-performing economy into the “at risk” school.
The RBA has fought its own 18 month easing campaign tooth and nail, never relinquishing its faith in China and the commodities boom. As such it has looked increasingly discombobulated as it repeatedly cut rates around data that has made a mockery of its bullish forecasts. I expect exactly this to continue.
Treasury has been even further behind the curve, issuing successive budget forecasts and updates that have been repeatedly wiped out within months as commodity price falls hit growth, profits and taxes. Last week Martin Parkinson and David Gruen appeared in the Senate where they hosed down any prospect of a recession. But at the same time they admitted past mistakes on commodity prices and, most importantly, gave the green light to the RBA to ignore tradables inflation should the dollar fall far enough. Treasury is now clearly congnisant enough of the risks to Australia to be preparing for big changes in our macroeconomic settings.
At the level of the legislature, there is no doubt that the “all good” school remains firmly in control. But although no politician has gone anywhere near addressing Australia’s coming adjustment, the Labor government has at least broached the subject and begun adjusting budget expectations to lower revenues.
The same debate momentum is apparent in the swelling numbers within the “at risk” school. From a few iconoclasts several years ago, the “at risk” school now contains the most blue chip lineup of economists in the Australian landscape. And more are joining every day.
In summing up, I would characterise the debate result this way. As the incumbent, the “all good” school has the distinct advantage of institutional inertia: the hopes of a vested interest majority, two and half decades of being right, as well as near zero accountability.
However, the “at risk” school has all of the momentum: a persistently under-performing economy, a far superior recent forecasting record and transparency galore.
The ultimate arbiter of the debate will be the economy and with any luck the momentum in the “at risk” narrative will be enough to reposition policy to make the best of increasingly challenging circumstances.
At which point the “all good” school is almost certain to claim vindication (if there’s anyone left in it!).
Update
If you want to get a sense of how superficial the “all good” school has become, you can’t go past the below video from Seven Sunrise over the long weekend billed as “David Koch and Michael Pascoe argue the strengths and weaknesses of the Australian economy”.
The “argument” (launched last week by the Kouk) is that contemplating risk (including recession) is irresponsible, whinging, unAustralian or any number of other colourful metaphors.
This is a perfect example of the conundrum raised recently by Ross Garnaut. The real problem we face as China slows is our own fattened arrogance in assuming that our good luck will never run out.
Enjoy the dizzying heights of the “all good” economic narrative.
