The Pascometer is back today following yesterday’s poor effort with an improved piece:
This week’s The Economist makes a well-argued case for much more spending on public works as much to head off looming asset bubbles in a world of cheap money as to generate growth. The magazine’s leader, “More bricks, fewer bubbles” is taking particular aim at Europe and the US, but the core of the lesson applies just as well here. The Economist is hardly a hotbed of socialist propaganda, but it suggests there are dangerous bubbles ahead if we rely on cheap money to stimulate market-led investment in new stock.
Despite all the rhetoric about the size of government, public spending is running at its lowest share of the Australian economy in at least half a century and quite possibly much longer. While we’re relying on stronger housing prices to generate interest in building new dwellings, our investment in public housing continues to go nowhere since its GFC blip, as the accompanying graph from the latest Reserve Bank statement on monetary policy shows.
It would take a brave and bold Coalition government to embark on spending that is more direct, to use its now unlimited debt facility to good effect. It would take a government with a genuine sense of direction and purpose, as opposed to “whatever the other mob isn’t”. It requires pragmatism, rather than rhetoric, sense rather than ideology – the sort of flexibility to accept that maybe the timing isn’t right just now for reducing car industry protection.
Yet to combine that sort of stimulus with looming politically unpopular and difficult reforms, from work practices to tax, could solve both political and economic problems for the government and – much more importantly – for the nation.
This is the first time a I can remember that the Pascometer has acknowledged the housing bubble, albeit implicitly. After today’s insane housing finance numbers, who wouldn’t! Kudos nonetheless.
The rest is also useful though it doesn’t go far enough. Australia’s basic problem is failing competitiveness so any public investment should be seen within the context of productivity not cheaper housing. A moderate public investment program targeting productivity enhancing infrastructure helps close the gap between our standards of living and economic capacity and can support the economy while we move through a reform period directed at many more productivity measures.
Any decent reform agenda is also going to have prevent housing getting any more expensive, by changing tax and other incentives as well as providing new options to control credit, otherwise the housing bubble will crowd out any progress we make on competitiveness elsewhere.
