There are two contemporary traditions in Australian economics. The first is the old school in which productivity is the engine of prosperity, the current account deficit is a concern, the quality of investment matters and exports are a priority. Let’s call it the John Crawford school after the eminent economist that perhaps most captured its tenets.
The second is a younger school. It is the post 1980s thinking that was born alongside the big shift in the Australian economy towards services and increasing current account deficits. It sees the engine of prosperity as the private sector, period. It sees productivity as important but not central, doesn’t care about what or where investment comes from, has a passing interest in exports and concludes that debt is all good so long as it’s in the private sector where nothing can go wrong. Let’s call it the Pitchford School after John Pitchford who wrote a small but extraordinarily widely quoted riposte to Paul Keating’s Banana Republic moment.
For the past thirty years the Pitchford School has been dominant in policy-making circles and the Crawford School has been driven into academic retreat. The 23 year bull run has made the Pitchford School seem absolute, so long as you ignore the great run of good fortune of a housing bubble twice bailed out by 150 year commodity boom.
Following the GFC when the Australian banks were virtually nationalised for a period, there was a brief sunrise for the Crawford School in policy circles. Private debt suddenly became an issue and deleveraging a priority. Export-led growth took centre-stage, the commodity boom was prioritised and productivity reform re-entered the common lexicon. The lesson had been learned that the Pitchford School path can work for a goodly period but if left to its own devices can, usually will, culminate in a private debt implosion.
But, the revelation was momentary. Since the end of the mining boom, the Pitchford School is once again ascendant, perhaps most obviously in the path of post-boom rebalancing that has been chosen. The export focus has suddenly been dumped in favour of a housing boom with its rising debts and vulnerabilities ignored in favour of platitudes about success.
That’s what John Edwards of the RBA would like from you today. Not hard work, innovation or a sense of shared mission and sacrifice to drive Australian prosperity forward, but a spirit of complacency and resting on your laurels. From the AFR:
“We have this sort of nostalgia for the ’80s – many of us – and recall it with affection and imagine that it’s possible to replicate it indefinitely,” Dr Edwards told The Australian Financial Review. “But you can’t – at some point you’ve got to let it go and recognise circumstances are now different. We have to find a discourse that recognises our success.”
…“We need continuous reform and adjustment to entrench our prosperity, but in order for it to be deliverable it has to be based on a recognition of success and making sensible claims for the outcomes,” he said. “The reason we have what we describe as reform fatigue, is that people no longer believe the story of prolonged failure and imminent catastrophe.
“And they’re also aware many of the reforms are ones that advantage one group of Australians over others, but don’t necessarily make the whole lot of us better off.”
With respect, there is no “reform fatigue” in the population because there’s been no reform. Since the GST (excepting the carbon price), reform fatigue has strangled our leadership as the power of vested-interests and a relaxed and comfortable population has made them gun shy for nearly two generations. The resistance to reform is a political strategy from above not a grass-roots movement from below and is, by definition therefore, more advantageous to the few than the many over the long term.
Edwards’ framing of the mining boom is equally thin:
Dr Edwards’ primary argument is to challenge the view Australia won an enormous windfall that was recklessly spent. He estimates that over the decade after 2003, when the boom started, it contributed about 3 per cent to real gross domestic product.
While hardly trivial, it’s far “less than people imagine, and exactly equivalent to the increase in savings over that period,” Dr Edwards said in the interview. “In other words, far from being feckless – we saved it.”
We’ve lived through a 150 year mining boom and are yet to see a current account surplus. That’s not saving the proceeds of one of the two greatest booms in Australian history. Edwards argument is filled out a little more by Laura Tingle:
“Nor, for all the indignant scolding, can it reasonably be said that Australians have been merely the lucky beneficiaries of China’s explosive growth, or that they have complacently dozed through an unparalleled opportunity to reshape their nation and prepare for the challenges ahead.
“Australians have been saving more, investing more, working more and learning more”, he says.
“During the mining boom Australia’s capital stock has increased by nearly two-thirds, a larger share of Australians have jobs, the share of young people in training and higher education has increased markedly, household saving has increased from zero to one-tenth of household disposable income, national gross saving has risen to well over one fifth of GDP, the current account deficit has narrowed, household credit growth has slowed sharply, and Australian banks have dramatically reduced their dependence on foreign borrowing and thus the vulnerability of Australia’s financial system to global shocks.
“Of the biggest investment boom in Australian history, well over four-fifths has been matched by Australian savings.”
I haven’t seen the calculation that the mining boom only added 3% to GDP but what I can say is that framing the boom in this way is oxymoronic. Without productivity growth over the boom period the economy grew its income by leveraging up temporary increases in the terms of trade. That debt was borrowed offshore by the banks and would have imploded post-GFC without the mining boom. Couching the boom as a largely irrelevant 3% of GDP while celebrating its fixing of the mistakes of the past is having your cake and eating it too. That it is done in the name of defending complacency shows that the Pitchford School has learned nothing.
I look forward to reading Dr Edward’s treatise in full.
