Former AFR commentator and now private economist David Bassanese has a message today for those arguing for any sort of tightening in the monetary or fiscal settings:
For starters, the Abbott government was so keen to destroy the economic reputation of the previous Labor government that it recklessly damaged still-fragile business and consumer confidence by talking up a “budget crisis” that barely existed.
…the Reserve Bank has been lulled into expressing concerns that the housing market has become “unbalanced” between investors and first home buyers – so much so it’s threatening to dampen critical investor demand through new macroprudential controls.
…The fact that investors are more prominent in this cycle should be no surprise given that rental yields have remained attractive relative to interest rates.
…It’s no surprise first-home buyers are boycotting much of the markets given high unemployment, sluggish growth in household income, and the removal of incentives to buy established homes.
We should not forget that Australia’s good fortune in recent decades was partly luck – financial deregulation and a structural decline in interest rates produced a consumer leveraging boom that was conveniently replaced by a mining boom just has households had gorged on all the debt they could afford.
We’ve got no tricks left – yet our complacency in the face of looming challenges remains undaunted.
That’s right. We have no tricks left. But we do have adult options to rebuild from the damage that two decades of policy tricks have wrought upon the economy.
That option is structural reform aimed at repairing the nation’s competitiveness including:
- productivity reform in tax, industrial relations, competition, Federal relations etc
- large scale productivity-directed infrastructure investment
- lowering the exchange rate and ensuring the devaluation is “real” by preventing wage rises
That will boost investment, jobs, tax receipts and the economy generally very materially in time, and that recovery will be built on real economic progress not the tricks that Bassanese recommends without mentioning the political economy costs of:
- economically marginalising everyone under the age of 35
- a larger recession not much further down the track
- the complete hollowing out of Australia’s political economy and budget as bank guarantees become unshakable law
- the further destruction of tradable sectors that are the future beyond a 24 month horizon.
Is it complacency to be tightening against these risks? It think not. Does it mean doing so will be easy? No. Could it cause recession? Yes, but probably not given the surge in net exports.
But the extraordinarily complacent argument that letting the bubble rip again is the best option, flies in the face of every economic lesson the world has learned in the past decade, nay, century. That way lies only slightly delayed but far greater pain.
Back to Switzer Financial with you, Mr Bassanese.
