Dog Days: Australia After the Boom (Redback) (21 page)

The central economic policy idea in this book is that the prospects of full employment and low inflation without external financing problems are determined jointly by the levels of expenditure and competitiveness, and not by the level of expenditure alone. The intellectual origins of this idea go back to James Meade (including his visit to Australia in the 1930s), Roland Wilson, Trevor Swan and then Max Corden. Failure to apply this insight was a cause of the Australian recessions of 1974–75, 1982–83 and 1990–91. Marx said, in his reflections on the rise of Louis Napoleon, that history repeats itself the first time as tragedy and then as farce. This books tries to help Australians to avoid having to find a word to contain both tragedy and farce.

On the macro-economic framework, I have benefited a great deal from discussions over recent years with Max Corden, Peter Jonson, David Gruen, Martin Parkinson, Gordon de Brouwer, David Vines and Glenn Stevens. Of course, none should be blamed for the resting place of my thoughts that is recorded in this book. I have received helpful comment on the evolving macro-economic issues from seminars and conferences at which I have discussed versions of the macro-economic framework at the University of Melbourne on several occasions (including a joint seminar with Peter Jonson at the Institute of Applied Economic and Social Research), the Australian Treasury, the Australian National University, the Economics Society of Australia (separately at the ACT and Victorian branches), Victoria University, Peking University and the Australian Agricultural and Resource Economics Society.

The book also has a micro-economic reform dimension. Interaction with colleagues at the University of Melbourne is responsible for much that is of value in my suggestions in this area. The work led by Deborah Cobb-Clark at the Melbourne Institute and of Sue Richardson in Adelaide has helped to shape perspectives on the labour market and income distribution. The work of colleagues at the Melbourne Institute of Applied Economic Research and the seminar at the new Mitchell Institute at the University of Victoria was particularly helpful for the chapter on effectiveness of government. My colleague John Freebairn at Melbourne has sharpened up my thoughts on business taxation reform and has more important things to say himself, and Tom Abhayaratna helped with insights from the Henry Review and other work on tax reform.

The thoughts on resources taxation go back to my joint work with Anthony Clunies Ross in the 1970s and early 1980s. The discussion of the Australian Federation owes much to my joint work with Vince FitzGerald more than a decade ago. (Incidentally, in noting with thanks Bob Hawke’s careful reading of the draft manuscript, I should register that Bob disagrees with my generally positive view of the potential value of the Federation.) The ideas about the context of Asian and Chinese economic growth have come from my longstanding collaboration with colleagues in the Crawford School of Economics and Governance at the Australian National University. The thoughts on climate change come out of work with the excellent Garnaut Climate Change Review secretariats led by Ron Ben-David in 2007–08 and Steven Kennedy in 2010–11, and my continuing interaction with those teams and people working in this field at the University of Melbourne, the Australian National University, the University of Queensland, the Grattan Institute and the Climate Institute.

The book is also about the political culture and political economy of reform. I was privileged to work closely with those who were responsible for Australia’s great Reform Era from 1983 to the end of the century. Thanks especially to Graham Evans for comments on the draft manuscript from the experience of those times.

Thanks for help beyond the call of friendship and collegiality to Max Corden. Max’s many careful readings of and commentary on drafts helped me to identify and clarify opaque presentation and argument. Any errors of logic that remain are, of course, entirely mine. Thanks too to my University of Melbourne colleagues Glyn Davis and Maxine McKew for helpful comments on draft chapters.

Thanks to my publishers Black Inc. and especially Chris Feik for excellent editorial advice and support and also enjoyable interaction in the challenging task of turning an economist’s tendency to argue points at unconscionable length into a book that I hope can be read by a wide range of people who care about the future of our country; and to Anna Lensky for her work on introducing the book to people for whom it should be of interest.

Thanks as always to Veronica Webster, who contributed excellent support for research on many matters and work of great reliability on the endnotes and references.

Special thanks to Jayne and John Garnaut for much discussion of the subject of the book and for comments on drafts.

Ross Garnaut

University of Melbourne

1 October 2013

‘There are Salad Days’: An edited version of this talk to the Economics Society was published in the
Oxford Review of Economic Policy
(Garnaut 2005a). So far as I know, William Shakespeare introduced the expression ‘Salad Days’ into our language through the voice of Cleopatra reflecting on her youthful dalliance with Julius Caesar: ‘My salad days, when I was green in judgement, cold in blood …’
Antony and Cleopatra
, Act 1, Scene 5. The term ‘Dog Days’ is of Ancient Roman and, before that, Greek and Egyptian lineage. It originally referred to the hottest days of the Mediterranean midsummer, when tempers frayed; when the dog star Sirius appears in the early morning sky just at or before sunrise.

‘the longest unbroken period of economic expansion’: These comparisons are drawn from national accounts data converted into a common international currency at contemporary exchange rates.

‘more damaging than … in 1990–91’: See my presentations to the CLSA China Forum 2013 on 14 May 2013, and to the ‘Monetary Policy and the Exchange Rate for the End of the Resources Boom: Two Different Views’ seminar at the University of Melbourne on 24 May 2013 and the Treasury in Canberra on 7 June 2013, all available at www.rossgarnaut.com.au.

‘capitalism works because’: Hirsch 1976.

‘Modern economic growth originated’: I covered this ground in my address to the 2012 Annual Meeting of the Consortium of Humanities Centres and Institutes, ‘Can Humanity Manage the Anthropocene: The Challenge of Climate Change’ (Garnaut 2012).

‘contributed by population growth’: Maddison 2001. See also Garnaut 2013a.

‘growth rates around 3–4 per cent’: Data about growth rates here and elsewhere in the book are taken from the World Bank, World Development Report, various years.

‘productivity growth slumped’: Gordon 2012.

‘the increased influence of money’: Sachs 2012; Krugman 2007; Stiglitz 2012.

‘affected much less by the Great Crash’: Garnaut with Llewellyn-Smith 2009.

‘This development falls into three periods’: For more detail see Garnaut, Cai and Song 2013.

‘The averages hide some important details’: Leigh 2013.

‘yearned to be free’: See Marsh 1995 and Kelly 1992.

‘all contributed to stagnation’: Shann 1927.

‘in response to foreign exchange shortages’: Schedvin 1989.

‘Australia’s terms of trade rose’: McLean 2013.

‘a global slump’: Garnaut 1979.

‘winding back of protection’: Rattigan 1986; Garnaut 1994a; Anderson and Garnaut 1987; Rattigan and Carmichael 1996.

‘Independent reports’: Campbell 1981; Martin 1991; Garnaut 1989; Hilmer 1993.

‘multilateral trade negotiations for the first time’: Garnaut 1994b, 1996 and 2005b; Elek 2009; Drysdale 1988; Drysdale and Garnaut 1993.

‘three contrasting parts’: Here and elsewhere, Australian economic data are from Australian Bureau of Statistics sources, but assessed conveniently through the Reserve Bank of Australia’s Statistical Tables.

‘relinquished political control of monetary policy’: MacFarlane 1996.

‘Privatisation was preceded by careful work’: See Evans 1992 and 1995 for an account of the work on regulation prior to privatisation in telecommunications and transport.

‘A mostly helpful myth’: The bit that was not myth was the strong support for market-oriented reform from part of the Liberal Party’s representation in the Parliament through the 1980s and early 1990s. See Hyde 2002; Hewson and Fischer 1991.

‘The quality of political leadership’: There are many accounts of this period, none yet comprehensive in its coverage. Although his book project did not have the cooperation of Bob Hawke, Paul Kelly’s
The End of Certainty: Power, Politics and Business in Australia
(1992) provides much relevant detail.

‘I said to the Australia Unlimited Conference’: This 1999 speech was published as Chapter 14 in Garnaut 2001. See Howard, 1999a, 1999b, 1999c, 1999d. My various other papers referred to in this chapter are available on my website, www.rossgarnaut.com.au, under the ‘Australian Economy’ tab.

‘a meeting of a Senate Committee’: Economics References Committee 2005.

‘the increase was remarkable’: Budget data are taken from the Australian Treasury, materials available on www.treasury.gov.au.

‘September 2013 projections’: The Bureau of Resources and Energy Economics 2013.

‘the economic analysis underlying the policy choices’: But for those who want to know more, the standard international macro-economic analysis underlying this note and the book has its origins in Meade’s 1951 classic
The Balance of Payments
. This was presented, in the form in which it has come to be known by most economists, by Trevor Swan (the Swan Diagram). Max Corden (2009) has made creative use of this approach in many articles, most recently in ‘China’s Exchange Rate Policy, Its Current Account Surplus, and the Global Imbalances’. Applications of standard international macro-economic analysis with floating currencies can be traced back to Mundell and Fleming. For a classic application of the analysis, see Max Corden’s 1977 book,
Inflation, Exchange Rates and the World Economy: Lectures on International Monetary Economics
. For a more detailed application to the contemporary Australian situation, see Garnaut 2013b.

‘beginning to bite’: Commonwealth of Australia 2010.

‘the fabled “Dutch Disease”’: There is a considerable literature related to the Dutch Disease. The Australian literature began with Bob Gregory’s 1976 paper ‘Some Implications of the Growth of the Mineral Sector’ in the
Australian Journal of Agricultural Economics
. See also Snape 1977; Corden and Neary 1982; Corden 2012.

‘in his General Theory’: Keynes 1936; Commonwealth of Australia 1945.

‘uniquely well placed’: For a detailed discussion of the implications of opportunities for Australia from growth in Asia in the early decades of the twenty-first century, see Commonwealth of Australia 2012.

‘productivity isn’t everything’: Krugman 1994.

‘excellent public institutions’: The main data presented in this chapter are from the Australian Bureau of Statistics via the Productivity Commission’s
2013 PC Productivity Update
, www.pc.gov.au/research/productivity/update/2013.

‘Recent studies’: The independent centre of the Australian polity has been more active recently in discussing opportunities for increasing productivity. Various publications and public presentations from the Productivity Commission, the Grattan Institute and the Committee for the Economic Development of Australia are important. Note in particular Gary Banks’s 2012 speech ‘Productivity Policies: The “To Do” List’; Tony Wood’s recent paper for the Grattan Institute (Wood et al. 2012); and CEDA’s 2013
Setting Public Policy
report. From Australian academia, I have found of particular value the paper by John Freebairn and Max Corden on investment in infrastructure as a stimulus measure (Freebairn and Corden 2013). For discussion of the costs of monopoly and the opportunities for reform see Craig Emerson’s 2009 speech ‘Labor Is the Party of Competition’. See also Garnaut 2013c.

‘reform in one industry’: Emerson 2009.

‘monopoly power’: A recent Parliamentary Committee reviewed and reported on the phenomenon of exceptionally high prices in Australia for internationally traded information technology products. See Standing Committee on Infrastructure and Communications 2013.

‘comprehensive economy-wide reform’: Garnaut 2011b; Wood et al. 2012; Productivity Commission 2013.

‘Gas is a special problem’: For an early authoritative assessment see Massachusetts Institute of Technology 2011.

‘results of past work’: Asprey 1975; Commonwealth of Australia 2012.

‘Adam Smith advised’: Smith 1776.

‘seen to be fair’: Our understanding of relationships between labour supply, household income, and health and education services is much richer now than ever before, to a significant extent because of the work at the University of Melbourne based on the HILDA model, and related surveys and analysis.

‘now a small minority’: Richardson 2013.

‘the McClure Review’: Reference Group on Welfare Reform 2000.

‘in his book
Battlelines
’: Abbott 2009.

‘long-term opportunities’: Vince FitzGerald and I set out proposals for reform in some detail in our 2002
Review of Commonwealth-State Fund
ing Final Report: A Review of the Allocation of Commonwealth Grants to the States and Territories
. Since then my thoughts have moved towards requiring a more complete separation of federal and state responsibilities than we suggested in 2002. See also the
2012 GST Distribution Review
by John Brumby, Bruce Carter and Nick Greiner, available online at www.gstdistributionreview.gov.au.

‘have become joint responsibilities’: I was helped in my thinking about these matters by a 2013 seminar at the Mitchell Institute for Health and Education Policy at Victoria University, which has been established to undertake research on health and education policy.

‘a new component to climate change’: An introduction to the voluminous literature on these matters can be found in the references cited in Garnaut 2008 and 2011a (both available online at www.garnautreview.org.au). For a recent update on the science, see the Intergovernmental Panel on Climate Change 2013,
Climate Change 2013: The Physical Science Basis
(www.ipcc.ch).

‘History had ended’: Fukuyama 1992 and 2012.

‘an unrepresentative subset of reality’: A careful study of reporting on climate change in the media has identified bias in reporting of the science in the three English-speaking countries in which News Ltd plays a major role, with Australia, the country in which the News Ltd role has been largest, standing out for the degree of bias. See Painter 2011.

‘identified by Cicero’: See Cicero and Carville 2012. I am grateful to Nicholas Reece for drawing my attention to this classical insight into contemporary democratic practice.

‘As Machiavelli explained’: Machiavelli 1532.

‘The most elaborate analysis’: Spies-Butcher and Wilson 2008.

‘the levy … contributed’: The Fraser government’s crude-oil levy in 1981–82 absorbed 72 per cent of the gross value of sales which, after the 12.5 per cent royalty, represented almost the whole of the increase in revenue from oil fields that were producing in 1976. The crude-oil levy only applied to ‘old oil’, and not to fields brought into operation after the introduction of the crude-oil levy. It included any increase in production from old fields. In the estimates of what a similar approach to the increase in iron ore and coal prices from 2002 would have yielded today, I have applied the crude-oil levy tax rates only to the volume of production in 2002. There has been considerable growth in output from established coal and iron ore mines since then.

‘will effectively destroy’: John Howard, 1 July 1984.