Unwinding the Coalition's economic pantomime

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Theatrical masksOn the surface, the Abbott Government is returning the country to economic rationalism — the notion, motivated by a deep suspicion of government and its capacity to pick winners, that sound government policy is a case of: 'Don't just do something, stand there.' Any government interference in the price mechanism is deemed to be inevitably counterproductive and to reflect the capture of vested interests.

The view that the price mechanism is sacrosanct, and that any interference in it from government is sacrilegious, is the biggest circular argument in economics, a discipline riddled with circular arguments. How do we know the value of something? The price mechanism. What is most valuable? The price mechanism.

It produces some amusing political pantomime. The Government is on the one hand arguing — most notably with the SPC Ardmona case, the exit of the car manufacturers and Qantas — that it will not get involved in supporting Australia's industry base. But then it argues that its policies will boost Australia's industry base. Lower unemployment will inevitably follow. For the first time ever it is apparently possible to have it both ways. 'We are not going to do anything because that would be wrong, but at the same time we are doing something quite brilliant that will save the economy.' War is peace.

Such nonsense has become the norm in this era of deregulation and neo-liberal economic thought. Australian treasurers have been reduced to mere marketers of their bureaucrats' policies, trying to put the best spin on the fact that they don't do much. Interest rates are set independently by the Reserve Bank, and treasurers are simply required to balance the Budget as best they can.

They do not have much room to move. Fluctuations in tax receipts are largely out of their control and they cannot slash government spending without doing excessive harm. Any budget deficit was characterised as evilly irresponsible before the last election; now it is just something we all have to accept.

The other important element in the economy, the level of the currency, is also outside their control. It is set by forces far larger than the Australian Government (the Australian dollar is the fifth most traded currency in the world, far out of proportion to the size of the Australian economy). So governments tinker and try to make out that they have a great vision for the nation's future. Small wonder politicians are held in less and less esteem.

If it really were the case that governments could do nothing about the industry base, then that would be where the matter ends. But it is not the case. In fact it is an outright lie, albeit a common one in this era of 'deregulation'. Just as one cannot 'deregulate' financial markets because financial markets are by definition systems of rules, governments cannot adopt a hands off approach to an economy. They can perhaps reduce regulations in certain sectors of the economy, but that is all.

When the Government refused to spend $25 million on SPC Ardmona or help Qantas with debt guarantees, this was presented as a disciplined refusal to distort the price mechanism. Yet negatively geared properties last year cost the Australian taxpayer over $13 billion. Surely that amounts to a pretty decent interference in the price mechanism. Housing construction is a major part of our industry base. Australia has one of the most inflated property markets in the world, precisely because of those distortions in the price mechanism.

No Australian government is about to change the tax break because it would be electoral suicide, but to argue purity on the one hand and be so obviously impure on the other does damage the argument.

That is only one instance where government 'interferes' in the price mechanism. Much of Australia's mining infrastructure, for example, was paid for by governments after World War II, although they are more reluctant to do that now. The decisions made by governments over decades shape how an industry base develops.

Mark Latham, displaying his economic rationalist credentials, argues that the demise of the car industry is a sign that after 23 years of continuous economic growth and wealth creation, the consumption side of the economy has become more powerful than the production side. 'Cashed-up shoppers are exercising greater purchasing muscle than the feeble industry plans of union hand-maidens like [opposition industry spokesman Kim] Carr.'

This is either circularity or a statement of the obvious. The demand side of an economy is always more 'powerful' than the production side. Demand, or peoples' willingness to transact, always comes first. The decision not to support the car manufacturers may have been justified, but not for that reason.

By using such ideologically-driven, simplistic analyses — customers versus producers, corporate welfare versus pure markets — governments subtly avoid responsibility. In fact, government is inevitably a vital actor in shaping a nation's industry base, and the choices it makes have complex consequences, many of which are hard to track in advance. 'Don't just do something, stand there' is simply not an option.

But it is a convenient escape route when you are not willing to do the hard work to understand how a nation's industry base should be positioned in the global economy.


David James headshotDavid James is a business journalist with a PhD in English literature. He edits Personal Super Investor.

Theatrical masks image from Shutterstock

Topic tags: David James, economics, Tony Abbott, Joe Hockey, Qantas

 

 

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Existing comments

There's no contradiction whatsoever between not subsidizing specific industries or firms and believing that the economy as a whole will benefit from this policy. It's known as free market economics. And it works, as history bears out in places like Hong Kong and the U.S. in the 19th century. Subsidies prop up inefficient enterprises and divert resources from efficient wealth-creating sectors and firms. Sure, contest this economic theory if you like by coming up with a better theory. But you can't just blithely assume it's a logical contradiction.
HH | 11 March 2014


Rupert Murdoch argued in speehes here last year that the market is not only the most efficient but the most moral of systems. That's the Gov's economic driver - one branch of its confident ethos. There will be stops and starts in implementing this Murdoch dictum as compromises even within its own Cabinet will occur, but they can't ignore him - and it seems now, don't want to - because his media outlets are backing the Gov strongly. But allied to this flawed moral position is another, articulated by Cardinal Pell a few years back. It is that environmentalists preference nature against humans, a false position that caused distortions of Catholic teaching over the centuries in relation to, for example, understanding of the unfolding universe as 'God's first book'. So once again, with stops and starts, the Gov. is winding back on nature protections. These two serious errors - pro-market and anti-nature - are the moral/spiritual positions behind the Gov's self-justificatory agendas, and need to be exposed before they do much more damage to all life on Earth.
Len Puglisi | 12 March 2014


Isn't it time to turn away from the "Chicago School" approach to economics with its focus on 'balanced budgets' and the like, and reexamine what people like Gunnar Myrdal had to say, recognising the social impacts of economic decisions. Too much emphasis is being placed on the balanced budget approach - what's the point of a balanced budget it people suffer?
Paddy Byers | 12 March 2014


Agood article I would like more breadth as the writer seems to have a grip on economic matters suggestions even .We here in far north Qld are left behind frequently. I would like comments on developing a food bowl in the North to feed Asia.Another is the apparent and deliberate blindness to car truck exhaust .If the car industry has collapsed has anyone made advances in electronic or other forms of transport Australian owned would a government support a set up strategy. The railways are a disgrace different gauges all over the place Governments have managed over 40 years to end some trade imbalances why cant they take 40 years staring now to end this excessive house price madness without sending everyone broke.
Trent Kimpton | 12 March 2014


Well, Mr or Ms H, or, if you'll excuse the familiarity, H, you seem to have managed better than I at unpicking Mr James's meaning. He seems to me to be making a rather round argument about circular arguments and a government that is deeply suspicious of itself while doing nothing, especially about doing nothing. Or something. I wish he'd convince the advertising industry that 'demand always comes first'. Your Hong Kong and early U.S. examples of free market economics might well show that such policies are capable of increasing general prosperity. But people don't particularly want to be generally prosperous. They want to be more prosperous than the next bloke.
John Vernau | 12 March 2014


The government`s job is to look after the public interest, protect consumers from bad behaviour, and provide a general environment favourable to industrial and business development subject to these constraints. It should develop infrastructure to benefit the general community including business. But none of that is easy or necessarily obvious at the time, and government is especially very poor at picking winners in business and industry. In general it should just stay out of the way, try and maintain the ring, but not be a fighter or trainer itself! The housing debacle over negative gearing is a good example of how government interference in the market so typically goes awry, with unintended bad consequences. And a particular feature of Australia is how difficult it is change any spending or tax policy with coteries of special interest growing up around it almost immediately, and pollies being so weak and supine.
Eugene | 12 March 2014


HH " It's known as free market economics" No contradictions at all. It's also known as "Worshipping Mammon" There are no contradictions because the businesses that are driven to the wall, fairly or unfairly, are soon forgotten and history is written by the survivors. Sometimes it needs minimal help to save struggling businesses through lean periods. All "free market economics" aims at is expanding the gap between the "Haves" and the "Nots."
Robert Liddy | 12 March 2014


David writes: "The Government is on the one hand arguing — most notably with the SPC Ardmona case, the exit of the car manufacturers and Qantas — that it will not get involved in supporting Australia's industry base. But then it argues that its policies will boost Australia's industry base". That's not so much a contradiction because Abbott's desire, above all else, is to destroy unions, and by doing that, the Labor Party. So get rid of unionised workplaces - factories - and let the workers find part-time, casual and powerless positions of employment. Abbott entirely looks backward - a 1950s DLP politician - he has no understanding of what a government needs to do to position Australia for a good future.
Russell | 12 March 2014


RL. 1. Hundreds of businesses fail every week in Australia, even as many others start up, or break through to profitability. 2. "Sometimes it needs minimal help to save struggling businesses through lean periods." True. But who has the better incentive to discern the difference between a good business temporarily in distress and a terminal enterprise? A private financier putting their own funds on the line, or a vote-hungry politician spending from consolidated revenue?
HH | 12 March 2014


Governments create laws,regulate business and have huge impact on the market, and as we have seen, destroying tariff protection for Australian owned businesses and producers is not "standing there and doing nothing". There is no such thing as a Level Playing Field, markets are driven by survival of the fittest, the multi-nationals gobbling up thousands of small businesses. This level of foreign investment is worrying, as land and business is increasingly giving profits to others living in countries who support and protect their own. Governments ARE part of industry and their role should be to ensure our wealth goes back into supporting local communities and economies; welfare is necessary while the wealth of billionaires like Gina or Rupert is unchecked. Media control,the "fourth estate" is threatening to take government out of the picture...
Catherine | 14 March 2014


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