On 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 is a business journalist with a PhD in English literature. He edits Personal Super Investor.
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